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February, 2008

Dear Families and Friends,

This month was simple, just planning, worrying and talking with financial folks.

We won't write down the log of worry, but there was plenty of it. Most of it concerned the wisdom of taking on a mortgage. We've been mortgage free for a long time now, and it gives us great flexibility. However, with the cost estimate for the barn renovation mounting up, it was clear that we either forget the project or accept the idea of a new mortgage, one that might last longer than we do. Add to this the ever-increasing slide in the value of the dollar, and a euro-loan becomes "interesting".

February 5

Today was signing day with Axel. He brought over the official drawings of our new barn/atelier/loft and we had to sign them and the forms that would go to the local government officials. Since we are on our second Bavarian building project, we even understand what we are signing. There are two or three levels of approval required.

For an historical building, the first hurdle would be the "Denkmalschutz" (http://www.denkmalschutz.de/home.html?&L=2) , an agency that in America might be called the Historical Preservation Society. We needed this step for the 250-year-old house, but not for the 150-year-old barn. Unlike most of our neighbors, we are fans of the Denkmalschutz process, since we very much value the old feel of Germany, but we were happy enough to not have this added complication for our barn.

The next level of approvals comes from the town, Pommersfelden. Here, the goal seems to be community tranquility. The neighbors need to sign a specific release. Axel tried to short cut this process by just asking the one neighbor who will be able to see the change, but the town fathers insisted on even more neighborly signatures. This is one of the reasons why staying on good term with neighbors matters here in Germany. In our case, it was easy enough and, on February 20th, we had our Pommersfelden approval.

The final approval comes from the Landratsamt of our local area ("Kreis", roughly: "county"), Bamberg. This is the agency that checks building codes and, I'm sure, updates all the tax roles. A week after the Pommersfelden approval, we received our official case number (#08000114) from Landratsamt Bamberg. (In a coincidence, the U.S. nuclear plant project I work with also got their official case number the same week, #52-020. Similar process, much different scale in time and money!)

If all goes well, approval will happen in mid-March, in time for ground breaking (actually, roof-breaking) as early as April Fool's day. How appropriate.

February 22

We met with our first banker, a very pleasant fellow from our own bank, Sparkasse, who took us through the process for a normal German home building loan. This is NOT simple.

First, banks like Sparkasse generally work with a government organization, Kreditanstalt für Wiederaufbau (KfW), that has a number of special programs, each of which aims to reinforce some sort of government policy. There are different loan programs for energy saving modifications, for solar power installation, for "ecological reconstruction", etc.

But, the basic KfW loan implements, in principle, a very-German government mandate towards thrift: good people save before they spend and hence KfW will loan only after one has saved. Basically, the idea is for people to save up about 40% of the amount they will need for a house, in a special Sparkasse savings account. Once the money is saved, a loan is created for the remaining 60% and everything is pretty much like a normal American mortgage loan, except there may be substantial penalties for early payment and, in some instances, it is impossible to pay the loan off early, thus losing any opportunity for cutting back on interest expenses.

We don't have the 40% saved up and we want our new living space NOW, not in the future; immediate gratification Americans, I guess. Well, Germans also want houses before their savings are complete, so banks arrange a package around the KfW building loan, one that allows the full amount of the loan right away. Here's how it works: The bank gives you XXX thousand euros. Monthly, you pay them two amounts of money. One part goes into a savings account toward the 40% portion and the other goes toward the 60% "loan". Until the savings account contains the full 40%, the loan is, in part, an interest-only loan - on the full amount (XXX thousand euros). When the savings account is full, the money is transferred to pay off part of the loan. The balance, 60% of the original XXX, is paid off over time, just like a regular loan.

The trick here is that, until the savings account is full, one is paying loan interest (about 4.8%) on all the money but getting only savings account interest (1%) on the money accumulating in the savings account. OK, if the period for saving is short, bad if it is not. Add to this the complication that some loans allow early repayment and some don't and some KfW loans are at different interest rates than others (loans for building with ecological material, for example, come with a lower interest rate) and loans can be for whatever savings and repayment periods one wants. Anyone who really understands this should be giving financial advice to sovereign nations.

In any event, our bank loan officer assured us Sparkasse would be happy to give us a mortgage and we just have to get back with him when we want to proceed.

February 28

I have to admit, the explanation I gave above is probably what the Sparkasse agent was telling us, but it wasn't what I was understanding. Mostly, I kept thinking: "Can it get more complicated?" It was only the following week, when our insurance agents brought along their financing specialist, that I began to understand what we had been told.

The financial fellow (FF) looked at our Sparkasse offer and explained the part about the difference in interest between the loan interest (4.8%) and the savings balance interest (1%) and why that effectively makes the quoted loan interest (4.8%) a bit deceptive. Normal, but deceptive. However, FF made clear that "deceptive" is not the same thing as "bad" and the best loan may in fact be one of these savings-plus-loan deals from KfW.

One nice part about this whole discussion was that it was held in our own living room, with our two insurance agents there to help us when the German discussion completely lost us. So far, neither of our financial contacts has volunteered to speak in English and navigating this topic in German is hard, very hard. The next time some U.S. consumer advocate demands that loan information be given in "simple English", I'll stand up and cheer. In our case, neither the loan nor the language could be considered "simple".

We filled out some basic loan application forms and FF said he would go away and come back with competing offers, but the best one may still be, at least in part, a KfW loan. That will be a "March" story.

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