Free “Avoiding Forclosure” DVD via NFCC

We received an email from Melissa Minkalis of the National Foundation for Credit Counseling (NFCC). They are offering a Free DVD about avoiding foreclosure.

I did not order the DVD or know much more about it. I did quickly verify that the NFCC is a legit organization and doesn’t seem to be simply harvesting contact info, etc.

From the email:

Did you know foreclosure rates rose 81% in 2008, making the housing crisis the #1 issue facing our economy today?

The main problem concerning this crisis is that most homeowners don’t seek help until it’s too late. The key is to get reliable advice as early as possible. Sadly, many people don’t realize that trustworthy help is available and what may seem like a dire financial situation can actually be organized, itemized, and prioritized by a NFCC certified credit counselor.

Today, I would like to offer you and your readers a chance to order a new DVD from the NFCC, Avoiding Foreclosure, which can be ordered, FREE of charge by visiting [our Avoiding Foreclosure order form]

Showing inspiring stories from folks who decided to really take charge of their unfortunate situations, this free, informative DVD will provide viewers with motivation for change. Even the toughest of circumstances can result in positive solutions with the help of NFCC certified professionals. It is the hope that seeing these stories first hand will give others the courage to take action.

The Bernanke Put

Fingers crossed.

He should moderate his language, open the possibility of a rate cut, and send the markets higher.

I hope he keeps his mouth closed, talks about inflation and the US dollar, and keeps rates right where they are.

Wishful thinking? Perhaps. However, I just have a vibe that he isn’t the soft touch that people think he is. My impression is that he just might suprise a few people.

Time’s up Bernanke! – are you made of steel or of butter?

Good luck,

Phil

PS In what is becoming a theme, here is another idiot piece by Ben Stein, and here is another piece about bankruptcy and an instant 7000 people out of a job. Of course, you need to make up your own minds.

This post is for entertainment purposes only. No part of this post should be construed to constitute investment advice. The author is not an investment professional and assumes no responsibility for any investment activities you undertake. Prior to undertaking any financial decisions, you should contact an investment professional.

The Fall of the All Consuming Yankee

The consumer is tapped out. After consistent 25 basis point increases to the Federal Funds Rate, we are finally starting to see the effects on the stock market.

Yesterday morning we saw three headlines that caught my attention. The first detailed Sears’ guidance for this quarter – a reduction from $2.12 to from $1.06 to $1.32 per share. These revisions are, at best, a 30% reduction and, at worst, a 50% reduction from their previous optimistic estimates.

Notably, declines were across all categories. If you follow the theory that the consumer is on thin ice, then it is hardly surprising to find big ticket items are not being purchased. Sears is having trouble selling new stainless steel fridges and widescreen TVs because consumers do not feel confident about their financial situation. The only sector that wasn’t hit as hard was women’s apparel and footwear – suggesting stressed housewives may be engaging in retail therapy.

The second headline noted that Home Depot is now expecting a 15% to 18% drop in earnings per share for fiscal 2007, as opposed to their previous guidance of 9%. This is a further example of a, supposedly wise, management team who were unable to predict the severity of the downturn.

All should take note – when pundits tell you the housing crash will be over by Q4 of this year, they are making a foolish guess. Furthermore, even if they are right, do not expect the market to rebound. Burnt fingers will not be so quickly back into the fire.

Home Depot’s response to this downturn was particularly ironic:

Home Depot, which has more than 2,000 stores in the United States, Canada, Mexico and China, said Tuesday it will open approximately 108 new stores in fiscal 2007.”

Lastly, this tidbit was to be found in Yahoo’s summary of the Best of Today’s Business:

More than 2 million subprime, adjustable-rate mortgages will be reset to much higher interest rates over the next several months, raising monthly payments for people with weak credit. In October alone, a record $50 billion in ARMs will reset, said Mark Zandi, chief economist of Moody’s Economy.com. Consumer groups fear this could spark a new wave of foreclosures.” (emphasis added)

Many commentators speak about the small impact of subprime foreclosures (e.g. here) as if somehow the problems stop with subprime. However, the problem is a continuum, beginning in subprime and extending all the way into Alt A.

The housing sector is in far worse shape than the experts on Wall Street realize – yesterday we saw a pull back in the market, and the futures this morning point to a similar flat or down day. However, over the past months, Wall Street has failed to price in the poor economic outlook. Yet, here is an example of the situation consumers face:

Arizona’s only publicly traded home builder must write off $100 million on land and operations after a second quarter in which home orders fell 28 percent and new-home cancellations climbed to 37 percent, according to preliminary numbers released Friday.

New-home cancellations have left the Valley’s housing market with at least 20,000 homes built but unsold. Builders have offered hefty incentives of $50,000 and more to sell the houses, but many potential buyers can’t sell their existing homes.

The result is a glut of homes for sale…”

Granted, Arizona is one of the worst locations, but it isn’t the only region to suffer this problem. While subprime mortgagees have low credit ratings, they don’t necessarily purchase in low socio-economic areas. Subprime foreclosure properties can not be neatly segregated into a single suburb.

We are just starting to see the fall out.

With Wall Street starting to show signs of reduced consumer spending, both due to fear and also due to rising costs (see “M3 money supply”), businesses will be reducing inventory and preparing for leaner times. This will sap at business confidence and reduce capital expenditure. As more home loans reset from teaser rates to rates approaching double digits, consumer disposable income will further decrease. If foreclosures continue to rise, we may witness further financial strain, as seen with Bear Sterns two weeks ago.

In short, the situation is unlikely to improve from here. The next 6 months do not look good.

If you haven’t already, take a look at the S&P500 over the last 6 months – notice the recent double top and the market’s inability to rise to new highs. My thoughts? Consider moving at least a portion of your holdings to cash if you can.

Philip John

This post is for entertainment purposes only. No part of this post should be construed to constitute investment advice. The author is not an investment professional and assumes no responsibility for any investment activities you undertake. Prior to undertaking any financial decisions, you should contact an investment professional.

Up in ARMS – When is it right to use an Adjustable Rate Mortgage?

This article Orginally appeared on ThinkingAboutMoney.com
An ARM can be a huge money saver, or a time bomb. Unfortunately, there are a lot of time bombs out there.

In my previous posting, I focused on interest only mortgages and a couple of readers pointed out the risks of these mortgages – well actually, they pointed out the risks of adjustable rate mortgages, which are a different beast entirely (though they often come in the same package).

There are many variations of adjustable rate mortgages. The worst of them are those that allow for negative amortization – meaning the principal on the loan increases over time because your payments are not sufficient to cover the interest on the loan. These loans are evil and should be avoided in almost all cases (the one exception is a reverse mortgage used by some senior citizens to turn the equity of their home into income).

Adjustable rate mortgages have two separate issues that can magnify to either save you lots of money or cost you lots of money. First, they almost always start out with below market rates (either due to marketing discounts or rates bought down through points) which results in effective interest rate increases early in the life of the loan. Second, they vary with interest rates.

When are adjustable rate mortgages a wise choice?

The only ARM I’ve had was on a condo I purchased in 1985. That year conventional mortgages were over 12% – very high from a historical perspective. It was also fairly early in my career and I was still enjoying steady increases in salary (I had a real job back then). It was also a fairly slow time for real-estate – one of the periods of stable or declining prices common in the California real estate market. The combination of high interest rates, increasing income and stagnant property values is the perfect storm for getting an ARM. Over the next ten years or so, the choice turned out to be very wise. The loan was linked to T-Bills that only once during that period exceeded the rate at the start of the loan, and at one point was 4 points lower than that initial value. Most of the years I held the loan my payments actually dropped. Ultimately I paid thousands of dollars less than I would have with a conventional loan.

I honestly don’t know if I was lucky or smart at the time – but I do remember considering the risk and deciding that it was worth the chance.

Unfortunately, most people who use adjustable rate mortgages today are using them for a different reason – to purchase a more expensive home than they can really afford. All of the factors that pointed to use of ARMs in 1985 are different today.

Right now we are at a peak of housing values after a period of rapid increase (not only recent increases, but a major increase in values in the 1999-2001 period). Historically these boom periods are separated by periods of stable or declining prices – periods of a decade or more. So purchasing the most house you can afford in order to get maximum leverage is high risk choice, at least at the moment.

Despite recent rate increases, mortgage rates remain near historic lows. That means that there is a high risk that an adjustable rate mortgage will result in higher payments over time, in some cases dramatic increases.

The final factor to consider is your own income. The recent economic recovery has not resulted in widespread wage increases. With the increased levels of outsourcing and continuing shift of manufacturing to low wage countries, there is no reason to expect wages for most people to grow significantly or even necessarily to keep up with inflation.

In short, if you currently have an ARM, you may well be sitting on a time bomb. I strongly encourage you to look at the historic values for the index on which your ARM is based to get a sense of how it might move. Interest rates during the past 4 or 5 years were generally the lowest in the past 40. Betting that they will go back down is probably a long shot.

The good news is that it may not be too late for you to get out of the trap. Fixed rate loans are still relatively cheap. If your income has increased, now may be the perfect time to refinance into a fixed rate loan and protect yourself from possible rate increases.

Mortgage and interest rate statistics:
http://www.federalreserve.gov/RELEASES/h15/data.htm

Housing booms and busts:
http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf

Credit and Debt: Did you know…

Whether it’s due to bad or irrational decisions, youthful naiveté, a bad streak of luck, or situations totally beyond our control, we’re all faced with mounting debt at some point.

If it gets bad enough, some of us may even have to work with our creditors to forgive some of our debt just to remain solvent. But did you know that getting a break on your debt could greatly effect your tax situation? How about the effect accepting a settlement offer has on your credit report?

Michele Singletary over at the Washington Post has written a series of three articles addressing these types of questions. The series was prompted by a reader looking for advice regarding a bad debt.

The first article covers the original question: the reader thought that accepting a settlement offer would negatively impact their credit score. It turns out that could or could not be the case, but the reason had nothing to do with the reduction in the amount they owed. It actually has to do with the account activity date reported on your credit report: the more recent that date, the greater the negative impact on your score.

The second article gives some additional background, including reminding us that forgiven debt must be reported as income to the IRS. That’s right. You are liable for taxes on the amount of debt forgiven.

The final article of the series breaks down how bad debt is collected and who the money actually goes to. As well as defending the actions of the reader and her own advice.

Overall the articles are informative and quite well written. Definitely worth the read if you’re looking to expand your knowledge, whether or not you agree with her advice in this particular case.

Prosper.com: A 6-month Review

After launching in February as the first person-to-person lending site in the US, Prosper.com has seen a good deal of activity. Now that it’s been 6 months since they opened their doors, I used Google Blogsearch to see what people’s experiences were out there in the blogosphere.

I discovered that there were some very valid criticisms of Prosper. For example, the risk and time to manage these loans may not be worth the effort. Plus to further exacerbate the problem, uninformed lenders are setting lending rates at risk/return levels no intelligent investor would touch. It can also sometimes be difficult to find loans for borrowers in states that set rate limits.

Despite these valid criticisms though, I found mostly positive reviews. Since loans on Prosper are amortized over 3 years, it will take some time to see the full impact of the site on the internet community, but looking 6 months out, things seem to be pretty positive. Here are the most interesting discussions I’ve found online:

Good Feedback

Criticisms

Strategy

How Prosper Works
Prosper.com is the United States’ first person-to-person lending system. It matches individual borrowers with individual lenders, and allows lenders to receive better interest than they could in the bank, while allowing borrowers to face lower rates than loan providers. Proper.com claims to be highly secure, and provides collections services if the borrower defaults on their loans.

Each borrower is given a credit rating based on their Experian credit report, which lenders use to determine how much they would be willing to loan money. Lenders offer to fund part or all of a borrowers loan, and the loans with the lowest rates that meet the borrower’s target loan amount will be packaged by Prosper and transferred to the borrowers account.

Frank the Financially Savvy Atheist provides a good summary of the risks involved with lending money on Prosper, and you can also check out the lender tutorial and borrower tutorial on Prosper.com.

As a side note, U.K.-based Zopa will soon be launching in the U.S. and offers a similar model.

Prime Interest Rate & Credit Interest Spreads

Almost all of us hear some variation of this from our credit card or car loan company: your interest rate is a variable rate of 14.99% based on Prime plus 6.74%. That means your current rate is 14.99% but may change at any time, so if the prime interest rate goes up or down 0.5% so will your card. Let’s look at the Prime rate closer, and I’ll share some tips to enhance your credit search.

The Prime Interest Rate, also known as the Wall Street Journal Prime Rate, is based on a survey of lenders by the WSJ. This is the rate that lenders offer to their most premium borrowers. The additional interest that your lender tacks on your loan, called the spread or margin, will decrease as your creditworthiness increases.

Better Credit; Lower Spread. Many of us start out with credit cards in college with rates running into the high teens or low twenties — analogous to a 10-12% spread. However, as you get older and build your credit, your spread will decrease. For example, I recently received an unsecured line of credit from CitiBank with a spread of 0.99%. The idea being that as your creditworthiness increases, your risk decreases, so a lower interest rate is required.

Comparison Shopping: Apples to Apples. It’s more important to find a low spread than it is to find a low interest rate. Because prime can change frequently, look for the spread on that credit card you’ve been eyeing. If you found a card with an 11.99% interest rate two months ago, and you just found another card with an 11.99% interest rate today, the new card may be more costly if interest rates fell 0.50% within the last two months. Always be sure to compare apples to apples by comparing the spread.

About Fed Rates

Just like credit card rates are based on the Prime Rate, the Prime Rate is based on the Fed Discount Rate and Fed Funds Rate.

  • The Fed Discount Rate is what the Federal Reserve loans money to banks at.
  • The Fed Funds Rate is based on the Fed Discount Rate and is the Fed’s target of what they would like banks to loan money to each other at.

Because banks and credit card companies borrow money at these rates to provide loans and credit to their customers, some if not all of the cost is passed on to the consumer through the Prime Rate. So when you hear that the Fed is raising or lowering interest rates, look for a change in your Prime Rate coming to a statement near you.

Finding Rates
You can find all the current Prime and Fed rates at BankRate.

Resources
The Federal Reserve: Monetary Policy. Investopedia.
Credit Card Management: Basics of Card Rates. AOL Money & Finance.