Americans thirst for credit has led them to a record level of debt. Credit card debt has increased 25% to $963 million over the last 10 years. The average balance for families holding a balance was $7,300 in 2007. Credit card issuers collect $15 billion in fees from consumers, but Congress just made it a little tougher on them with the Credit Card Accountability, Responsibility and Disclosure Act, which the President has said he will sign. The bill gives consumers relief from penalty fees and some interest rate hikes. The credit card companies are threatening to cut reward programs, like points and airline miles, as a way to make up for lost revenue, but that remains to be seen. In summary, the bill means the following to consumers:
1. Banks will have to give 45 days’ notice before raising their rates.
2. No more rate hikes on existing balances.
3. Banks must notify customers in advance before significantly changing terms, like rewards programs.
4. Banks must send out your bill at least 21 days before the due date.
5. Payments received by 5pm on the due date, must be recorded as received on time, not late due to some bogus mid-day deadline. Also, banks will not be allowed to charge late fees for applying your payment on Monday (one day after a Sunday due date) or one day after a holiday due date.
6. Banks will have to get consumers’ permission before allowing their card to be charged in excess of the credit limit. Say your credit limit is $10,000 and your balance is $9,900 when you charge something for $200, thus putting you $100 over your credit limit. The banks currently accept most transactions like this, but charge you a hefty “over limit” fee. Now they will have to ask your permission or reject the charge that would put you over your limit.
7. If you have several sub-balances on one card at different interest rates, banks currently apply the portion of your payment that exceeds the minimum payment to the balance with the lowest interest rate. Now, they will have to apply those over-payments to the balance with the highest interest rate.
8. No one under 21 (i.e. students) can have a card unless a parent, legal guardian, or spouse (over 21) is the primary card holder. Any increase to that young person’s credit will require written permission from the parent, guardian or adult spouse.
9. On a somewhat unrelated issue, gift card issuers will have to inform buyers of fees for not using the card within a certain amount of time. Gift card issuers have been earning hefty fees by charging card recipients who wait a year or more before using the card. Cards will now not be allowed to expire within 5 years of the purchase date. Californians, however, will still enjoy extra protection. Under existing state law, gift cards purchased in California, NEVER EXPIRE.
The banks are arguing that these punitive credit card measures will require them to scale back on reward programs. Many industry experts, however, feel that, in fact, banks will have to increase these reward programs to remain competitive. Most credit cards are essentially the same and it is these rewards that give the cards their personality, or brand identity. Banks earn high fees from merchants when customers use their cards at retail locations so they are unlikely to eliminate their reward programs, thus giving their best customers a good reason to use a competitor’s card.
Sunday, May 31, 2009
Monday, April 20, 2009
The middle states and the educated enjoy better economic realities
While few people feel completely immune from job loss, some geographies and segments are fairing far better than others. The national unemployment rate is currently 8.5% and many experts expect it to reach double digits by the end of the year. The states in the middle of the country, from the Rocky Mountains to the Mississippi River, have unemployment rates at or below the national average. These states, more than others, enjoy some diversification in their states’ economies and largely missed the housing boom and bust, though recent declines in oil and crop prices may cause them to start to feel some pain.
California, Nevada, Oregon, Michigan, and the Carolinas, on the other hand, all lead the way with double digit unemployment and, unfortunately, share one or more of the following characteristics:
· a concentration in an out of favor industry
· a severe housing bubble
· inflated property tax revenues in the boom years
· falling income, property and sales tax revenue in the bust years
In the good years, many of these states enjoyed an expansion of state government services that must now be scaled back as tax revenue evaporates. As a result, they are experiencing deep funding cuts to sacred cows such as schools, emergency responders (i.e. police, fire and 911), and parks and recreation. These cuts create a sense of deterioration in the quality of life for everyone.
A key piece of interesting information from the data is that college graduates are fairing far better than those with just a high school diploma. Unemployment for college graduates is only 4.3%, less than half the national average. In contrast, unemployment for teenagers, just out of high school is over 20%. Unlike the last two recessions (1990-1991 and 2001-2003), the 2008 and beyond recession is marked with much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.
If you are a college grad and find yourself unemployed or fear that you will become unemployed in the near future, you should check in with your school’s alumni association. Many schools are offering special programs for their alums including:
· Career counseling
· Job fairs
· Networking events
· Discounts on test prep courses (i.e. Kaplan)
· Access to and discounts on health insurance
· Discounts on graduate degrees
California, Nevada, Oregon, Michigan, and the Carolinas, on the other hand, all lead the way with double digit unemployment and, unfortunately, share one or more of the following characteristics:
· a concentration in an out of favor industry
· a severe housing bubble
· inflated property tax revenues in the boom years
· falling income, property and sales tax revenue in the bust years
In the good years, many of these states enjoyed an expansion of state government services that must now be scaled back as tax revenue evaporates. As a result, they are experiencing deep funding cuts to sacred cows such as schools, emergency responders (i.e. police, fire and 911), and parks and recreation. These cuts create a sense of deterioration in the quality of life for everyone.
A key piece of interesting information from the data is that college graduates are fairing far better than those with just a high school diploma. Unemployment for college graduates is only 4.3%, less than half the national average. In contrast, unemployment for teenagers, just out of high school is over 20%. Unlike the last two recessions (1990-1991 and 2001-2003), the 2008 and beyond recession is marked with much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.
If you are a college grad and find yourself unemployed or fear that you will become unemployed in the near future, you should check in with your school’s alumni association. Many schools are offering special programs for their alums including:
· Career counseling
· Job fairs
· Networking events
· Discounts on test prep courses (i.e. Kaplan)
· Access to and discounts on health insurance
· Discounts on graduate degrees
Monday, March 16, 2009
Investing is not a Get Rich Quick Game
In these tough economic times it is more important than ever to remember that, aside from your state lottery, there are no “get rich quick schemes.” There seems to be no shortage of: infomercials promising $10,000 a month for part-time home based businesses, friends approaching you about the next big network marketing thing (think Amway, LCN long distance, and Mary Kay), and investment managers and funds promising to return double digit returns, even in this bad market. Marketers of investment products are great at highlighting whichever most recently ended time period yields the best results for them. For example, their 5 year return could be 10%, but if you add just 2 years, it could drop to 8%. If their performance declines, they can add or subtract a few months or years to make their performance appear a little better.
Keep in mind that past performance is no guarantee of future results. It reminds me of when I go to Oakland Raider games, and even though they have lost more games in the last 5 years than any NFL team over any 5 year span in NFL history, they still claim to be the “winningest team in professional football.” Note that up until a few years ago it was the “winningest team in professional sports.” Anyone who follows the NFL knows this is fishy, but most people don’t follow the market closely enough to spot this kind of monkey business in investment results. We are in a global market mess. There have been 15 bear markets (i.e. bad) since 1929 and the one we are in right now is the second worst (down 58% since 2007). The worst (down 86% from 1929-1932) and the third worst (down 54% from 1937-1938) both occurred during the Great Depression.
When investing, keep in mind the old adage; if it sounds too good to be true, IT PROBABLY IS. I’ve recently come across friends touting 801(k)s (401(k)s with double returns) and funds and/or managers with guaranteed returns. If you take anything from this, please remember that there is NO GUARANTEED INVESTMENT IN THE STOCK MARKET. Anyone who says otherwise is not being truthful. Someone is taking the risk, either you or the fund and/or manager; and I can assure you that people who sell funds and investments for a living think first and foremost about limiting their risk, not necessarily yours. More modest return investments, like bonds, carry less risk, while equity investments offer higher potential returns, and in return carry more risk. No one is going to offer high returns for little or no risk. On average, the market returns 10%-12% over a 30 year period and most experts agree that is about all you can hang your hat on.
Investing is a process over time, not a calling of the top and bottom of the market. Getting in and getting out at the respective bottom and top is not an investment strategy; it is a speculative game that results in a lot of sleepless nights. Your strategy should include a disciplined plan of consistent investing in a diversified portfolio over some period of time. It is the accumulation of that principal, along with reinvested investment income and dividends that will yield accumulated wealth over the long run. The best way to ride the highs and lows of the market is to pick a portfolio of well diversified securities and periodically rebalance back to your targets. For example, a sample portfolio could include the following asset classes: (i) 30% Bonds, (ii) 25% large company stocks, (iii) 20% small company stocks, and (iv) 25% natural resources (i.e. energy, gold, silver, etc..). At any given point in time, some assets will be up, but others will be down. If your investment time horizon is long term, your portfolio should be more heavily weighted towards equity and if your horizon is shorter-term, then it should skew more towards bonds. Things you can do to manage your nest egg:
· Pick target percentages for your various asset classes and rebalance your portfolio back to your targets annually, thus forcing you to sell high and buy low.
· Invest a consistent amount monthly , bi-monthly, or quarterly.
· Diversify, diversify, and diversify.
· Don’t allow stock from your company to dominate your portfolio (think about those at Enron who lost everything when it went down).
· If you use an independent advisor, demand that they use a bank for custody and reporting services for your assets (this protects you against Ponzi schemes like Bernie Madoff’s).
Keep in mind that past performance is no guarantee of future results. It reminds me of when I go to Oakland Raider games, and even though they have lost more games in the last 5 years than any NFL team over any 5 year span in NFL history, they still claim to be the “winningest team in professional football.” Note that up until a few years ago it was the “winningest team in professional sports.” Anyone who follows the NFL knows this is fishy, but most people don’t follow the market closely enough to spot this kind of monkey business in investment results. We are in a global market mess. There have been 15 bear markets (i.e. bad) since 1929 and the one we are in right now is the second worst (down 58% since 2007). The worst (down 86% from 1929-1932) and the third worst (down 54% from 1937-1938) both occurred during the Great Depression.
When investing, keep in mind the old adage; if it sounds too good to be true, IT PROBABLY IS. I’ve recently come across friends touting 801(k)s (401(k)s with double returns) and funds and/or managers with guaranteed returns. If you take anything from this, please remember that there is NO GUARANTEED INVESTMENT IN THE STOCK MARKET. Anyone who says otherwise is not being truthful. Someone is taking the risk, either you or the fund and/or manager; and I can assure you that people who sell funds and investments for a living think first and foremost about limiting their risk, not necessarily yours. More modest return investments, like bonds, carry less risk, while equity investments offer higher potential returns, and in return carry more risk. No one is going to offer high returns for little or no risk. On average, the market returns 10%-12% over a 30 year period and most experts agree that is about all you can hang your hat on.
Investing is a process over time, not a calling of the top and bottom of the market. Getting in and getting out at the respective bottom and top is not an investment strategy; it is a speculative game that results in a lot of sleepless nights. Your strategy should include a disciplined plan of consistent investing in a diversified portfolio over some period of time. It is the accumulation of that principal, along with reinvested investment income and dividends that will yield accumulated wealth over the long run. The best way to ride the highs and lows of the market is to pick a portfolio of well diversified securities and periodically rebalance back to your targets. For example, a sample portfolio could include the following asset classes: (i) 30% Bonds, (ii) 25% large company stocks, (iii) 20% small company stocks, and (iv) 25% natural resources (i.e. energy, gold, silver, etc..). At any given point in time, some assets will be up, but others will be down. If your investment time horizon is long term, your portfolio should be more heavily weighted towards equity and if your horizon is shorter-term, then it should skew more towards bonds. Things you can do to manage your nest egg:
· Pick target percentages for your various asset classes and rebalance your portfolio back to your targets annually, thus forcing you to sell high and buy low.
· Invest a consistent amount monthly , bi-monthly, or quarterly.
· Diversify, diversify, and diversify.
· Don’t allow stock from your company to dominate your portfolio (think about those at Enron who lost everything when it went down).
· If you use an independent advisor, demand that they use a bank for custody and reporting services for your assets (this protects you against Ponzi schemes like Bernie Madoff’s).
Sunday, March 1, 2009
Recession Brings out Creativity in Thieves
A recent story in the local news here reminded me of the resiliency of thieves. Most of us have become accustomed to removing valuables from our parked cars, thinking that doing so will cause thieves to take a pass on our car and move on to one where the goodies they seek can be found in plain sight. With so much attention paid to cyber-crooks and identity theft in recent years, it is easy to lose vigilance on the more rudimentary acts like removing stuff from your car, but stories like this remind us that thieves find value in things that don’t appear, on face value, to have much value.
A Bay Area family went on a trip for a few days and left their car in one of the off-site parking lots at the airport. Like most of us, they were careful to tuck all of their valuables out of sight, but the thieves broke in any way for two things: their auto registration and garage door opener. California, and most states I suspect, requires drivers to carry their license, registration, and proof of insurance at all times. Most drivers keep their registration in the glove compartment because you only really need it when requested by law enforcement. With this in mind, once these thieves saw the victim’s garage door opener clipped to the sun visor, they knew the last piece to their bounty was in the glove box.
They jimmied the lock, took the registration and the opener and headed to the traveling family’s home. For a thief, it doesn’t get much better than this. You have an address to a home you know will remain empty for a few days and you have access to the garage where you have privacy, thus time to gain access to the house. The thieves raided the house of its consumer electronics, jewelry, and other valuables. They even took the family’s second car from the garage; drove it around for a few days before leaving the late model Mercedes Benz parked in front of a neighbor’s house down the street.
Though much attention has been paid to identity theft, we can’t forget that the conventional thieves are still out there; and in this down economy, they are more creative than ever. To protect yourself from being victimized like this, here are some things you can do:
· Black out your address on your auto registration
· Lock your glove compartment
· Don’t leave anything in your car with your address on it
· When parked anywhere long-term (i.e. airport), either lock your garage door opener in your glove compartment, or take it with you
· If you have a GPS system in your car, don’t register “home” as a destination
· Let your neighbors know when you are going to be out of town for more than a few days so they can identify suspicious activity around your home.
A Bay Area family went on a trip for a few days and left their car in one of the off-site parking lots at the airport. Like most of us, they were careful to tuck all of their valuables out of sight, but the thieves broke in any way for two things: their auto registration and garage door opener. California, and most states I suspect, requires drivers to carry their license, registration, and proof of insurance at all times. Most drivers keep their registration in the glove compartment because you only really need it when requested by law enforcement. With this in mind, once these thieves saw the victim’s garage door opener clipped to the sun visor, they knew the last piece to their bounty was in the glove box.
They jimmied the lock, took the registration and the opener and headed to the traveling family’s home. For a thief, it doesn’t get much better than this. You have an address to a home you know will remain empty for a few days and you have access to the garage where you have privacy, thus time to gain access to the house. The thieves raided the house of its consumer electronics, jewelry, and other valuables. They even took the family’s second car from the garage; drove it around for a few days before leaving the late model Mercedes Benz parked in front of a neighbor’s house down the street.
Though much attention has been paid to identity theft, we can’t forget that the conventional thieves are still out there; and in this down economy, they are more creative than ever. To protect yourself from being victimized like this, here are some things you can do:
· Black out your address on your auto registration
· Lock your glove compartment
· Don’t leave anything in your car with your address on it
· When parked anywhere long-term (i.e. airport), either lock your garage door opener in your glove compartment, or take it with you
· If you have a GPS system in your car, don’t register “home” as a destination
· Let your neighbors know when you are going to be out of town for more than a few days so they can identify suspicious activity around your home.
Monday, February 23, 2009
Not Much Relief in Housing Plan for High Cost Areas
Whether or not the recently announced $275 billion Homeowner Affordability and Stability Plan helps you largely depends on where you live and your particular situation. For starters the property MUST BE YOUR PRIMARY RESIDENCE; and your EXISTING loan MUST be a conforming loan, which among other things, means it MUST be LESS than $417,000. In some expensive metro areas, however, the limit was recently increased to $729,750. Keep in mind, however, these higher limits were, for the most part, introduced in 2008; so, if you bought your home more than 1 year ago, these higher limits will not apply to you. On the flip side, any loan that is not conforming is a non-conforming (also called jumbo) loan. To simplify, conforming = $417,000 or less and non-conforming/jumbo = greater than $417,000.
This week’s release was fairly general, but a more detailed plan is expected on March 4, 2009. The three phases of the plans are as follows:
1. Refinance Plan ($0 estimated cost to taxpayer): This plan is for people who are paying on their mortgage, but their home has lost too much value to qualify for refinancing. Conforming loans require 20% of equity in the home and many people have fallen below this threshold. To qualify under the plan, you MUST have a conforming loan, you must NOT be behind on your payments, and your mortgage must fall between 80% and 105% of your home’s current market value. To illustrate: if you have a $400,000 mortgage, your current value must fall between $320,000 and $420,000. The trick here is that your CURRENT LOAN must be a conforming loan. Good luck in high cost areas like LA, SF, DC, and NY where conforming loans used in new home purchases are rare. To put this in some perspective, in 2006, 60% of loans used to purchase a home (not refinance) in the SF Bay Area were non-conforming.
A second mortgage on your property will not disqualify you from this program. As long as the amount owed on the first mortgage is less than 105% of the value of property and the second mortgage lender agrees to remain in the second position, you may still qualify. Ultimately, the lender will want to see your ability to meet the payments on the new first mortgage.
The hope with this plan is that it will provide an opportunity for millions of families stuck in higher rate loans, to refinance into lower rate loans with zero cost to the taxpayer.
2. Loan Modification ($75 billion estimated cost to taxpayer): This plan is intended to help people whose mortgage payment is too high for their income. This could be due to an increased mortgage payment, loss of income, or both. This plan is open to people who are BOTH CURRENT and BEHIND on their mortgage. Just like the Refinance Plan, above, you MUST have a conforming loan. Lenders will be encouraged to cut monthly payments for troubled borrowers to 31% of monthly income, which most experts believe is a reasonable level. The goal is to reduce payments to manageable levels for borrowers whose income is not sufficient to make their monthly payments. The reduced payment is achieved through government provided lender incentives. Lenders are likely to lower payments mainly by reducing interest rates and the government will share partially in the cost of reducing the interest rates of these borrowers. Banks receiving TARP funds are strongly encouraged to work with borrowers, reducing principal if necessary, though that decision is ultimately left to the lender. The added risk to the lender is that, if the borrower files for bankruptcy, pending legislation may allow a judge to reduce the principal anyway.
3. The final part of the plan doubles the size of cash outlay to Fannie Mae and Freddie Mac, which the government hopes will restore confidence in those entities and help to keep interest rates low. The government will cover $200 billion in losses from Fannie Mae and Freddie Mac, which own or guarantee more than 60% of U.S. mortgage debt. They perform a very important part of the mortgage cycle because they purchase loans (conforming only) from banks, allowing the banks to receive money today (instead of 30 years from now), which in turn allows them to make more loans today. In other words, Fannie Mae and Freddie Mac inject liquidity into the mortgage market.
What is not covered by the plan:
1. Mortgages greater than $417,000 (limit is up to $729,250 in some high cost areas in ’08 and ’09)
2. Vacation property
3. Rental property, unless it is 2-4 units and you live in one of the units.
4. Second mortgages
This week’s release was fairly general, but a more detailed plan is expected on March 4, 2009. The three phases of the plans are as follows:
1. Refinance Plan ($0 estimated cost to taxpayer): This plan is for people who are paying on their mortgage, but their home has lost too much value to qualify for refinancing. Conforming loans require 20% of equity in the home and many people have fallen below this threshold. To qualify under the plan, you MUST have a conforming loan, you must NOT be behind on your payments, and your mortgage must fall between 80% and 105% of your home’s current market value. To illustrate: if you have a $400,000 mortgage, your current value must fall between $320,000 and $420,000. The trick here is that your CURRENT LOAN must be a conforming loan. Good luck in high cost areas like LA, SF, DC, and NY where conforming loans used in new home purchases are rare. To put this in some perspective, in 2006, 60% of loans used to purchase a home (not refinance) in the SF Bay Area were non-conforming.
A second mortgage on your property will not disqualify you from this program. As long as the amount owed on the first mortgage is less than 105% of the value of property and the second mortgage lender agrees to remain in the second position, you may still qualify. Ultimately, the lender will want to see your ability to meet the payments on the new first mortgage.
The hope with this plan is that it will provide an opportunity for millions of families stuck in higher rate loans, to refinance into lower rate loans with zero cost to the taxpayer.
2. Loan Modification ($75 billion estimated cost to taxpayer): This plan is intended to help people whose mortgage payment is too high for their income. This could be due to an increased mortgage payment, loss of income, or both. This plan is open to people who are BOTH CURRENT and BEHIND on their mortgage. Just like the Refinance Plan, above, you MUST have a conforming loan. Lenders will be encouraged to cut monthly payments for troubled borrowers to 31% of monthly income, which most experts believe is a reasonable level. The goal is to reduce payments to manageable levels for borrowers whose income is not sufficient to make their monthly payments. The reduced payment is achieved through government provided lender incentives. Lenders are likely to lower payments mainly by reducing interest rates and the government will share partially in the cost of reducing the interest rates of these borrowers. Banks receiving TARP funds are strongly encouraged to work with borrowers, reducing principal if necessary, though that decision is ultimately left to the lender. The added risk to the lender is that, if the borrower files for bankruptcy, pending legislation may allow a judge to reduce the principal anyway.
3. The final part of the plan doubles the size of cash outlay to Fannie Mae and Freddie Mac, which the government hopes will restore confidence in those entities and help to keep interest rates low. The government will cover $200 billion in losses from Fannie Mae and Freddie Mac, which own or guarantee more than 60% of U.S. mortgage debt. They perform a very important part of the mortgage cycle because they purchase loans (conforming only) from banks, allowing the banks to receive money today (instead of 30 years from now), which in turn allows them to make more loans today. In other words, Fannie Mae and Freddie Mac inject liquidity into the mortgage market.
What is not covered by the plan:
1. Mortgages greater than $417,000 (limit is up to $729,250 in some high cost areas in ’08 and ’09)
2. Vacation property
3. Rental property, unless it is 2-4 units and you live in one of the units.
4. Second mortgages
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