When markets are tough, emotions run high. Investors want change and advisors are willing to give that to them. You have to be careful when making changes to your investments. There is no room for mistake.
So, when should you make an investment change that is recommended by your advisor? That depends on two things. First, it depends on whether or not you are working with an advisor that is selling investment products and this is just the latest product. Second, it depends on whether or not this makes the most sense for you as a client.
The problem is that, for most people, it is tough to know whether or not you are being sold a product or given a good recommendation. So, to keep the playing field even and your money protected, let’s take a look at some of the recommendations that don’t make sense.
1) Be suspicious when the recommendation is based on selling an investment and investing it into the next great investment product that is going to revolutionize your life.
If a recommendation is really questionable, it will need to be dressed up. So, the recommendation ends up being over the top. This is what I am seeing today with the equity indexed annuities. These are being aggressively marketed as the cure all to everything. Here is what you need to know about investments – there is no one sure slam dunk way to invest money without taking risk. If there were, then you wouldn’t have thousands of money managers working that hard to figure out markets.
2) Be suspicious when the recommendation is to sell one commission based mutual fund and invest it into another commission based mutual fund.
For you to pay a commission a second time on the same investment money, there needs to be a good reason. If there is not a good reason and this is just to create commission, it is unfortunately going to be tough to recognize. The sales pitch is going to be pretty convincing. So, the key is to spend time making the advisor really explain the reasoning. Ask some very tough questions. Most importantly, pray about making a good decision and don’t go forward until you are 100% at peace with the decision.
3) Be suspicious when the recommendation is to move your money from one investment to another one and take a penalty when you do so.
You typically see this with annuities. I cannot think of any reason to sell an annuity to move money into another annuity and restart a new surrender charge penalty. These recommendations come with big justifications for selling the annuity and taking that loss.
Here is what typically happens when you are receiving the offer. Let’s say that you have $100,000 in an annuity. However, if you sell it, you are going to take a 5% loss. The recommendation is to sell the annuity, take the penalty, and then reinvest that money into this new annuity that gives you a 5% bonus for investing. Thus, you are reimbursed for that penalty.
Unfortunately, what most investors don’t realize is that you don’t get something for free. In this case, the investor will not only take the big penalty hit, but they will also be unknowingly paying for the 5% bonus that they just received in the new annuity.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, July 31, 2008
Wednesday, July 30, 2008
Are you Proactive, Inactive, or Living on Blind Assumptions?
I have had a lot of interesting conversations over the past few days. The same theme kept coming up over and over again. I would catch myself talking about the same subject in each conversation. It wasn’t about bear markets. It wasn’t about the economy. It wasn’t about investment gains or losses. It was about state of mind, which is critically important today when it comes to stewardship of your money.
At any given time in your life, you could be proactive, inactive, or living on blind assumptions when it comes to your money. I was talking with a client who was just about to turn 74. She stressed the importance of making good decisions with money and being informed, of being pro-active rather than inactive with money.
I then had the pleasure of having a conversation with another client who really values education. She reads all of the time and asks a lot of questions. From the first day that I met her, she has always put a priority on education and just cannot get enough. She is the definition of proactive.
The key to being a successful steward of what God has given to you is to be proactive. A proactive person values being informed and strives to learn as much as possible. A proactive person knows the pros and cons behind the decisions that are being made. A proactive person doesn’t just take advice or recommendations blindly. They understand the significance of a full understanding of the basis for the advice that is being given.
During my second conversation, my proactive client then told me the story of a woman who just lost her husband. This couple lived in an expensive home and lived a pretty expensive lifestyle. To the world outside, they had everything. In reality, her husband died, leaving them with nothing but a stack of debt. He was living on blind assumptions that he would live for a long time and had plenty of time to make things up. Unfortunately, life was not so fortunate for him. The reality is that no one is promised tomorrow. It is always important to prepare today for tomorrow’s unknowns.
Being inactive is managing God’s money with your eyes closed. You check in every once in a while and make sure that all is working well. You rely on the advice of others, never fully understanding why it is that you believe that way.
Basically, inactive people create a lot of risk. For example, with investments, there is always the possibility that you working with a financial advisor who is a sales person that is disguised as a qualified investment advisor. I see this type of situation often. The problem is that it is often too late and the damage is done when you realize that what seemed like a qualified recommendation was nothing more than a mere sales pitch designed to benefit only one person. Time is a precious commodity when it comes to investing.
Living on blind assumptions is just assuming everything will work out without a basis for that belief. When managing God’s money that way, there is a huge risk that these assumptions without merit are a mere gamble and your chances of failure are greater.
There is only one way to live when it comes to stewardship. It is about being proactive. It is about being and staying informed. It is a commitment to education. It is an understanding of risk and how it works, which is critical when making any financial decisions. The wrong risk can set you back for a long time.
I bring this up today because there are a lot of investors who are inactive and living on blind assumptions. We just don’t have the luxury of driving blind when it comes to stewardship of God’s money. This is a tough investment environment. The decisions that you make today concerning risk will either be a home run or a disaster.
Check and double check what you are doing with God’s money today. Understand the reason behind the investment strategy that is being presented to you. Invest the time to learn. Pray for understanding and seek confirmation of that feeling of peace that you are on the right track. If you don’t get that feeling of peace, it is probably a sign that you are on the wrong track.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
At any given time in your life, you could be proactive, inactive, or living on blind assumptions when it comes to your money. I was talking with a client who was just about to turn 74. She stressed the importance of making good decisions with money and being informed, of being pro-active rather than inactive with money.
I then had the pleasure of having a conversation with another client who really values education. She reads all of the time and asks a lot of questions. From the first day that I met her, she has always put a priority on education and just cannot get enough. She is the definition of proactive.
The key to being a successful steward of what God has given to you is to be proactive. A proactive person values being informed and strives to learn as much as possible. A proactive person knows the pros and cons behind the decisions that are being made. A proactive person doesn’t just take advice or recommendations blindly. They understand the significance of a full understanding of the basis for the advice that is being given.
During my second conversation, my proactive client then told me the story of a woman who just lost her husband. This couple lived in an expensive home and lived a pretty expensive lifestyle. To the world outside, they had everything. In reality, her husband died, leaving them with nothing but a stack of debt. He was living on blind assumptions that he would live for a long time and had plenty of time to make things up. Unfortunately, life was not so fortunate for him. The reality is that no one is promised tomorrow. It is always important to prepare today for tomorrow’s unknowns.
Being inactive is managing God’s money with your eyes closed. You check in every once in a while and make sure that all is working well. You rely on the advice of others, never fully understanding why it is that you believe that way.
Basically, inactive people create a lot of risk. For example, with investments, there is always the possibility that you working with a financial advisor who is a sales person that is disguised as a qualified investment advisor. I see this type of situation often. The problem is that it is often too late and the damage is done when you realize that what seemed like a qualified recommendation was nothing more than a mere sales pitch designed to benefit only one person. Time is a precious commodity when it comes to investing.
Living on blind assumptions is just assuming everything will work out without a basis for that belief. When managing God’s money that way, there is a huge risk that these assumptions without merit are a mere gamble and your chances of failure are greater.
There is only one way to live when it comes to stewardship. It is about being proactive. It is about being and staying informed. It is a commitment to education. It is an understanding of risk and how it works, which is critical when making any financial decisions. The wrong risk can set you back for a long time.
I bring this up today because there are a lot of investors who are inactive and living on blind assumptions. We just don’t have the luxury of driving blind when it comes to stewardship of God’s money. This is a tough investment environment. The decisions that you make today concerning risk will either be a home run or a disaster.
Check and double check what you are doing with God’s money today. Understand the reason behind the investment strategy that is being presented to you. Invest the time to learn. Pray for understanding and seek confirmation of that feeling of peace that you are on the right track. If you don’t get that feeling of peace, it is probably a sign that you are on the wrong track.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, July 29, 2008
The Top Questions and Answers Concerning Debt
1) Will my credit score go up once I have paid a debt in collections off? What if I don’t pay it in full and just settle it?
It might go up a little. It all depends on everything else that is on your report. Keep in mind that the majority of the damage is done to your credit score at the point it goes into collections.
2) Why are the credit scores different at the 3 credit reporting agencies?
First, they all have their own tweak to the FICO score. Second, it is rare that all three reports have the same information. That can make a difference.
3) Is it smart to just not use credit at all?
This is a financed based society. You need to have a credit score. Using credit each month and paying it off each month is good for your credit score.
4) Can credit card companies legally change your interest rate?
Yes, they can change any detail to the credit contract that you signed. By signing on the dotted line, you are agreeing to the fine print which gives them the right to make changes.
5) Why does your credit balance increase so much when it gets to a collection agency?
Basically, it comes down to bogus fees. Collection agencies add a ton of fees and penalties.
6) Do these companies that advertise that they can repair my credit score really work?
There is no magic to improving your credit score. Thus, there is nothing that they can do for you that you cannot do for yourself. Then there are companies that guarantee they will get everything removed, but that is not possible. If a consumer lies to the credit reporting agency and tells them that an item shouldn’t be on the report and the consumer reporting agency cannot find anything to refute that claim, then the item gets removed. These companies basically advocate that you lie about everything in hopes that they get removed.
7) What is the quickest way to improve my credit score?
There is no quick way. It takes time and positive credit activity
8) If I want something correct on my credit report, do I need to contact all three credit reporting companies?
You only have to contact one. If they make changes, they are to contact the other two and have it corrected.
9) I have no debt and feel like I am on track for my financial goals. Do I really need a credit score?
Dave Ramsey says that the credit score is not important. In a financed based society, it is imperative to keep your credit score strong. Plus, you cannot ever say that in your lifetime you will not need to take out a loan. You need a credit score for insurance scoring and you might even need it for a job interview.
10) Can anyone just check my credit file?
Creditors don’t need your permission to check your credit file. They just need a permissible purpose and there are a lot of permissible purposes. A credit inquiry is just a statement of fact that someone inquired about your credit.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
It might go up a little. It all depends on everything else that is on your report. Keep in mind that the majority of the damage is done to your credit score at the point it goes into collections.
2) Why are the credit scores different at the 3 credit reporting agencies?
First, they all have their own tweak to the FICO score. Second, it is rare that all three reports have the same information. That can make a difference.
3) Is it smart to just not use credit at all?
This is a financed based society. You need to have a credit score. Using credit each month and paying it off each month is good for your credit score.
4) Can credit card companies legally change your interest rate?
Yes, they can change any detail to the credit contract that you signed. By signing on the dotted line, you are agreeing to the fine print which gives them the right to make changes.
5) Why does your credit balance increase so much when it gets to a collection agency?
Basically, it comes down to bogus fees. Collection agencies add a ton of fees and penalties.
6) Do these companies that advertise that they can repair my credit score really work?
There is no magic to improving your credit score. Thus, there is nothing that they can do for you that you cannot do for yourself. Then there are companies that guarantee they will get everything removed, but that is not possible. If a consumer lies to the credit reporting agency and tells them that an item shouldn’t be on the report and the consumer reporting agency cannot find anything to refute that claim, then the item gets removed. These companies basically advocate that you lie about everything in hopes that they get removed.
7) What is the quickest way to improve my credit score?
There is no quick way. It takes time and positive credit activity
8) If I want something correct on my credit report, do I need to contact all three credit reporting companies?
You only have to contact one. If they make changes, they are to contact the other two and have it corrected.
9) I have no debt and feel like I am on track for my financial goals. Do I really need a credit score?
Dave Ramsey says that the credit score is not important. In a financed based society, it is imperative to keep your credit score strong. Plus, you cannot ever say that in your lifetime you will not need to take out a loan. You need a credit score for insurance scoring and you might even need it for a job interview.
10) Can anyone just check my credit file?
Creditors don’t need your permission to check your credit file. They just need a permissible purpose and there are a lot of permissible purposes. A credit inquiry is just a statement of fact that someone inquired about your credit.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Sunday, July 27, 2008
A Big Promise from a Mortgage Consultant
Ask Bob
Hi Bob,
Remember I talked with you over the radio about the mortgage lender suggesting that I contact their "credit repair" person, well the web for this particular one is "xxxxxxx" the lender guaranteed me a score of 640 within 35 days if I worked with her, their fee to start is $199. sounds really good for a guaranteed score improvement that high, I don't know if I could do that on my own by submitting letters to the credit bureaus do you?
Thanks for giving me an opportunity to talk you through this one. First of all, it is impossible to guarantee that type of performance. Secondly, the web-site states that they don't use meaningless guarantees. Once again, they are doing the same thing that you would be doing.
The credit reporting agencies don't speed up the process just because it comes from a credit repair agency. They investigate it at the same rate as if you would have sent those letters in yourself. The site also says that it will take 30 to 60 calender days. The credit reporting agency has 30 to as much as 45 days (if new information is presented) to investigate.
The reality of credit reporting is this:
You have negative and inaccurate information on your credit report - if that is the case, you dispute it requesting it be corrected or removed.
You have negative and accurate information on your credit report - it will stay on your credit report for 7 1/2 years past the first missed payment - there are no exceptions regardless of what anyone says.
So, if you have anything on your credit report that is inaccurate, get it removed or corrected by following the instructions on my web-site. You can do that for free.
http://www.prudentmoney.com/adminnm/templates/abiz-conresources.asp?articleid=1124&zoneid=67
If you want to have some fun with the mortgage person, request that she put the guarantee in writing with her signature as well as the owner of her mortgage company. Then ask what you get in the event that the 640 is not reached. I will say that is the first credit repair type web-site that was actually legit.
Keep the Faith
Hi Bob,
Remember I talked with you over the radio about the mortgage lender suggesting that I contact their "credit repair" person, well the web for this particular one is "xxxxxxx" the lender guaranteed me a score of 640 within 35 days if I worked with her, their fee to start is $199. sounds really good for a guaranteed score improvement that high, I don't know if I could do that on my own by submitting letters to the credit bureaus do you?
Thanks for giving me an opportunity to talk you through this one. First of all, it is impossible to guarantee that type of performance. Secondly, the web-site states that they don't use meaningless guarantees. Once again, they are doing the same thing that you would be doing.
The credit reporting agencies don't speed up the process just because it comes from a credit repair agency. They investigate it at the same rate as if you would have sent those letters in yourself. The site also says that it will take 30 to 60 calender days. The credit reporting agency has 30 to as much as 45 days (if new information is presented) to investigate.
The reality of credit reporting is this:
You have negative and inaccurate information on your credit report - if that is the case, you dispute it requesting it be corrected or removed.
You have negative and accurate information on your credit report - it will stay on your credit report for 7 1/2 years past the first missed payment - there are no exceptions regardless of what anyone says.
So, if you have anything on your credit report that is inaccurate, get it removed or corrected by following the instructions on my web-site. You can do that for free.
http://www.prudentmoney.com/adminnm/templates/abiz-conresources.asp?articleid=1124&zoneid=67
If you want to have some fun with the mortgage person, request that she put the guarantee in writing with her signature as well as the owner of her mortgage company. Then ask what you get in the event that the 640 is not reached. I will say that is the first credit repair type web-site that was actually legit.
Keep the Faith
Thursday, July 24, 2008
Oh Great Another Chance to Buy a Plasma TV
Have you heard the news? You might be receiving Round 2 of the desperation, I mean, rebate checks that Washington so desperately wants you to take and spend. Wait a minute. Didn’t Congress also say that they were concerned about the saving rates in America? Oh yeah, that was a sound bite for another time. Today, we need spending at whatever cost.
Congress is actually considering sending out another few billion in free money. I am no historian, but I would challenge anyone to find a time in history where so many extraordinary things are being done to save an economy that every lawmaker says is strong and has good fundamentals. If everything is in good shape, why the heroic measures? Let’s face it, we haven’t even seen a negative quarter of growth and they want to send out more money. I guess that’s one more band aid before November in order to boost those numbers.
Is it just me, or are the politicians completely out of control? When I think about it further, maybe they are not out of control – maybe Congress is so desperate that they are trying everything possible to postpone the inevitable.
Then there is Treasury Secretary Hank Paulson and his bail-out, oh sorry, I mean confidence building plan for Freddie Mac and Fannie Mae. Let’s see…everything is fine with the two companies. They are well funded with no problems. However, we need to make sure that we can give (read: print) all of the money that they need to carry out business in the event that they do get into trouble.
Then there is our Federal Reserve Board Chairman. I cannot believe I am going to write this. Is he the only realistic guy in Washington? He is the only one that has anything negative to say about our economy right now. There was a time that if the Federal Reserve Board Chairman said real negative things about the future of the economy the markets would tank. This happened this past week and the stock market took off as if someone captured Bin Laden. Could it be that no one really cares anymore about the Fed Chairman?
Maybe the new voice of manipulation is Treasury Secretary Paulson. Over the past year, he is the one who has moved markets by arranging for the bail-out of Bear Sterns, announcing many different housing bail-out plans (none of them have worked), and now his words moved the markets on the bail out plan for Freddie Mac and Fannie Mae.
Lots of desperation and reassuring words. Watch their actions and ignore their words.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Congress is actually considering sending out another few billion in free money. I am no historian, but I would challenge anyone to find a time in history where so many extraordinary things are being done to save an economy that every lawmaker says is strong and has good fundamentals. If everything is in good shape, why the heroic measures? Let’s face it, we haven’t even seen a negative quarter of growth and they want to send out more money. I guess that’s one more band aid before November in order to boost those numbers.
Is it just me, or are the politicians completely out of control? When I think about it further, maybe they are not out of control – maybe Congress is so desperate that they are trying everything possible to postpone the inevitable.
Then there is Treasury Secretary Hank Paulson and his bail-out, oh sorry, I mean confidence building plan for Freddie Mac and Fannie Mae. Let’s see…everything is fine with the two companies. They are well funded with no problems. However, we need to make sure that we can give (read: print) all of the money that they need to carry out business in the event that they do get into trouble.
Then there is our Federal Reserve Board Chairman. I cannot believe I am going to write this. Is he the only realistic guy in Washington? He is the only one that has anything negative to say about our economy right now. There was a time that if the Federal Reserve Board Chairman said real negative things about the future of the economy the markets would tank. This happened this past week and the stock market took off as if someone captured Bin Laden. Could it be that no one really cares anymore about the Fed Chairman?
Maybe the new voice of manipulation is Treasury Secretary Paulson. Over the past year, he is the one who has moved markets by arranging for the bail-out of Bear Sterns, announcing many different housing bail-out plans (none of them have worked), and now his words moved the markets on the bail out plan for Freddie Mac and Fannie Mae.
Lots of desperation and reassuring words. Watch their actions and ignore their words.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, July 23, 2008
What You Might be Assuming about Your Financial Advisor Versus the Reality
I am convinced that there are a lot of people who have invested their money with financial advisors that are operating under the wrong set of assumptions. Assumptions are dangerous. You can assume something for a long time and then realize that is was all wrong. Then you lost one of your greatest assets – time.
When the market is going up, these assumptions aren’t so dangerous. However, in a tough stock market environment like today, these assumptions are very detrimental to your long-term financial goals.
My advisor is watching my investments – Unfortunately, your advisor might be just watching your investments go down. Keeping an eye on the investments is not a management strategy. It is just something that an advisor might say to calm the nerves of clients.
My advisor has me properly diversified – Diversification is the difference between accounts that are losing money and those that are surviving the bear market. I looked at someone’s portfolio just the other day. They felt like they were properly diversified, or at least that is what they were told. The portfolio consisted of 12 mutual funds. There were a lot of funds. Unfortunately, the portfolio had no meaningful diversification. Roughly 88% was in stocks and 12% was in bonds. Not nearly enough diversification for this type of bear market. Diversification isn’t defined as number of investments. It is how your money is spread amongst many different types of assets.
My advisor is moving my money around – I see this often and it ends up being an unfortunate mistake for the client. The advisor calls the client and tells the client that changes need to be made in the portfolio. The advisor wants to sell one mutual fund and buy another. Unfortunately, the advisor is just selling one stock mutual fund and buying another, earning a commission in the process. It is nothing but a parallel move.
My advisor says not to worry the market is coming back – In bear markets, this might not be for a long time. I refer to this investment philosophy as the philosophy of hope. Hope is not a good investment. If risk is real high, you take less risk…not just stay invested in the HOPE that things are just going to come back.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
When the market is going up, these assumptions aren’t so dangerous. However, in a tough stock market environment like today, these assumptions are very detrimental to your long-term financial goals.
My advisor is watching my investments – Unfortunately, your advisor might be just watching your investments go down. Keeping an eye on the investments is not a management strategy. It is just something that an advisor might say to calm the nerves of clients.
My advisor has me properly diversified – Diversification is the difference between accounts that are losing money and those that are surviving the bear market. I looked at someone’s portfolio just the other day. They felt like they were properly diversified, or at least that is what they were told. The portfolio consisted of 12 mutual funds. There were a lot of funds. Unfortunately, the portfolio had no meaningful diversification. Roughly 88% was in stocks and 12% was in bonds. Not nearly enough diversification for this type of bear market. Diversification isn’t defined as number of investments. It is how your money is spread amongst many different types of assets.
My advisor is moving my money around – I see this often and it ends up being an unfortunate mistake for the client. The advisor calls the client and tells the client that changes need to be made in the portfolio. The advisor wants to sell one mutual fund and buy another. Unfortunately, the advisor is just selling one stock mutual fund and buying another, earning a commission in the process. It is nothing but a parallel move.
My advisor says not to worry the market is coming back – In bear markets, this might not be for a long time. I refer to this investment philosophy as the philosophy of hope. Hope is not a good investment. If risk is real high, you take less risk…not just stay invested in the HOPE that things are just going to come back.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, July 22, 2008
Loans are Getting Much Tougher to Get
I had Alice White Hinckley on the show with me yesterday. She is a mortgage consultant that I have known for over 25 years. If you are in the market to refinance or finance a new home purchase, I would highly recommend her. She is very good at what she does.
The mortgage markets are really changing. Credit scores are incredibly important. The bottom line is that anything north of 680 is going to get you a good rate. However, the further you fall from 680, the rates start to go up. Alice said that they will increase at every 20 point interval as you decline below 680. Then there comes a point where you don’t qualify at all.
The biggest problem is the lack of equity in homes. Due to the small percentage that was placed as a down payment during the initial purchase as well as the declining values of homes, many homeowners find themselves upside down in their home (owing more than the house is worth). Banks and lenders want to see some type of equity.
Private mortgage insurance has also increased in price. Beyond the monthly price increases, often times lenders are requiring an upfront cost to be paid at closing. In other words, not only are interest rates higher, so are the closing costs.
So, here are a few tips:
1) Plan ahead – If you know that you will need to refinance, talk with a mortgage consultant ahead of time so that you know your situation. Even then, things could change between today and the time you are going to refinance. It appears that things are changing daily as banks attempt to keep up with this credit crisis.
2) Know your credit score – This is also important. Work to keep that credit score high. If your credit score is low, do whatever is necessary to increase your credit score (beyond calling one of the credit repair companies that advertise on the telephone pole).
3) Find a mortgage consultant and stay away from the sales people – In this environment, you need someone who is going to act as a consultant and not someone who is going to pretend to be a consultant but really is nothing more than a slick salesman.
4) If fees at closing seem excessive, they just might be – Some of these mortgage brokers are charging outrageous fees and getting away with it. Most fees are standard across the board. Then some try to charge points (additional fees) stating that there is no way around it. Remember you can always get a second opinion.
5) If you have an adjustable rate mortgage, don’t just assume you should re-finance – Look the numbers over very carefully. Your rate might not increase to the point where refinancing makes sense. If you can buy another year, it makes sense to do so. The credit markets might be in better shape a year from now.
To listen to yesterday’s show, click here.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
The mortgage markets are really changing. Credit scores are incredibly important. The bottom line is that anything north of 680 is going to get you a good rate. However, the further you fall from 680, the rates start to go up. Alice said that they will increase at every 20 point interval as you decline below 680. Then there comes a point where you don’t qualify at all.
The biggest problem is the lack of equity in homes. Due to the small percentage that was placed as a down payment during the initial purchase as well as the declining values of homes, many homeowners find themselves upside down in their home (owing more than the house is worth). Banks and lenders want to see some type of equity.
Private mortgage insurance has also increased in price. Beyond the monthly price increases, often times lenders are requiring an upfront cost to be paid at closing. In other words, not only are interest rates higher, so are the closing costs.
So, here are a few tips:
1) Plan ahead – If you know that you will need to refinance, talk with a mortgage consultant ahead of time so that you know your situation. Even then, things could change between today and the time you are going to refinance. It appears that things are changing daily as banks attempt to keep up with this credit crisis.
2) Know your credit score – This is also important. Work to keep that credit score high. If your credit score is low, do whatever is necessary to increase your credit score (beyond calling one of the credit repair companies that advertise on the telephone pole).
3) Find a mortgage consultant and stay away from the sales people – In this environment, you need someone who is going to act as a consultant and not someone who is going to pretend to be a consultant but really is nothing more than a slick salesman.
4) If fees at closing seem excessive, they just might be – Some of these mortgage brokers are charging outrageous fees and getting away with it. Most fees are standard across the board. Then some try to charge points (additional fees) stating that there is no way around it. Remember you can always get a second opinion.
5) If you have an adjustable rate mortgage, don’t just assume you should re-finance – Look the numbers over very carefully. Your rate might not increase to the point where refinancing makes sense. If you can buy another year, it makes sense to do so. The credit markets might be in better shape a year from now.
To listen to yesterday’s show, click here.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, July 21, 2008
ICBA Debunks Deposit Insurance Myths
I wanted to pass this on in today’s blog. This press release came from the Independent Community Bankers of America. Incidentally, this is why I like the smaller community banks versus the big banks.
Washington, D.C. (July 17, 2008) – The Independent Community Bankers of America (ICBA) is challenging unfounded concerns raised about the safety of bank deposits. Federal deposit insurance guarantees your deposits are safe in every financial institution insured by the Federal Deposit Insurance Corporation, including community banks. Don’t believe the hype. Get the facts.
Myth: Your money is safer in big banks.
Fact: No one has ever lost a penny of FDIC-insured deposits held in community banks. The FDIC insures deposits up to $100,000 per depositor and $250,000 for certain retirement accounts. If you have more than $100,000 at a community bank, you can still be fully insured if your accounts meet certain requirements. For example, accounts owned by a single person are separately insured from joint accounts or retirement accounts owned by that person. The FDIC’s Electronic Deposit Insurance Estimator (on the web at http://www.fdic.gov/edie) can determine your coverage.
Community banks focus on the needs of local families, businesses and farmers, and their top executives are generally available on site to answer your questions directly and make timely decisions. Many of the nation’s largest banks are structured to serve large corporations and have CEOs headquartered in office suites, not local banks.
Myth: Your money is stored in a vault at the bank.
Fact: Community bank deposits are reinvested in your local economy. Your money on deposit will be used to make loans in the community that help your neighbors start a nearby business, purchase a home, or send a son or daughter to college. Continuing to hold deposits in community banks ensures the neighborhoods where you live and work will continue to grow and thrive.
Myth: Community banks are undercapitalized.
Fact: The vast majority of our nation’s banks, especially community banks, are strong, safe and stable. Community bankers are common sense lenders that don’t engage in high-risk activities. Instead, they stick to the longstanding fundamentals of responsible banking, and always seek to serve the long-term interests of their customers and communities.
Myth: The FDIC takeover of IndyMac Bancorp means my bank is at risk.
Fact: IndyMac Bancorp was taken over because, in part, depositors became fearful and attempted to close their accounts at once, destabilizing the bank. The overwhelming majority of the nation’s banks are safe and well capitalized. As stated by FDIC Chairman Sheila Bair, IndyMac is only one of nearly 8,500 depository institutions operating in the United States and represents just 0.2 percent of banking-industry assets. There is little chance your bank will be taken over by the FDIC. And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits.
Myth: Community banks are involved in problems with subprime mortgage lending.
Fact: Community banks are common-sense lenders that have avoided subprime lending. There is no mortgage-lending crisis for community banks because they are well-run, highly capitalized, tightly regulated and more risk-averse than big banks. Community banks have money to lend homeowners for new purchases and to refinance existing mortgages. In spite of talk of a credit crunch, community banks are open for business.
About ICBA
The Independent Community Bankers of America, the nation’s voice for community banks, represents nearly 5,000 community banks of all sizes and charter types throughout the United States and is dedicated exclusively to representing the interests of the community banking industry and the communities and customers we serve. For more information, visit www.icba.org.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, July 18, 2008
Is the Bear Market Over?
I was talking to my assistant this morning and she said that someone on one of the news stations was declaring an end to the bear market. I tell you what concerns me about this type of news casting. Of course, this guy might be right on the money and his guess (because no one can predict the future) might be lucky enough to be right.
Before I go on, I don’t want to always come out as the one who throws cold water on the party. Let’s face it – the stock market has had a few good days. That is the good news. At the same time, a few good days in the stock market don’t make for the end of a bear market.
Anyone who has taken the time to study bear markets, and especially anyone who is going to make predictions, would know that you not only look at bear markets from the standpoint of how much the stock market has lost, but you also look at it from the standpoint of time. The average length of the last three major bear markets has been 447 days. We are currently at day 268. If history is any indication, we still have a ways to go.
So, it is a little too early to be putting on the party hats and declaring an end to the bear. This is not the time to be complacent. In fact there is never a good time to be complacent when it comes to your investments and the subject of risk.
I have done quite a bit of research on the structure of this bear market. My analysis would suggest that the bear market actually started July 17, 2007. That would make this bear market one year old. That was the date the two Bear Sterns hedge funds were declared for the most part worthless because of all of the credit losses. That was the first of a year’s long series of problems in the credit markets which takes us to where we are today.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, July 17, 2008
Are You Prepared for a Bank Failure?
The IndyMac bank failure was certainly a sign of the times. It was sobering to see bank customers lined up outside the bank just trying to get their money. Of course, this leads to speculation that hundreds of banks could potentially fail.
Of course, thus far, it is tough to tell which banks are in trouble. Most companies tell you that they have plenty of money and that there are no concerns up until the day that they close their doors. Companies always put a brave face on in the midst of potential collapse. If you think back to Bear Sterns, just four days before their collapse, the CEO stated that everything was just fine.
Regardless of whether hundreds of banks fail or not, there are general principles that you should follow. The number one principle in this situation is to have your money diversified. This principle also applies to bank accounts.
You should always have your money in the forms of bank and savings accounts and CD’s only in FDIC insured banks. In addition, you should always stay within the limits of the FDIC regarding FDIC insurance.
The Federal Deposit Insurance Corporation (the FDIC) was created by Congress in 1933 to protect consumers against bank failure. The FDIC protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails.
The FDIC insures up to $100,000 per person per bank. So if you have $105,000 in a CD, it will insure that you will receive $100,000 of that back in the event of a bank failure.
If you have a joint account, that joint account is insured up to $200,000. Remember the rule of thumb is $100,000 per person per bank. If you have an IRA, that $100,000 increases to $250,000 due to legislation passed by Congress.
The FDIC doesn’t insure investment accounts or money market accounts. This only applies to savings, bank, and CD accounts. It also applies to various other cash type instruments.
So it makes no sense to go beyond those limits whether or not we are facing a banking crisis. Go only with FDIC insured banks and stay under those limits and you should be just fine.
Incidentally, the FDIC fund has a value of $53,000,000. The IndyMac bail-out is estimated to cost $4 to $8 billion.
What about brokerage houses where you have your investments? The Securities Investor Protection Corporation, commonly known as SIPC, provides customers with limited protection. The SIPC, a non-profit, non-government membership group, is the insurance body for the brokerage industry.
It protects up to $500,000 per customer and of that amount, $100,000 protection of cash. It only protects customers in the event the broker firm fails and or the broker steals the customer’s money. It doesn’t protect against investment value loss.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, July 16, 2008
Another Bank of America Story
Dear Bob,
Bank of America allowed someone to take out a credit card in my name signing themselves on as an ‘authorized user.’ I knew nothing of the card. Bank of America filed a lawsuit against me, and then withdrew it when they knew they would lose the case. They sold the file to three different debt collectors, which also withdrew when sent the court documents.
Bob, I disputed this with the credit bureaus, but they returned with an answer also adding another $2,000 to the debt. They have defamed my name and assassinated my character in the credit world. My attorney told me to send them a letter and get aggressive with them. My question is - what department would I send this letter to at Bank of America? I know to send it where it is recorded on my credit report, but what department? God Bless You and Your's, Bob!!!
These are tough situations. First and foremost, this is an identity theft case. The proper sequence of events needs to be followed as a means for protection when identity theft occurs. In an identity theft case, you are a guilty victim. You are a victim and you are guilty until proven innocent, which is up to you.
Then you need to watch your credit report like a hawk. The minute something shows up, it is important to put a detailed case together and dispute the item. If any type of legal situation occurs because of the identity theft, don’t just assume it will go away because you know you are an identity theft victim. Get an attorney immediately and fight it.
As this listener describes in this painful story, the events can get quickly out of control. Unfortunately in his case, it has gotten way out of control and might be tough to crawl out. I always encourage anyone to fight for their rights. At the same time, you have to be realistic as to the time, stress, and energy you spend. Fighting the mistakes of a company such as Bank of America might end up being fruitless.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Bank of America allowed someone to take out a credit card in my name signing themselves on as an ‘authorized user.’ I knew nothing of the card. Bank of America filed a lawsuit against me, and then withdrew it when they knew they would lose the case. They sold the file to three different debt collectors, which also withdrew when sent the court documents.
Bob, I disputed this with the credit bureaus, but they returned with an answer also adding another $2,000 to the debt. They have defamed my name and assassinated my character in the credit world. My attorney told me to send them a letter and get aggressive with them. My question is - what department would I send this letter to at Bank of America? I know to send it where it is recorded on my credit report, but what department? God Bless You and Your's, Bob!!!
These are tough situations. First and foremost, this is an identity theft case. The proper sequence of events needs to be followed as a means for protection when identity theft occurs. In an identity theft case, you are a guilty victim. You are a victim and you are guilty until proven innocent, which is up to you.
Then you need to watch your credit report like a hawk. The minute something shows up, it is important to put a detailed case together and dispute the item. If any type of legal situation occurs because of the identity theft, don’t just assume it will go away because you know you are an identity theft victim. Get an attorney immediately and fight it.
As this listener describes in this painful story, the events can get quickly out of control. Unfortunately in his case, it has gotten way out of control and might be tough to crawl out. I always encourage anyone to fight for their rights. At the same time, you have to be realistic as to the time, stress, and energy you spend. Fighting the mistakes of a company such as Bank of America might end up being fruitless.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, July 15, 2008
Fannie Mae and Freddie Mac – Where There is Smoke, There is Fire
The rumor mill has been circulating about the potential collapse of the two mortgage giants Freddie Mac and Fannie Mae. This has been the reason for a lot of the loss in the stock market over the past week. Let’s take a look at what all of this means
Freddie Mac and Fannie Mae are Government-sponsored entities that were originally created as a means to help low income homeowners experience the American Dream of Home Ownership.
In the 1930’s, Congress created the Federal National Mortgage Corporation, or Fannie Mae, to encourage banks to make loans to low-income Americans by agreeing to purchase those mortgages from banks. If Fannie Mae, who was created by the Government, could step in and take the risk away from the banks by insuring the loans against loss, then the dream of home ownership would become more of a reality.
In 1970, Congress created a second agency called the Federal Home Loan Mortgage Corporation, or Freddie Mac. By the late 1980’s, these two companies were responsible for around 30% of the loans that were being written.
The two entities would buy or federally insure the loans from the banks. Then they would either own the mortgages themselves or they would take the loans and package them up into a bond and let Wall Street sell them to clients as income-producing investments.
Well what started out as a way to help low income Americans expanded to insuring loans up to $417,000. Of course, this “Government-backed” mortgage machine got completely out of control along with everyone else during the last 5 years and now has big problems.
According to a Wall Street Journal article from last Friday, together these two companies insure or own over 5.8 trillion dollars worth of loans. They are involved in roughly 70% of all mortgages written today. The mortgage markets desperately need these two companies to stay functional. If either were to fail, the implications would be disastrous for the economy.
The problem for these two companies is the same problem that Bear Stearns encountered. They are trying to raise money just to exist and no one wants to give them any. The investors who are willing to give them money will only do so at very high interest rates.
If these two companies are involved in some way with 70% of the mortgages, then anything that would prevent them from being that involved would mean big problems for the markets, the real estate industry, and the economy.
So the Federal Government steps in and announces on Sunday that they will in a sense bail out the two mortgage giants. They are expanding the line of credit or amount of money that the two mortgage giants can borrow. A short-term fix for sure. The Government is depending on one thing to occur – the real estate and mortgage markets to improve. Unfortunately, that could still be way off into the future. Will this bail-out attempt prove to be an exercise of throwing good money after bad or a real solution?
The bigger problem is that the Federal Government continues to interfere with markets that are intended to be free. They have been doing this behind the scenes for years. However, in recent months, they are doing it in a big way right out in the open.
Not only are they making money available to the two mortgage giants, but Paulson also wants to be granted authority to buy stock in both of the companies if needed. I can understand opening up the line of credit. However, the Government intervening to buy stock? That is getting a little out of control.
What are the ramifications for this move by the Government? I would suggest that it only pushes the problem further out into the future. When it is all said and done, these problems that we face in our credit markets have to be corrected and the only way for the problems to be truly corrected is to allow nature to take its course, losses in the market to be realized and not postponed, and most importantly, for the Federal Government to stay out of the way.
What this does for the stock market is creates large amounts of uncertainty. I am sure that much to the surprise of Treasury Secretary Paulson who created the bail-out plan, the markets didn’t care today as the stock market had another losing day. It is a message being sent to the Government that there is an extreme lack of confidence in the Federal Government.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Freddie Mac and Fannie Mae are Government-sponsored entities that were originally created as a means to help low income homeowners experience the American Dream of Home Ownership.
In the 1930’s, Congress created the Federal National Mortgage Corporation, or Fannie Mae, to encourage banks to make loans to low-income Americans by agreeing to purchase those mortgages from banks. If Fannie Mae, who was created by the Government, could step in and take the risk away from the banks by insuring the loans against loss, then the dream of home ownership would become more of a reality.
In 1970, Congress created a second agency called the Federal Home Loan Mortgage Corporation, or Freddie Mac. By the late 1980’s, these two companies were responsible for around 30% of the loans that were being written.
The two entities would buy or federally insure the loans from the banks. Then they would either own the mortgages themselves or they would take the loans and package them up into a bond and let Wall Street sell them to clients as income-producing investments.
Well what started out as a way to help low income Americans expanded to insuring loans up to $417,000. Of course, this “Government-backed” mortgage machine got completely out of control along with everyone else during the last 5 years and now has big problems.
According to a Wall Street Journal article from last Friday, together these two companies insure or own over 5.8 trillion dollars worth of loans. They are involved in roughly 70% of all mortgages written today. The mortgage markets desperately need these two companies to stay functional. If either were to fail, the implications would be disastrous for the economy.
The problem for these two companies is the same problem that Bear Stearns encountered. They are trying to raise money just to exist and no one wants to give them any. The investors who are willing to give them money will only do so at very high interest rates.
If these two companies are involved in some way with 70% of the mortgages, then anything that would prevent them from being that involved would mean big problems for the markets, the real estate industry, and the economy.
So the Federal Government steps in and announces on Sunday that they will in a sense bail out the two mortgage giants. They are expanding the line of credit or amount of money that the two mortgage giants can borrow. A short-term fix for sure. The Government is depending on one thing to occur – the real estate and mortgage markets to improve. Unfortunately, that could still be way off into the future. Will this bail-out attempt prove to be an exercise of throwing good money after bad or a real solution?
The bigger problem is that the Federal Government continues to interfere with markets that are intended to be free. They have been doing this behind the scenes for years. However, in recent months, they are doing it in a big way right out in the open.
Not only are they making money available to the two mortgage giants, but Paulson also wants to be granted authority to buy stock in both of the companies if needed. I can understand opening up the line of credit. However, the Government intervening to buy stock? That is getting a little out of control.
What are the ramifications for this move by the Government? I would suggest that it only pushes the problem further out into the future. When it is all said and done, these problems that we face in our credit markets have to be corrected and the only way for the problems to be truly corrected is to allow nature to take its course, losses in the market to be realized and not postponed, and most importantly, for the Federal Government to stay out of the way.
What this does for the stock market is creates large amounts of uncertainty. I am sure that much to the surprise of Treasury Secretary Paulson who created the bail-out plan, the markets didn’t care today as the stock market had another losing day. It is a message being sent to the Government that there is an extreme lack of confidence in the Federal Government.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, July 14, 2008
Even If Interest Rates Go Up, Keep Payments Current
Dear Bob,
I was 2 days late on my credit card bill. My interest rate went from 3% to 24%. That means my monthly payment went from $30 to $175. I all ready contacted the credit card company and they are not willing to do anything, they said after 45 days maybe. I am have been disabled for the past 2 years, on a work related injury, and we are on a strict budget, yet they said that they have to follow policy.
I am unable to make the payments. I have contacted a company to help but they said that I should stop payment on all my credit cards. I am current on all to this date, but for the previous mentioned, we cannot make the payment. What course of action should I take since they are not willing to work with us? We have been current on the bill since 2005 and this is the first time that the payment went out late.
What a potential disaster. This is a great email with a good ending. However, it could have been a disaster. First, anytime you go to one of these credit solutions companies, they are going to tell you to go ahead and wreck your credit. This is some of the most irresponsible advice given to this listener from this company.
His credit was good. He was just late on a payment. Had he followed their advice, he would have done 7 ½ years of damage and been dealing with debt collectors for a long time.
The key in any situation like this one is to stay current with the payment regardless of the interest rate. If at any point you default, the consequences are much worse. It always makes sense to do whatever you have to do to keep paying and look for alternatives.
Fortunately, his alternative was to go to http://www.penfed.org/ where he was able to transfer the balance to a 5.9% for life credit card. That quickly solved his problem.
Remember, a good credit score gives you all of the options in the world.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, July 11, 2008
It was all in my head! – Thanks Phil Gramm
Dear former Senator Gramm,
I am so thankful that you helped me get some peace about all of these (what I thought were) economic problems we are facing today. Yesterday you said that this whole recession thing was in our heads by referring to it as a “mental recession.” I will also officially stop whining. You are right when you say we have become a country of whiners.
All of those foreclosures, the real estate crisis, all of these companies going belly up, unemployment increasing, the 20% plus loss in the stock market, $4 plus gasoline, the increase in food prices, consumers folding under massive debt problems, etc – you are so right! That is just in our heads. Those are not real problems.
Thanks to you, I am going to stop complaining. I see the light. The next time I put $90 worth of gas in my car, I am just going to remember what you said, realize it is all in my head, and resist the urge to complain. When I have to pay higher prices for all of those necessities, I am just going to remember it is all an illusion. When my neighbor goes into foreclosure, I am just going to conclude that it was their decision to do so, they didn’t like the house, and someone is going to give them credit to buy another with nothing down.
Wow, I feel so free. I can see where you could come to that conclusion. Being a politician (both Democrat and Republican – I guess you couldn’t figure out which party served your best interest) off and on for 14 years, I could see where you come to that conclusion looking down from your “perch.”
I mean there is no one more qualified to address the reality of America than someone who has served as a politician as long as you have.
I am sure that Senator McCain feels better knowing that he shouldn’t whine (following those remarks) having selected you to advise his campaign. Don’t worry Senator McCain, the potential fall-out from comments from Mr. Gramm and others that you call advisors are just in your head as well.
Just like a politician to tell us to ignore the problems and stop whining because it is all in our heads.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
I am so thankful that you helped me get some peace about all of these (what I thought were) economic problems we are facing today. Yesterday you said that this whole recession thing was in our heads by referring to it as a “mental recession.” I will also officially stop whining. You are right when you say we have become a country of whiners.
All of those foreclosures, the real estate crisis, all of these companies going belly up, unemployment increasing, the 20% plus loss in the stock market, $4 plus gasoline, the increase in food prices, consumers folding under massive debt problems, etc – you are so right! That is just in our heads. Those are not real problems.
Thanks to you, I am going to stop complaining. I see the light. The next time I put $90 worth of gas in my car, I am just going to remember what you said, realize it is all in my head, and resist the urge to complain. When I have to pay higher prices for all of those necessities, I am just going to remember it is all an illusion. When my neighbor goes into foreclosure, I am just going to conclude that it was their decision to do so, they didn’t like the house, and someone is going to give them credit to buy another with nothing down.
Wow, I feel so free. I can see where you could come to that conclusion. Being a politician (both Democrat and Republican – I guess you couldn’t figure out which party served your best interest) off and on for 14 years, I could see where you come to that conclusion looking down from your “perch.”
I mean there is no one more qualified to address the reality of America than someone who has served as a politician as long as you have.
I am sure that Senator McCain feels better knowing that he shouldn’t whine (following those remarks) having selected you to advise his campaign. Don’t worry Senator McCain, the potential fall-out from comments from Mr. Gramm and others that you call advisors are just in your head as well.
Just like a politician to tell us to ignore the problems and stop whining because it is all in our heads.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, July 10, 2008
Facing Arbitration
Arbitration is the preferred process that debt collectors and credit card companies take when attempting to collect debt. Unlike the filing of a lawsuit, the arbitration process starts with little fanfare. It comes in a letter stating that the process has started and informs the consumer on what to do. The problem is that whether it is a lawsuit or the arbitration process, they both lead to the same thing - the awarding of a judgment.
Judgments are the worst case scenario for the consumer. Once a judgment is awarded, the debt collector has an additional 10 years to attempt to collect the debt with ways that weren’t available prior to obtaining the judgment. Of course, it depends upon each state. For instance, in some states, a judgment gives the creditor the ability to garnish bank accounts. Not only that, but judgments are also renewable for another 10 years following the completion of the first 10 year period.
So what do you do if faced with a judgment? The answer is quite simple. You get an attorney to represent you. Statistics suggest that 93% of judgments that are served go through the process without the consumer even responding. So, who do you think that the creditor is going to pursue – the one with the attorney or the one without the attorney? I would suggest that the odds are in the favor of the consumer with the attorney.
Besides, even if they do pursue the judgment, you would want an attorney to make sure that you get the true benefit of the law. The worst thing you can do is ignore this. Of course, that is what the credit industry counts on.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Judgments are the worst case scenario for the consumer. Once a judgment is awarded, the debt collector has an additional 10 years to attempt to collect the debt with ways that weren’t available prior to obtaining the judgment. Of course, it depends upon each state. For instance, in some states, a judgment gives the creditor the ability to garnish bank accounts. Not only that, but judgments are also renewable for another 10 years following the completion of the first 10 year period.
So what do you do if faced with a judgment? The answer is quite simple. You get an attorney to represent you. Statistics suggest that 93% of judgments that are served go through the process without the consumer even responding. So, who do you think that the creditor is going to pursue – the one with the attorney or the one without the attorney? I would suggest that the odds are in the favor of the consumer with the attorney.
Besides, even if they do pursue the judgment, you would want an attorney to make sure that you get the true benefit of the law. The worst thing you can do is ignore this. Of course, that is what the credit industry counts on.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, July 09, 2008
The Credit Industry’s Secret Weapon to Collecting Debt…and You Agreed to It
With credit card debt rising to a record high of $957 billion in the first quarter of this year, credit card companies and debt collectors are getting very aggressive in collecting delinquent debts. They have a method of going through the legal process that has a success rate of 99%. It is reported that in 93% of the cases that are awarded, the debtor didn’t respond or even participate.
Well, it is the industry’s chief debt collecting weapon called arbitration. The worst part is that consumers agree to it in the majority of credit applications that are signed. The fine print states that all disputes are settled through arbitration.
Arbitration was intended to be a fair and balanced way to handle a dispute. However, you take an epic problem such as delinquent debt and throw in arbitration fees to collect that debt and you get arbitration firms that cater to the credit card industry. In Business Week, an article alleges that one of the country’s largest arbitration firms, National Arbitration Forum or NAF, sets up an arbitration service that is completely one-sided and favors the credit card industry. The system caters so much to the credit card industry that big banks such as Chase exclusively use NAF to arbitrate their cases. In fact, it is in the fine print.
Allegedly the system is designed to put very little time and research into the cases and arranged to where they just side in favor with the creditor. The amount is rarely researched for accuracy. The consumer doesn’t even have a chance.
The process is very simple. A notice of arbitration is sent in the mail. The letter says that the consumer has 30 days to respond. Reportedly 93.7% of the cases are decided without the consumers ever responding. 0.3% of consumers actually ask for a hearing. Only 6% participate by mail.
To make matters worse, the consumer has to get on a plane and fly to the arbitration hearings just to participate. Of course, this makes it even more difficult for the consumer to defend their case.
A current NAF arbitrator told Business Week that “there doesn’t have to have to be much due diligence put in the complaint. If there is no response, you are golden. If you get a problematic case, you dismiss it.”
It comes with no fanfare and most consumers don’t realize the significance of it. It comes in a non-descript, straight-forward letter that states the process has been started. It probably would not create the same reaction as being served a lawsuit. Thus, often times they are disregarded. However, that is a huge mistake. The consequences of arbitration are no different than those of a lawsuit procedure.
The objective for both arbitration and a lawsuit are the same. It is to seek a judgment. Once that is accomplished, then they have you for a very long time. Legally, they can pursue this debt for up to 20 years. The judgment also affords them more aggressive methods in collecting the debt.
This is why it is critical to keep debts current no matter what. Once a debt defaults and goes to collections, you have created a much longer term problem.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Well, it is the industry’s chief debt collecting weapon called arbitration. The worst part is that consumers agree to it in the majority of credit applications that are signed. The fine print states that all disputes are settled through arbitration.
Arbitration was intended to be a fair and balanced way to handle a dispute. However, you take an epic problem such as delinquent debt and throw in arbitration fees to collect that debt and you get arbitration firms that cater to the credit card industry. In Business Week, an article alleges that one of the country’s largest arbitration firms, National Arbitration Forum or NAF, sets up an arbitration service that is completely one-sided and favors the credit card industry. The system caters so much to the credit card industry that big banks such as Chase exclusively use NAF to arbitrate their cases. In fact, it is in the fine print.
Allegedly the system is designed to put very little time and research into the cases and arranged to where they just side in favor with the creditor. The amount is rarely researched for accuracy. The consumer doesn’t even have a chance.
The process is very simple. A notice of arbitration is sent in the mail. The letter says that the consumer has 30 days to respond. Reportedly 93.7% of the cases are decided without the consumers ever responding. 0.3% of consumers actually ask for a hearing. Only 6% participate by mail.
To make matters worse, the consumer has to get on a plane and fly to the arbitration hearings just to participate. Of course, this makes it even more difficult for the consumer to defend their case.
A current NAF arbitrator told Business Week that “there doesn’t have to have to be much due diligence put in the complaint. If there is no response, you are golden. If you get a problematic case, you dismiss it.”
It comes with no fanfare and most consumers don’t realize the significance of it. It comes in a non-descript, straight-forward letter that states the process has been started. It probably would not create the same reaction as being served a lawsuit. Thus, often times they are disregarded. However, that is a huge mistake. The consequences of arbitration are no different than those of a lawsuit procedure.
The objective for both arbitration and a lawsuit are the same. It is to seek a judgment. Once that is accomplished, then they have you for a very long time. Legally, they can pursue this debt for up to 20 years. The judgment also affords them more aggressive methods in collecting the debt.
This is why it is critical to keep debts current no matter what. Once a debt defaults and goes to collections, you have created a much longer term problem.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, July 08, 2008
Politicians and Legal Bribery
Last week I wrote about how Senator Dodd is heavily bankrolled by the industry in which his committee is supposed to be monitoring and regulating. I wanted to take that story a step further.
Over the weekend, the Wall Street Journal reported that the housing industry has already given more money in political contributions this election cycle than in the entire previous cycle.
More than $95 million has been given to politicians. Why such the high paybacks? There is key legislation in the works out right now by the politicians to rescue the housing markets. Of course, these political contributors have a lot to lose. Thus, they resort to the best weapon when it comes to politics….legal bribery.
Steve O’Connor of the Mortgage Bankers Association commented that it was “relationship building…..a way to educate (lawmakers) as to how our industry works and its perspective.”
Really, I can’t make this stuff up. What happened to writing your Representative? Isn’t that how we are supposed to be able to influence and “educate” our politicians? Well, you better include a cash donation with that letter.
Representative Barney Frank commented that there was no way that this would be an influence on their positions on legislation.
Well, who am I to accuse the integrity of a politician? I don’t know what happens behind closed doors. I am just looking at the details and the ugly picture they paint.
1) The housing industry wouldn’t be forking over 95 million dollars to politicians if it did not help their cause. Let’s face it! This is an industry that is greatly hurting. I am sure that there would be better uses for $95 million than for “educational purposes and relationship building.”
2) Politicians put themselves in a bad position. Simply put, this is human nature of the worst kind. There is no way that a politician can say with a straight face that this doesn’t influence their decision making. Once again, (see #1) if this were not influential, the money would stop flowing. For example, the National Association of Home Builders cut off their campaign contributions because they weren’t getting what they wanted. You won’t be surprised to know that things all of the sudden changed when the legislation started to be more industry friendly.
As you would expect, Countrywide has been a big contributor to the politicians on the committees that they need the most help. The Wall Street Journal reports that Countrywide has at least three state probes of possible mortgage fraud.
You wonder why things are not getting done in Washington. You wonder why it is taking so long for industry members to be held responsible for their action.
The bottom line is that no politician can serve political campaign contributions and American citizens at the same time. Once again, November is a great opportunity for the voice of the American people to be heard. Your vote can count and be heard. It is too bad that the citizens of this great country sit back and let these politicians work to get elected rather than work to serve.
The excuse that this is just politics doesn’t cut it anymore.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Over the weekend, the Wall Street Journal reported that the housing industry has already given more money in political contributions this election cycle than in the entire previous cycle.
More than $95 million has been given to politicians. Why such the high paybacks? There is key legislation in the works out right now by the politicians to rescue the housing markets. Of course, these political contributors have a lot to lose. Thus, they resort to the best weapon when it comes to politics….legal bribery.
Steve O’Connor of the Mortgage Bankers Association commented that it was “relationship building…..a way to educate (lawmakers) as to how our industry works and its perspective.”
Really, I can’t make this stuff up. What happened to writing your Representative? Isn’t that how we are supposed to be able to influence and “educate” our politicians? Well, you better include a cash donation with that letter.
Representative Barney Frank commented that there was no way that this would be an influence on their positions on legislation.
Well, who am I to accuse the integrity of a politician? I don’t know what happens behind closed doors. I am just looking at the details and the ugly picture they paint.
1) The housing industry wouldn’t be forking over 95 million dollars to politicians if it did not help their cause. Let’s face it! This is an industry that is greatly hurting. I am sure that there would be better uses for $95 million than for “educational purposes and relationship building.”
2) Politicians put themselves in a bad position. Simply put, this is human nature of the worst kind. There is no way that a politician can say with a straight face that this doesn’t influence their decision making. Once again, (see #1) if this were not influential, the money would stop flowing. For example, the National Association of Home Builders cut off their campaign contributions because they weren’t getting what they wanted. You won’t be surprised to know that things all of the sudden changed when the legislation started to be more industry friendly.
As you would expect, Countrywide has been a big contributor to the politicians on the committees that they need the most help. The Wall Street Journal reports that Countrywide has at least three state probes of possible mortgage fraud.
You wonder why things are not getting done in Washington. You wonder why it is taking so long for industry members to be held responsible for their action.
The bottom line is that no politician can serve political campaign contributions and American citizens at the same time. Once again, November is a great opportunity for the voice of the American people to be heard. Your vote can count and be heard. It is too bad that the citizens of this great country sit back and let these politicians work to get elected rather than work to serve.
The excuse that this is just politics doesn’t cut it anymore.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, July 07, 2008
If Bear Markets Decline on Average -30%, Shouldn’t This One be Two-Thirds of the Way Over?
(this week’s stock market outlook)
I was watching an analyst on Fox News channel give his analysis of the current bear market. Yes, now we can call officially call it a bear market after the now greater than 20% decline in at least the Dow Jones Industrial Average.
It would make sense. If you have lost around 30%, that should mean it is over. Well, unfortunately, it doesn’t quite work that way. Most bear markets don’t decline in a straight line and then end. It is much more complicated. There are two other elements at work during a bear market – volatility and time.
Let’s take a look at the last three major bear markets.
2000 Bear Market 664 Market Days
1973 Bear Market 505 Market Days
1968 Bear Market 464 Market Days
To date, we are only 160 days into the current bear market.
It is the journey of the bear that is brutal for investors. The volatility is tough. Consider this journey for the S&P 500 during the 2000 bear market.
Go to the stock market outlook to see the real story of the ups and downs of the stock market.
During that bear market period, the S&P 500 declined over -20% on three different occasions. A bear market declines over a period of time then recovers for a certain period of time only to start declining again. This repeats over and over until the bear market completes.
One of the tactics of the financial service industry is to convince investors that it is all about the percentage lost or gained. What they fail to communicate is the importance of the loss of time to the equation. If you were invested in the Dow Jones, you would now be -3.7% below the high set back in 2000. This is what happens, bear markets take it away, bull markets give it back, and then bear markets take it away. This is why buy and hold is a tough strategy to justify.
Yes, I do acknowledge that this bear market could be of the milder type. However, I believe it is a low probability. It would be hard to imagine that with the issues we are facing today that it is going to be just a mild one.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
I was watching an analyst on Fox News channel give his analysis of the current bear market. Yes, now we can call officially call it a bear market after the now greater than 20% decline in at least the Dow Jones Industrial Average.
It would make sense. If you have lost around 30%, that should mean it is over. Well, unfortunately, it doesn’t quite work that way. Most bear markets don’t decline in a straight line and then end. It is much more complicated. There are two other elements at work during a bear market – volatility and time.
Let’s take a look at the last three major bear markets.
2000 Bear Market 664 Market Days
1973 Bear Market 505 Market Days
1968 Bear Market 464 Market Days
To date, we are only 160 days into the current bear market.
It is the journey of the bear that is brutal for investors. The volatility is tough. Consider this journey for the S&P 500 during the 2000 bear market.
Go to the stock market outlook to see the real story of the ups and downs of the stock market.
During that bear market period, the S&P 500 declined over -20% on three different occasions. A bear market declines over a period of time then recovers for a certain period of time only to start declining again. This repeats over and over until the bear market completes.
One of the tactics of the financial service industry is to convince investors that it is all about the percentage lost or gained. What they fail to communicate is the importance of the loss of time to the equation. If you were invested in the Dow Jones, you would now be -3.7% below the high set back in 2000. This is what happens, bear markets take it away, bull markets give it back, and then bear markets take it away. This is why buy and hold is a tough strategy to justify.
Yes, I do acknowledge that this bear market could be of the milder type. However, I believe it is a low probability. It would be hard to imagine that with the issues we are facing today that it is going to be just a mild one.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, July 02, 2008
Should Congress be the Jury or on Trial for the Housing Crisis?
There is so much finger pointing right now. Congress is desperately trying to find someone to blame. The blame will continue as more and more homeowners go into foreclosure. However, should Congress be on the jury or should Congress be on trial? Let’s take a look at some disturbing numbers, responsibilities, and facts.
The chief responsibility of Congress is that of making the laws for the government of the United States, which is designed to protect the citizens of this great country. Thus, the real chief responsibility of our politicians in Congress is to protect the American citizens.
In order to do so, Congress has to take all of the various sections of this overall task and break it down into committees. The committee that would have chief oversight over loans and the banking community is the United States Senate Committee on Banking, Housing, and Urban Affairs.
So where was this committee when mortgage companies were advertising 100% financing, no documentation loans, and ridiculous offers such as a payment of $1,000 a month for a million dollar home?
If they are the committee who is overseeing the entire banking and private loan process in our country, they were either blind or conveniently not doing their job.
Even though the real estate boom was filled with irresponsible lending, it was great for the economy. As long as the numbers look good, politicians get re-elected. From a political standpoint, you can worry about the consequences later when it will be much easier to conveniently find someone else to blame.
If you start putting the puzzle together, it gets even more disturbing. A recent story was released stating that Senator Christopher Dodd got a special deal on a loan through Countrywide. Who is Countrywide? They are the poster child for the mortgage crisis we have in this country. There are plenty of accusations and lawsuits citing fraud and unethical business practices. A former regional vice president is suing Countrywide for being wrongly fired after he reported fraudulent lending practices to superiors and refused to approve mortgages for unqualified buyers.
The lawsuit states that some loan officers would inflate housing values in order to get loans written and encourage people to lie about their incomes in order to qualify for the loans. Incidentally, these were referred to as “lying loans.”
So, who is Senator Dodd? Well he is the chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs. The committee who oversees the very industry where there is the crisis. By the way, he referred to Countrywide as being “abusive” in their lending practices earlier this year. However, back in 2003 when he got a special deal that a normal consumer wouldn’t be able to get, I guess they weren’t so abusive.
Let’s look at something else very interesting concerning Senator Dodd. To his credit, he did not oversee the creation of the mortgage crisis. He was elected chairman in 2007. Republican Senator Richard Shelby gets the credit for that “oversight.”
If you look at Senator Dodd’s campaign contribution record, roughly $5 million of the $8.4 million raised between 2003 and 2008 was from the investment and securities industries. Of course, this is THE group that has the most to lose if Congress does not step in and do something about the foreclosure crisis.
I also looked at Senator Shelby’s contribution record while he was the chairman of that committee. Only $553,000 of the $9 million raised between 2001 and 2006 came from the investment and securities industries.
Does it strike you a little bit odd that Senator Dodd is getting over half of his campaign contribution from the very industry that he oversees and is supposed to regulate?
Is it far to say that our politicians might be responsible for the creation of this mess? Obviously, there is personal responsibility on behalf of those who signed on the dotted line.
However, Congress is also supposed to create an environment that protects us from ourselves and that is where they failed.
I bring all of this up to make a point. We are in a big election year. The influence of campaign contributions, ignoring problems, and special favors would go away if Americans would vote. The sad irony is that we have the power to change politics in Washington and hold these politicians accountable. Unfortunately, that will never happen when only 58% of Americans make it out to the polls (based on the 2004 elections).
Maybe we should point the finger at American apathy.
As a side note…As a result of Christopher Dodd and another Senator Kent Conrad getting sweetheart deals from Countrywide, a request was made to all senators to divulge their mortgage information. All but one senator gave their information. Senator Maria Cantwell (Dem. Washington) was the only senator not to provide such information. Public records show that she has her loan with……Countrywide.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
The chief responsibility of Congress is that of making the laws for the government of the United States, which is designed to protect the citizens of this great country. Thus, the real chief responsibility of our politicians in Congress is to protect the American citizens.
In order to do so, Congress has to take all of the various sections of this overall task and break it down into committees. The committee that would have chief oversight over loans and the banking community is the United States Senate Committee on Banking, Housing, and Urban Affairs.
So where was this committee when mortgage companies were advertising 100% financing, no documentation loans, and ridiculous offers such as a payment of $1,000 a month for a million dollar home?
If they are the committee who is overseeing the entire banking and private loan process in our country, they were either blind or conveniently not doing their job.
Even though the real estate boom was filled with irresponsible lending, it was great for the economy. As long as the numbers look good, politicians get re-elected. From a political standpoint, you can worry about the consequences later when it will be much easier to conveniently find someone else to blame.
If you start putting the puzzle together, it gets even more disturbing. A recent story was released stating that Senator Christopher Dodd got a special deal on a loan through Countrywide. Who is Countrywide? They are the poster child for the mortgage crisis we have in this country. There are plenty of accusations and lawsuits citing fraud and unethical business practices. A former regional vice president is suing Countrywide for being wrongly fired after he reported fraudulent lending practices to superiors and refused to approve mortgages for unqualified buyers.
The lawsuit states that some loan officers would inflate housing values in order to get loans written and encourage people to lie about their incomes in order to qualify for the loans. Incidentally, these were referred to as “lying loans.”
So, who is Senator Dodd? Well he is the chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs. The committee who oversees the very industry where there is the crisis. By the way, he referred to Countrywide as being “abusive” in their lending practices earlier this year. However, back in 2003 when he got a special deal that a normal consumer wouldn’t be able to get, I guess they weren’t so abusive.
Let’s look at something else very interesting concerning Senator Dodd. To his credit, he did not oversee the creation of the mortgage crisis. He was elected chairman in 2007. Republican Senator Richard Shelby gets the credit for that “oversight.”
If you look at Senator Dodd’s campaign contribution record, roughly $5 million of the $8.4 million raised between 2003 and 2008 was from the investment and securities industries. Of course, this is THE group that has the most to lose if Congress does not step in and do something about the foreclosure crisis.
I also looked at Senator Shelby’s contribution record while he was the chairman of that committee. Only $553,000 of the $9 million raised between 2001 and 2006 came from the investment and securities industries.
Does it strike you a little bit odd that Senator Dodd is getting over half of his campaign contribution from the very industry that he oversees and is supposed to regulate?
Is it far to say that our politicians might be responsible for the creation of this mess? Obviously, there is personal responsibility on behalf of those who signed on the dotted line.
However, Congress is also supposed to create an environment that protects us from ourselves and that is where they failed.
I bring all of this up to make a point. We are in a big election year. The influence of campaign contributions, ignoring problems, and special favors would go away if Americans would vote. The sad irony is that we have the power to change politics in Washington and hold these politicians accountable. Unfortunately, that will never happen when only 58% of Americans make it out to the polls (based on the 2004 elections).
Maybe we should point the finger at American apathy.
As a side note…As a result of Christopher Dodd and another Senator Kent Conrad getting sweetheart deals from Countrywide, a request was made to all senators to divulge their mortgage information. All but one senator gave their information. Senator Maria Cantwell (Dem. Washington) was the only senator not to provide such information. Public records show that she has her loan with……Countrywide.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, July 01, 2008
Agenda Inspired Financial Writing – Getting Only Part of the Story
There is one thing for sure when it comes to Wall Street. There will always be a lot of agenda. We all have agenda. Agenda in itself is not bad. However, it is the type of agenda that only tells you part of the story with the objective of reshaping your beliefs.
Today, Wall Street and everyone associated with Wall Street is working overtime to reinforce to investors that this is nothing but a correction and that the only risk you are taking is the risk created by not just sticking in there for the long-term.
A client sent me an article today that was a prime example of this type of financial writing. After reading the article, I decided that I would change my plans today and talk about this writing. It is entitled, “Bear Market Guide: Stay Calm, Make Money.” The thing that bothers me the most is this article comes from a major financial publication.
The writer’s whole point is that you don’t want to get out of the market for fear of missing the rebound. You just want to stay calm and ride it out. He gives a lot of examples without giving you some of the key assumptions that he is making. Here is his example:
He starts out with an investor questioning the strategy of buy and hold. The person in the example says,” Being in the market feels like gambling now. Not sure that I believe in buy and hold anymore, I wish that I would have gotten out two weeks ago.” The writer’s response is that is the wrong gut reaction.
Let’s take a look at what he is basing that on:
“First of all, it is notoriously tough to get in just before rallies and out before selloffs.
For example, sell out now and you may miss the rebound. In 1974, the Dow Jones Industrial Average plunged 30% in the first nine months of year, only to rebound 16% in October.”
What he doesn’t tell you in the article is that prior to September 1974, the stock market had just dropped -48% over the preceding 21 months. He also didn’t tell you that September 1973 marked THE BOTTOM of that bear market decline.
Let me give you my example. Sam lost -16% from January 1973 to August 1973. If he sold out, he would have missed out on a 10% return over the next two months. However, following that 10% positive return, he would have lost another -44%.
He goes on with another example. “Similarly, stocks jumped 21% in 2003, after three years of big losses.” These are examples of recoveries following long bear markets. Maybe he believes that this is nothing more than a small correction and the problems we are facing are going to disappear into the night. We are only 8 months into this market decline.
Then he goes on to say that stocks “are actually a better deal – maybe even safer – than they were a year ago. And they look exceedingly cheap compared to 1999, the height of the stock market mania.”
What was happening at the end of 1999 is a different type of a risk than what is occurring now. Stocks are definitely cheaper today than they were a year ago. However, that does not make them a better deal if they are going to continue to decline.
Then the article quotes financial planner Harold Evensky, "In hindsight, this is likely to be a buying opportunity. What part of the worst case scenario is not already priced into stocks today?"
Well, that is the million dollar question, my Evensky. It is always the unknown that makes the market drop and there is a huge potential for unknown bad news.
Then he goes onto write, “before you panic over today's headlines and how far stocks could fall, consider the relative health of today's economy. In the early 1970s, economic output was falling. But today, despite the sluggishness, GDP is still inching ahead….Inflation topped 12% in the 1970s and 14% in the early 1980s. Today, it's at 4%.”
I don’t know about you. My costs seem to have gone up much more than 4%. Don’t forget that those stats are very manipulated. Plus in the 70’s a credit and real estate crisis were not occurring at the same time.
Then the most disturbing part is the study that he recites. “A recent study by T. Rowe Price showed that the chances of you running through your retirement savings rose from 13% to nearly 50% if the market increased less than 5% during the first 5 years of retirement.”
The writer adds, “We've been in a bear market for less than a year. So you still have four years to recover.”
Well, if this was 2000, the start of the last bear market, the average return over the next 8 years was 1.8%. Typical bear markets can subtract years from your investments growth.
So what is the take away? Readers look to this publication for advice. This article is written to tell you relax and don’t worry about it. Unfortunately, the writer doesn’t point out his assumptions, which by the way are some very dangerous assumptions.
First, he is assuming that this is going to be a major stock market bottom and everything is going to turn back into a bull market. The average loss in a bear market is -30% and the average duration of all bear markets since 1900 is 405 days. We are only 265 days into this one.
Second, he is assuming that the problems with the real estate and credit markets, as well as inflation, are not going to drastically impact the economy or the stock market.
Third, he is assuming that the risk of the current environment is not even close to the risk in 2000 or in the 70’s. I would suggest that the risk we face today is greater.
Finally, he is making the assumption that you are perfectly fine in stocks. That isn’t always the case.
The financial services industry would love more than anything for you just to sit tight and take the losses. They are not making money if you are not invested.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
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