Is it a Good Idea to Co-sign or Loan Money?

If you look back through the history books, there have been many countries that have become so indebted and on the brink of financial ruin, that a lender of last resort was needed to come in and bail out that country. Throughout history, we have played that role and I would suggest currently other countries are playing that role to a certain degree for us.

That can also happen on an individual level as well. A person can become so indebted or have such poor credit that they require a personal loan or someone to co-sign for them.

So what should you consider when it comes to co-signing or loaning money to someone?

Co-signing is the worst of all situations when it comes to debt because you are taking on the responsibility of the debt that you have no control over. If you are going to co-sign for someone, remember that it is the same as taking out the debt yourself. How are you going to know for sure that it is being paid back? If it doesn’t get paid back, then your credit is harmed and you will be on the hook for the debt.
I always like to look at the book of Proverbs. The book of wisdom to me is a compilation of wise bits of information that, if implemented, keep us out of harm’s way. Concerning co-signing, King Solomon writes in verse 26 of the 22nd chapter:

(26) Don’t agree to guarantee another person’s debt or put up security for someone else.

It is an important piece of wisdom because the majority of co-signing agreements don’t work out.

With all good intentions, people will lend money to help another out. Now it might be that you feel God leading you to help someone out and lend them money. If you are going to lend money to another, go into the agreement with one thing in mind. If they don’t pay it back, you are fine with considering it a gift.

In most situations, the person borrowing the money ends up in a bigger mess, doesn’t pay the money back, and then a relationship is destroyed. It is just not worth it.

Most importantly where you are co-signing or loaning money to or for another, just know the risk. Anyone that comes to you for either arrangement does so with all good intentions. When either a co-signing deal is consummated or money is given on a personal loan, both parties feel real good about everything working out.

You have to consider the risk. People get themselves in over their head and cannot get money the conventional way. For most people severely in debt, the solution is to create more debt. Thus, as a co-signer or a lender to someone, you become the lender of last resort and assume huge amounts of risk.

Once again, only go forward with either arrangement if you are fine with picking up the tab.

Having said all of that, I was having a conversation with Jeff before we went on air. What about the people who are good for it? What about the people who are good for their word?

There are those good people out there and I also believe that there will be people that God leads you to help. As we always talk about on Prudent Money, the best rule of thumb when it comes to making decisions is simply this:
First, know the risk of the decision.
Second, pray that God will give you peace about saying either yes or no.

The Five Things You Need To Know About Emergency Funds

To any financial question, there are two different answers. There is the textbook answer and the then there is the answer that works best for you. The textbook is the standard answer or the ideal answer. Remember that everyone’s financial situation is uniquely different. Thus, you can use the textbook answer as the starting point. Then move from there.

The textbook answer for funding emergencies is six months of salary. However, you might not need a full six months of cash sitting in a reserve. For some of you, that might be too much. For some of you, that might not be enough. Here are five things that you need to know when it comes to handling emergencies.

1) Unemployment - Determine the minimum amount that you need to get by on. That is the amount of money that you need monthly to cover the bare minimums. That would not include saving money, eating out, entertainment, etc. It would just be for the absolute necessities. Think through how long you would want to give yourself to find a job. Multiply the two numbers and then subtract any money that you think you would get from unemployment insurance.
2) Disability – Disability insurance comes in short-term and long-term. Most employers have disability insurance as part of an employment package. Take a few moments and familiarize yourself with the benefits. Know how long it pays out, determine the amount it pays each month, and finally know exactly when it starts. From a short-term standpoint, we want to know the gap if any between the day the disability occurs and when benefits start to pay. You will want to know that you can bridge that gap through an emergency fund.
3) A Bare Minimum - Have a minimum of $2,000 to $5,000 for those every-once-in-a-while big expenditures that pop up. It could be anything from your car breaking down, something needing to be replaced at your house, or paying a health insurance deductible.
4) Emergency Fund or Debt - Always liquidate the debt first. If you are paying down on a credit card, you can always borrow that money back in the event that you need it. The best case scenario is that you pay the debt down and don’t need the cash.
5) Emergency Fund or Retirement – Contrary to popular thought, I would select emergency fund. You can get that taken care of in a reasonable amount of time. Retirement will not matter if you have an emergency. Emergency funding should take precedence.

The Mortgage Industry Is Still At It

Countrywide is the poster child for irresponsible lending. Their aggressive marketing tactics and lending money at any costs have created huge problems in the credit markets.

A listener sent out a marketing letter that he just received. They are marketing a 40 year fixed rate mortgage and inviting you to also take out cash from your home. So they want to set you up on a mortgage that lowers your payment as well as allows you take money out of your home equity. In other words, they are inviting you to fully mortgage your home to the hilt by taking out all of the equity possible and assuming a low payment that will ensure that it will take forever to pay down the loan.

Then there is a marketing piece from Wells Fargo. Wells Fargo advertises the advantages of using their services as follows:

· Take as much cash out of your home as possible
· Skip your first payment
· Lock in your rate at this low
· Then they show a low payment

The disturbing part of this advertisement is that they advertise a payment that is before fees. It is not based on the APR. Most people don’t understand the difference between the stated rate and the APR. In addition, this is an advertisement that would cover a jumbo loan. There is no way that a consumer could get the advertised rate for a jumbo loan.

At what point does Congress step in and protect us from ourselves and the sleight of hand marketing tactics of the mortgage industry? Granted, consumers are ultimately responsible for the decisions that they make. However, I think that it is the responsibility of Congress to pass regulation that prohibits this type of advertising.

Shades of 1929

Some people get a little irritated when I make references to the great crash of 1929 because:

a) It is different this time
b) Something like that could never happen again
c) We are in a super bull market
d) Our economy is much different than in 1929

You can pick your own answer. I keep going back to 1929 because of all of the similarities. This morning Goldman Sachs announced that some wealthy individuals were going to pump in about 3 billion dollars into their failing funds in an effort to save them. It is a "great buying opportunity."

If you go back and read the history books, the exact same thing happened in 1929. The markets were getting into big trouble and a "pool" of investors would go in and buy tons of stock to prop up the stock market. Investors in the 20's would get a feeling of relief knowing that this group of wealthy individuals were pooling together to save the markets. It was the big name people back then and it is the big name investors this time around as well. Besides, what is a few billion among friends?

Now my favorite part of the press release about this influx of capital was the highlights from the Goldman letter sent to the clients (read: individuals losing a lot of money) into their funds. (read:ponzi schemes). Here is the excerpt:

....according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the "strategy getting too crowded,'' rather than the models not working.

In other words, it wasn't our fault that we invested all of your money into sub-prime debt. I would argue the model was terribly flawed from the start.

This is the problem with Wall Street, politicians, the Federal Reserve Board, _____ (fill in the blank) - No one will take responsibility for the irresponsibility that has taken place.

Easy Steps To Take In Life Insurance Planning

One of the most overlooked types of planning I find today when working with people is planning for financial hardship due to death of a loved one. For one thing, it is a topic that most people don’t enjoy talking about it. However, it might the most important. There are few things more tragic then the combination of death and financial hardship. It is a tough combination to overcome.

Fortunately, planning for this financial hardship on a basic level is pretty easy to do by following these next few steps. The first step is to determine the amount that you might need. Just answer the following questions:

Do you want to pay off a house or any other debt?
Do you want to replace an income? If so, for how long?
Do you want to take care of college education for the kids?
Are there any special needs that require additional funding?
Are you responsible for elderly parents?

Once you have the total amount, subtract out the value of any current investments or savings that might also be used in the event of a death. For instance, you would want to subtract out any money saved back for college education funding or any money saved in just a general education account.

Now that you have a net number, you know how much life insurance that you will need. There are all types of life insurance programs available. I would go with term. It is the cheapest insurance available and you should be able to cover your entire need for a good value.

The rule of thumb is to lock in the amount of the insurance for as long as possible. For instance, 30 year term would be preferable. You know that for 30 years, the cost is fixed.

Finally, go and get quotes from at least five companies. This will allow you to shop for the best rate. However, there is one word of caution about looking for the best rate – make sure you consider the quality of the life insurance company.

What Can You Do To Protect Yourself Against Financial Hardship?

Financial hardship can present itself in so many different ways. There are some definite steps that you can take. Let’s talk through these –

1) Make sure that you have an adequate emergency fund – I would even suggest that this is more important than saving for the future. It is vitally important to make sure that you have enough cash on hand in the event that life throws you a curve ball.
2) Make sure that your cash is working for you and make sure that your cash is in a safe place – savings accounts at banks are just not paying the going rate in savings. At some banks the rate could be as low as 0.50%. Check around and make sure that you are getting the going rate on your savings. In addition, make sure that you don’t exceed the FDIC insurance for any bank. The government insures deposits up to $ 100,000 per depositor. Anything over that is at risk.
3) If in the state of Texas, either issue a credit freeze on your credit files and or take out Identity Theft monitoring. I cannot stress enough how important it is to protect your identity.
4) Understand your health insurance and what you might have to pay out of pocket in the event of an illness.
5) Make sure that you have some type of disability insurance policy in force either through your work or through an independent policy.
6) The obvious thing to do is to make sure that you work as hard as possible at getting out of debt. If you have a lot of debt, put together a debt inventory so that you would know exactly the state of your situation.
7) Know where you are spending your money. If someone called me and needed a consultation session regarding a financial emergency, this would be the first thing that I ask for to determine the shape of the situation.
8) If it looks like you are running into a financial problem, be proactive and make sure that you know all of your options. There is a tendency to bury your head in the sand. Make sure that you start checking into every available option.

The Mortgage Environment

On my show yesterday, I interviewed Alice White Hinckley. I have known Alice for over 25 years. She frequently comes on my show to talk about mortgages. She describes the environment right now as very tough. We were really focusing on consumers that are in a position that need to refinance. So, I wanted to go through a few points that she made.

First, if you are having trouble with your mortgage, be proactive. The worst step you can take is to either ignore it or bury your head in the sand. It is best to call the bank and talk over your options. Keep in mind, the bank doesn’t want your mortgage back anymore than you want to face foreclosure.

Second, if you are in a situation where your rate on your mortgage is about to change within the next 6 months, go ahead and start looking at your options now. This is not a situation where a lot of options exist right now. If you are going to face a surprise, you need to be prepared for it. If you need to work on your credit score, you would then have 6 months to do something about it.

Mortgages have drastically changed. Everything is very black and white now. If you don’t meet certain criteria, then you don’t get a loan. As close as a few months back, mortgage companies would consider all types of information when writing a home loan. Now that information is limited to a few important pieces.

If you have any questions about your loan, I would greatly encourage you to e-mail Alice White at alwhite@firsthorizon.com.

Are No Fee Mortgages A Good Deal?

Is the no cost mortgage loan a good deal? Well the banks are getting very aggressive with their marketing and making it look like they are giving you the deal of the lifetime. Is it really a good deal?

I was watching TV the other night and came across an advertisement that really caught my attention. It was an advertisement for Bank of America’s no cost mortgage. They were going to pick up all of the closing costs. I thought at first that it was just a 30 minute infomercial. To my shock, I discovered that it was a continuous through-the-night infomercial that seemed to never finish. Wow, that is aggressive marketing and maybe unprecedented by the banking community.

The CEO of Bank of America, Ken Lewis, was quoted in Newsweek as saying – “We want a bigger share of your wallet…..” Well, I guess they really mean it.

Go ahead and give them a bigger share of your wallet. However, you might not be getting the better deal.

I went through the process of checking rates online with Bank of America. The first question was focused on the size of the payment. Then I saw all of the adjustable rate mortgages. It is good that Bank of America is still marketing these risky loans and talking about low payments.

After seeing the numbers and comparing them to a mortgage company where you have to pay fees, it was pretty easy to see where the “no cost” came from. The interest rate was higher on the Bank of America loan. Long-term you are much better off paying the lower interest rate and the closing costs up-front.

Bank of America will tell you this works better if you are only going to be in the house for a short term. Of course, that is the wrong way to buy a house. Home-buying should be viewed as a long-term commitment.

Well, I guess I can sum it up about Bank of America with another quote from their CEO Ken Lewis - “We are close to a time when we will look back and say we did some stupid things.”

No one does anything for free – so here is what you look for:

1) Get an estimate from a no fee mortgage and place it up against a company who charges fee
2) Read the fine print and see where the costs are buried

"Junk Mail" and Auto Insurance Rates

Auto insurance companies can raise your rates on your auto loans without informing you ahead of time. This has been a practice that federal regulation has done nothing about. The Fair Credit Reporting Act requires most companies to send a letter called a "notice of adverse action" to the consumer if the consumer was penalized due to a low credit score.

A group of consumers sued insurance giants Safeco and Geico and won based on this unfair practice. The case appealed all the way up to the Supreme Court was recently reversed.

Now the reasoning for reversal really leaves you scratching your head. Justice David Souters' reasoning was that it created too much “junk mail.” He did admit it was a loophole in the system. However, he stated that the cost of closing the loophole was way too high.

So, our Supreme Court is protecting us from junk mail and allowing auto insurance companies to get away with raising rates on insurance based on some obscure credit scoring system? The cost for making it a fair system is too high? Who is it to high for?

It is a good thing that the Supreme Court is there to protect the insurance industry. It would be a shame for the industry to be forced to make a little less money sending out those “junk mail” notices to make the system work better for the consumer.

They did allow for a system to where a certain group of people would be notified. However, the system is determined and controlled by the insurance industry. Thus, this is more of a smoke and mirrors fix.

Why would it be beneficial for consumers to know about the credit scoring? First, consumers should know the benchmark. A consumer should know that insurance rates would come down if credit scores were below a certain level. Second, many credit scores are low simply due to error. Statistics would show that a high percentage of consumers have enough mistakes on their credit reports to adversely effect their credit scores.

Politics are a way of life. Blatant politics are another story. When the reasoning for reversing a case that would help consumers was based on a “junk mail” problem, something else is obviously going on.

Handling a Debt Collector on Debt That Isn’t Yours

A few years ago I had Dean Malone on my show to discuss dealing with debt collector harassment. After finishing up that day, I went home. The minute I walked in, the telephone rang. Believe it or not, it was a debt collector. The debt collector was attempting to collect a debt on my wife that she didn’t even owe. How did we know? The debt was for an electricity company in Kansas City. She has never lived in Kansas City.

Now if that happens to you, there is a tendency to just blow it off. You know the debt is not yours. However, there is an important process you need to go through to make sure that this doesn’t turn into a big problem down the road.

Step 1 Attempt to get all of the information possible about the alleged debt, along with the name and address of the debt collector. In the process, keep your cool and don’t let the debt collector rattle you.

Step 2 Check your credit report and make sure that there is no entry. The chances are pretty good that there will not be an entry because more than likely they will not have a social security number.

Step 3 If it is on your credit report, you need to dispute the item with the credit reporting agency, offering as much proof as possible. It is also a good idea to provide your social security number and other identifying information.

Step 4 Send the debt collector a cease and desist letter.

Step 5 Monitor your credit reports.

What are the dangers of ignoring a mistaken debt collection?

The debt collector could continue to attempt to collect against you, take you to arbitration, and win a judgment against you. Once a judgment has been secured, it is tough to get it reversed. There are actual court cases cited where this happened.

Finally, Texas Legislatures Give Consumers the Silver Bullet Against Identity Theft

The Texas Legislature really got something right. Due to the increased threat of identity theft, they passed a law that gives Texas consumers the greatest possible protection against identity theft.

The Federal Law allows for consumers to freeze their credit files in the event that they have become a victim of identity theft. It is the equivalent of putting a lock on your credit reports. The consumer has to “un-freeze” the credit reports in order to gain access. A lender cannot check your credit with a credit freeze in place.

Thus, traditional identity theft is almost impossible.

The Federal Law states that the consumer has to present a police report in order for this to take place.

State legislatures are allowed to change the law in their state. Thus far, 34 other states have found the Federal Legislation on identity theft ridiculous because everyone should have the right without cause to lock up their credit reports and keep them private.

Now, Texas has passed this very consumer friendly provision. In Texas, you can now place a credit freeze on all 3 credit reports and prevent anyone from checking your credit. If you need to apply for credit, you would simply “un-freeze” the reports.

This has to be done individually with all 3 credit reporting agencies. What is the downside? It does take away the ability to buy something on credit at a moment’s notice. However, that is not such a bad thing. There is also a cost associated with this process. You might pay up to $10 for locking and unlocking your credit file.

Does that mean that by freezing your credit, identity theft cannot happen? As advanced as ID thieves are in stealing identities, I would never assume that it could not happen. I would still have your credit monitored by a good credit monitoring company such as http://www.truecredit.com/.

Be Careful About Penny Stock Scams

I had Tom Anderson, Associate Editor of Kiplinger Personal Finance Magazine, on the show to talk about penny stock scams. I am sure that you have seen the e-mails about the next great stock and how you need to invest today. These stock promoters are taking it to a different venue. They are advertising in the New York Times, USA Today, etc. By doing so, they get a certain level of credibility.

The objective of these promoters is to promote the hype about these stocks. By doing so, this drives the price of the stock up. Then, they turn around and sell their shares at these high prices. As a result, the stock falls. I had Tom on in June to talk about Guangzhou Global Telecom. Irresponsible advertising drove this stock up. The hype was that this was the next great telecom story out of China. Since June, the stock is down -74%.

Taking a closer look, you will find that these stocks are nothing as marketed. So here is the bottom line. First, just live by a modified old saying – “If it is too good to be true, do your homework.” Thoroughly research anything before acting. Go to http://www.sec.gov/ and research the stock. Second, if I knew the secret to making millions or I knew the next big thing, I wouldn’t tell anyone. Once you tell everyone, the secret is out and ceases to work.

Here is a link to the article.

Universities Sell Out Their Students to Credit Card Companies

A recent study reported by CNN states that the average credit card balance of those students polled was $18,800.00. This is a staggering amount of debt for students just trying to start out.

How does this happen? Well just look to the universities who support these credit card companies and you will get the number.

Consider these annual revenues that colleges make off of arrangements with credit card companies:

University of Tennessee - $ 10 million a year with Chase
Ohio State – estimated $ 20 million a year through credit card arrangements

In turn for these big profits, “universities are pursuing these sweetheart deals with credit card companies, and offering up premiere marketing locations and student names and addresses for a big profit,” says Robert Manning, Director of the Center for Consumer Financial Services at the Rochester Institute of Technology.

Credit card companies want to sign up people. They in turn want to charge big fees for doing so. They want the college students to rack up big amounts of debt. In most cases, they give the student way more credit limit then the student can financially support. These cards come with huge fees and high interest rates. So, they came up with this ingenious idea.

Let’s pay college campuses millions of dollars to allow us to use the university name on the credit card and maybe a picture of the administration building or mascot. This gives the student the feeling that they are doing this through the school and that the school would take care of them. In order for the credit card companies to pay these huge kickbacks to the colleges, they charge enormous fees to the student. It is a typical credit card trap.

The universities who need the revenue stream put their students at risk by allowing the vultures onto the college campuses to look for prey.

The universities and credit card companies say that they are providing a win/win for the college student. It is more like a conflict of interest by universities and college alumni associations who often negotiate these deals selling their souls.

LifeLock Aggressively Advertising – Know the Truth Behind the Product

LifeLock is at it again with his aggressive advertising on cable television. In the middle of what looks like downtown New York or one of the major metropolitan cities, CEO Todd Davis stands in front of a van with his social security number plastered on it and screams it out over a microphone.

He is free to give out his social security number because he is not concerned about identity theft. His service guarantees that his identity will never be stolen. Now he wants you to sign up with his service so that you will get the same advantage. He even gives you a million dollar guarantee.

What is the catch? Quite simply he is taking advantage of a law that was put into effect by Congress that allows any consumer to place a fraud alert on their credit report. A fraud alert is a 90 day lock put on a credit file that will prevent any attempts by an unauthorized individual to steal a person’s credit.

If a fraud alert is on a credit file, authorization has to be obtained by the consumer for access. Thus, an identity thief cannot get credit when a fraud alert is in effect.

Every 90 days, LifeLock will renew that fraud alert on your behalf.

So, what is my issue with this service? First, this is something that you can do for yourself every 90 days. Why pay someone monthly for 4 calls a year that you can make yourself? That is my issue from a practical standpoint.

From an ethical standpoint, there is a much bigger issue. The law clearly states that a fraud alert is to be issued only if the consumer SUSPECTS he or she has been a victim of an identity theft. Funny, that is not in the advertisement anywhere. Todd David is randomly issuing fraud alerts for consumers who do not suspect that they are identity theft victims.

Here is what the law says so to back up this claim:

"Upon the direct request of a consumer, or an individual acting on behalf of or as a personal representative of a consumer, who asserts in good faith (bold for emphasis) a suspicion that the consumer has been or is about to become a victim of fraud or related crime… "

Technically, a very broad interpretation of the law is that this applies because we are all "about to become a victim of fraud" at some time. We are always at risk. I don't think that was the intent of the law. If you lose your wallet, you are in a situation where you might become a victim. You are not in danger just because you get up in the morning and walk outside the house and get into your car.

Lifelock does include in their terms and conditions that you are signing up for this service under the assumption that you might become a victim of identity theft. Just like most offers in the credit industry, the details are not in the marketing program but buried in the fine print.

So, you need to know that basically you might be paying LifeLock to misrepresent you to the credit reporting agencies. This is no different then the other businesses in the credit industry that use smoke and mirror marketing to sell their product. Whether it is rent a credit score, consumer credit counseling, etc. they are all marketing the same way.

A Contract is a Contract!

What does it really mean when you sign on the dotted line? Whether it is a monthly membership to a health club or the signature on a mortgage, it means obligation. So what happens when you walk away from a contract?

There is a tendency to think “Oh, it is just a lease” or “This is just a gym membership” or even “I can just give this car back and the problem will go away.” Anytime you sign your name on the dotted line, you are obligated to pay a certain amount of money for a certain of time. Any attempts to get out of that will result in big problems. The bottom line is that the company that has your signature - your promise to pay.

Here are some things to consider:

1) Be realistic and know that you have to pay – there is no way out of a contract unless the company wants to give you a free pass.
2) Don’t make assumptions. Assumptions are our way of rationalizing away reality. Just because you voluntarily give a car back doesn’t mean that you are going to get out of it.
3) If you can legitimately get out of a contract, document it. Oral agreements don’t work. Get everything in writing.
4) Make sure that you have a good system in place where no mistakes can happen – those payments need to be made like clockwork.

It is so important to have a good system in place. One mistake or false assumption will potentially ruin your credit and send you to a debt collector.

Paying for Christmas in Advance

One of the biggest mistakes that I see people make with their money happens every December. I have to confess I have been one of those people in the past. Does this sound like you? Do you start preparing Christmas lists in December? Are you rushing around buying gifts without much of a budget in mind? Are you taking the time to closely watch your spending during a time when it is easy to overspend? Do you buy presents on credit, rationalizing you will pay for it later? Do you go into shock in January when you get that card statement?

If you answered yes to those questions, we need to talk.

Out of all of the months in the year, December has to be the toughest on the checking account. There are the gifts that you buy for loved ones. There are the unexpected gifts that you have to buy. There are gifts that you have to buy for people in the office or for friends. Then there is the money that is spent on Christmas parties. It all adds up in a big way.

I have found that most are very unprepared for Christmas. As a result, the credit card becomes the convenient solution to lack of preparation. If there is one month that needs some advanced planning, it is December.

So here are some tips to planning for Christmas:

1) Determine how many presents that you have to buy – family, extended family, friends, co-workers, kids’ teachers, etc.
2) Determine how much you are going to spend on each person.
3) Determine any extra expenses that you might incur – Christmas cards, postage, etc.
4) Realistically look at how you are going to pay for it and start saving.
5) Stay disciplined.

If you are not prepared, you create debt. It is that simple. Think about it for a moment. It is Christmas time. There is a lot emotion. We want to buy our loved ones gifts (especially kids). I also think we know deep down inside that we are going to spend more than we have – I call it fantasy budgeting. It is easy to just ignore the problem and use plastic.

This year do things differently. A little planning today and a lot of discipline over the next few months will go a long way.

Remembering 9/11

This week we remember the ones who died 6 years in that tragic and senseless terror attack on our country. It is easy to put this out of our minds, being thousands of miles away from where that tragedy took place. It is easy to feel unconnected and without emotion. We are just watching scenes on television. For most of us, we don’t even know anyone personally who lives with the pain of loss from 9/11.

However, 9/11 stands for so much. In the very least, it shows us that life is fragile and that we are not guaranteed tomorrow. It should show us the importance of family and friends and living in the moment. Most importantly, it should be a symbol of the importance of being right in your relationship with God and focusing on His will.

I hope that you will take the time to remember 9/11 and re-commit to what is truly important in your life.

The Danger of Trying to Play "Catch Up" with your Investments

Over the past 15 years I have had countless discussions on risk and investments and have found that the concept of time is misunderstood.

In those discussions about risk, I have had many tell me that they only have a small amount of time before retirement and they need to play “catch up.” So, what is the best way to make up for lost time? You just have to invest aggressively.

You always have the probability (although low) of selecting a high flying investment, making a big fat return, and getting caught back up quickly. Unfortunately, the higher probability is that you take on all of this risk and it ends up in big losses.

Prudent Rule 1 when it comes to investing – Aggressive investments can lose money as fast as they can make money. However, losses from aggressive investments are much tougher to make up. For example, if you lose 50% of your money it will take a 100% gain just to break even.

And history would show that you can easily lose at least 50% in an aggressive investment (see internet and technology stocks 2000 to 2002)

To illustrate this concept of loss versus gain, I went to http://www.morningstar.com/ and took a look at some of the mutual funds that they characterized as aggressive. A good example is a fund that Morningstar classifies as aggressive.

In 1999, this fund returned 291.15%. With that type of return, many investors probably invested in 2000 hoping for the same type of growth. Let’s say that you were behind in obtaining your retirement goals and decided to invest money into this fund right before that big year. You started off with $ 10,000. By the end of 1999, you turned that $ 10,000 into $ 39,115.00.

However as of June 30, 2007, that $ 10,000 would be worth $ 4,828.00.

Now that is an extreme example. However, it does illustrate how dangerous aggressive funds can be and trying to utilize them to get “caught up” for retirement.

Just keep in mind that all investments go through good and bad cycles or time periods. The problem with the aggressive type fund is that the bad cycles have a greater impact on your money than good cycles do on the positive side.

Mr. Irresponsibility

The problem that we are in today is a result (my opinion) of the adjustable rate mortgage (ARM). Alan Greenspan back in 2004 made the comment that people should look into adjustable rate mortgages because they would save money. He basically was encouraging people to take on risky loans.

He was trying to fuel the fire. Adjustable rate mortgages make it much easier for people to buy homes that they cannot afford. The economy definitely benefits from people buying more real estate due to the advantage of the ARM.

Now look at our problem. Today we learn that we had negative job growth in the economy for the past month. In Greenspan's latest quote he states today that our environment looks a lot like 1987 when the stock market crashed.

These comments are very irresponsible on his part.

Loan Sharking

Loan Shark - someone who lends money at excessive rates of interest; someone who take advantage of the misfortunes of others – see US credit card companies

There is not much of a difference between loan sharks and credit card companies. They both set up unreasonable terms accompanied by high interest rates. They both take advantage of personal misfortune. Loan sharks send out Guido to break your legs. The Credit Card industry uses foul mouth harassing debt collectors. Really, it is the same pain just two different types.

Well Credit Card Companies are looking to take advantage of a hurting segment of the population – sub-prime borrowers. Mintel International Group recently conducted a study and found the following:

Direct mail credit card offers to sub-prime customers in the United States jumped 41% during the first half of this year.

Direct mail offers targeted at customers with the best credit fell more than 13%.

So, it appears that the credit industry is aggressively pursuing people who are classified as having poor credit or sub-prime credit.

The study shows that the fees charged for late payments would exceed the interest rate charges. This fits the mold of the credit industry. They want people who are going to make mistakes so that they can charge higher penalty rates and charge high fees.

Their target market often just makes the minimum payments. Thus, the credit card companies make big money by accepting these minimum payments and charging high interest rates.

Offering credit to sub-prime borrowers is a risky, irresponsible action that prays on those who are in vulnerable situations. Who ever thought that there would be a day that the best customer for a credit card company would be one with the worst credit?

Incidentally, the study cited HSBC, Washington Mutual, and Capital One as some of the main companies practicing this irresponsible lending.

There are no good solutions to the Real Estate Crisis

Many of the solutions being offered by Washington and the financial media will do little to solve the real estate bust. Let's look at the root of the problem. The source of the problem is that consumers can no longer afford to make their payment. The low payment that they enjoyed for a period of time has changed to a much higher payment. As a result, many homeowners risk foreclosure because they are falling behind.

Most of these solutions involve helping homeowners stay in their homes by allowing them to qualify for a new fixed rate loan. Unfortunately, it doesn't solve the problem. If the homeowner couldn't make the higher payment on the adjustable rate mortgage, they will not be able to make the payment on the fixed loan. It is the payment that is the problem.

The mortgage industry wrote irresponsible loans to consumers who bought a house based on getting the lowest payment possible. As a result, we are all going to pay for this irresponsibility. This is not a problem that just goes away. This is debt plain and simple. Someone has to pay for it.

I have an idea. Why don't we use some of Greenspan's money that he is receiving for his books that he is writing and his enormous speaking fees he receives? After-all, he was the person on watch when this happened. He was also the one who encouraged people to take out adjustable rate mortgages.

The Political Smoke and Mirrors Solution to the Real Estate Crisis

I was very interested to hear what President Bush was going to say this morning concerning the mortgage crisis we are facing in America. I figured it would be more of a political answer than a real solution.

He actually identified the real problem being the adjustable rate mortgage. He also made a point of saying that it was not the government's job to bail out speculators. (read: we are not going to bail-out the homeowners who are in trouble)

The Government cannot just step in and bail out the mortgage crisis. It would be rewarding mortgage companies and banks for being irresponsible and greedy.

He made some references to a few changes that really would not help all of the homeowners who are facing this ominous situation in the future. He basically offered up the political smoke and mirrors solution.

He made a big speech acknowledging the problem. Then assured the America people that they were going to implement some changes that will help solve the problem. It is the political smoke and mirrors answer. In politics, you just have to look like you are solving the problem when really you are just crossing your fingers and hoping it will blow over. (read:Irag)

The mortgage crisis in America will have to work itself out over time. This is the bursting of a major debt bubble with the mortgage crisis being the final phase of the bubble. You don't just take 25 years of debt accumulation and expect that the problem is just going to go away. We will have to go through the "de-tox" process.

An Open Letter to Senator Dodd

Dear Senator Dodd,

I have been listening to your sound bites over the past year and have become quite confused. It appears that you are very concerned about everything that has happened to the homeowner. You have been quick to scream for reform and imply that the Federal Reserve Board should clean up this real estate and mortgage crisis. You seem to be positioning yourself as the Champion of the people during your run for a Presidential bid.

Last week there was a lot of hype over your meeting with Federal Reserve Board President Ben Bernanke and Treasury Secretary Paulson about the foreclosure problem. You held a press conference telling of your position and even suggesting that a hot line has been set-up for people who are in trouble. I will comment on that latter in the letter. First, I want to take a step back and talk about your role in the Senate.

You are currently serving as the Chairman of the Senate Banking Committee. Banks are in trouble. Banks have been at the heart of a great deal of this irresponsible lending. Maybe I am a little uninformed. Wouldn't the Senate Banking Committee have some oversight over the banking system? Are these problems a big surprise to you? Is it reasonable to think that there might be a future problem when lenders are lending money at 100% of the value of the home to people with horrible credit, lending money without verification of income, using teaser rates, and writing loans whose interest rates change over time? Well, maybe I am just taking advantage of the use of hindsight. However, it seemed years ago that this was a train wreck in the making.

It just seems like the Senate banking committee has some role in the supervision of the banking system. Thus, is it reasonable to suggest that a little responsibility could be taken by you and your committee for this mess since it was on your watch?

Now back to this solution. You talked about a number consumers could call. It is a program put together for those who are facing foreclosure. It was a number that had the word HOPE spelled out. After further investigation, I discovered that this number takes the consumer to a hot line for consumer credit counseling. Statistics, personal accounts, and even Congressional testimony conclude that these organizations just make the debt situation much worst.

Senator Dodd, how about some real solutions? How about you and the rest of your colleagues taking some responsibility for this mortgage mess. For those of you elected to the Senate, you are elected to protect the people from this type of thing. Yet, you allowed it to happen for a number of years.

Your ideas are at best band aid approaches. Your HOPE idea is nothing more than leading consumers to the lions den. It sure does sound good as you attempt to secure a bid as Democratic nominee for the President of the United States. Once again, how about some real leadership in Congress? That is the best thing that you can do for the American People who are struggling because Congress conveniently ignored the creation of potentially one of the biggest real estate busts on record.

Senator Dodd Turning Desperate Homeowners over to the “Sharks”

Congress is really scrambling. They just realized (or so they would like for you to believe) that we have a real problem in the housing markets. They are just now acting on the huge foreclosure problem that we are facing in America.

Of course, beyond bailing homeowners out, there is not much they can do to solve the problem. This problem could have been prevented had Congress acted years ago and set up proper regulations for the mortgage lending industry. However, that would not have been a good political solution . After all, those loose lending practices fueled economic growth. So the “party now and worry about the consequences later strategy” is now taking effect.

In a symbolic gesture, Senator Dodd held a press conference to discuss the foreclosure problem in America. He also suggested that the Federal Reserve Board should in a sense bail everyone out of this problem. He also announced that they have set up a program to help people out. He wants to make sure that no one goes through foreclosure. So, he announces a program for anyone that is going through this mess. Just call, 1-888-995-HOPE. This was a hotline for those facing foreclosure.

I called the number. To my disbelief, it was a number for an organization that feeds people into companies in the credit counseling business. Yes, the same industry that Congress investigated in 2004 and came to the conclusion that this industry needed reformed. (which little reform actually occurred following the announcement of their findings)

Senator Norm Coleman who headed up that investigation had this to say in his opening remarks:

“Over the past several years, however, the credit counseling industry has undergone significant changes. New and aggressive credit counseling agencies have changed the manner in which consumers are treated. These changes have resulted in consumer complaints about excessive fees, pressure tactics, non-existent counseling and education, promised results that never come about, ruined credit ratings, poor service, and in many cases being left in worse debt than before they initiated their debt management plan.”

“Make no mistake, these credit counseling agencies were designed to sell a product –the Debt Management Plan—not to deliver a service of education or counseling. “ He even referred to this industry as a bunch of "sharks."

Consumer Credit Counseling is just a part of an industry that markets HOPE and sells problems. I have a numerous examples of how in many cases these services not only make the problem worse but rip people off through the use of excessive fees.

So, this is the solution. The industry that Congress said needed reform and is ripping off consumers is now the answer to the country’s foreclosure problem. Although Senator Dodd has presented many bills to Congress and positioned himself as the Champion of the people when it comes to predatory lending, it appears that all of those presented bills as well as what he is currently doing is nothing more than political positioning and resume building. Talk is cheap until he can actually get something done in Congress. A true consumer champion would never have offered this as a solution.

This "solution" should be viewed as an insult to one’s intelligence. The list is a mile long of why these credit fix solutions are dangerous for consumers. These companies are of no value unless they can actually get the mortgage lender to re-structure the mortgage. It will take an act of Congress for that to happen. (literally and figuratively speaking)

Further Evidence of the Damage in the Credit Markets

Countrywide, your checks are no good! The Cuyahoga County in Cleveland Ohio said that they will no longer accept checks from Countrywide because they are concerned about their financial problems. "We're just trying to protect the assets of the county."

The biggest problem that we have regarding everything that is financial related is loss of confidence. This is how a bear market starts. I talked about this on my radio show yesterday. There is a big category 5 financial hurricane brewing. It might weaken and the damage to the economy and financial markets might be minimal. It might also hit the financial system hard (bear markets and recession)

You just need to know that it is brewing and risk is high.

There is a huge loss of confidence in the system. With the bursting of a debt bubble, you never know what news will come each day. Just be careful with your investments right now.

Ultra-Short Bond Funds in Trouble

This is what happens when debt bubbles burst. The problems start out with the low quality or riskiest debt first. Then it spreads to the higher quality debt.

Ultra-short bond funds also known as money market substitutes, are used by investors who want to attempt to make more interest than a money market or savings account. A little more risk is assumed through the use of these investments. However, they are generally considered to be pretty conservative.

Over the last four weeks, this has been the worst place to be. Apparently, many of these funds are have as part of their portfolios investments in sub-prime debt. How could that have happened? They placed client's money into investments that were rated high quality. How sub-prime debt could ever be rated high quality is beyond me.

One fund in particular is -6.26% over the last 4 weeks. This particular fund which has been opened since 1992 has never lost money.

Just when you think you are playing it safe, you find out otherwise. It is a real good idea to check out your money market account as well as your ultra-short bond funds to make sure that you are not taking unattended risk.

Shades of 1929

Some people get a little irritated when I make references to the great crash of 1929 because:

a) It is different this time.
b) Something like that could never happen again.
c) We are in a super bull market
d) Our economy is much different than in 1929

You can pick your own answer. I keep going back to 1929 because of all of the similarities. This morning Goldman Sachs announced that some wealthy individuals were going to pump in about 3 billion dollars into their failing funds in an effort to save them. It is a "great buying opportunity."

If you go back and read the history books, the exact same thing happened in 1929. The markets were getting into big trouble and a "pool" of investors would go in and buy tons of stock to prop up the stock market. Investors in the 20's would get a feeling of relief knowing that this group of wealthy individuals were pooling together to save the markets. It was the big name people back then and it is the big name investors this time around as well. Besides, what is a few billion among friends?

Now my favorite part of the press release about this influx of capital was the highlights from the Goldman letter sent to the clients (read: individuals losing a lot of money) into their funds. (read:ponzi schemes). Here is the excerpt:

....according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the ``strategy getting too crowded,'' rather than the models not working.

In other words, it wasn't our fault that we invested all of your money into sub-prime debt. I would argue the model was terribly flawed from the start.

This is the problem with Wall Street, politicians, the Federal Reserve Board, _____ (fill in the blank) - No one will take responsibility for the irresponsibility that has taken place.

This Isn't a Sub-Prime Problem

The headlines read that the stock market is heading for trouble because of the "sub-prime" mortgage problem. Ben Stein said last weekend that the sub-prime problem is grossly overstated. He points out that sub-prime mortgages make up such a small part of the entire mortgage universe. (I still cannot figure out how an actor turned economic commentator is qualified to give economic analysis.)

Well, that is a relief! That makes for a great soundbite and something that the fox commentators can argue over for an hour while whipping its television audience in the process.

This is a credit problem resulting from a 25 year busting of a credit bubble. This stems from lenders writing irresponsible mortgages to consumsers who could not ultimately afford them. At the root of the problem is the adjustable rate mortgage. These mortgages come due and consumers cannot make their new higher payment. Consumers are dropping like flies and homes are going into foreclosure. Incidentally, 120 billion dollars these loans are coming due the second half of the year.

AIG and Countrywide (the biggest of the biggest mortgage writers) both said in a statement that this is spreading to the prime loans. Adjustable rate mortgages were written on ALL types of loans and in great number. Mortgage lenders were (and still are) selling the American Dream for the low monthly payment.

Now these consumers are in a world of hurt.

So follow the smoke and you will see the problem. Irresponsible lending equals Consumer problems equal high foreclosures equal a worsening of the real estate bust equals problems problems in the credit markets equal problems in the stock market equals problems for the economy.

Good credit, not so good credit, and bad credit. It is all about the bursting of a credit bubble that has been building for 25 years. That is the problem.

My problem with pop culture analysis is that it has no substance. No one on financial television is brave enough to tell the real story. Many of these analysts work for big brokerage companies and have taken the creed. Repeat after me....We are always in a bull market and there are no problems ever. Even when there are problems we are still in a bull market. Bear markets don't exist.

Then some of them are just actors.....Bueller, Bueller, Bueller??

Dow Jones Drop of 387 points - A Mini-Panic?

I really get amused as to what the media writes about the stock market. The AP refers to the drop in the market as a "mini-panic." 387 points sounds like a big drop. That is about a 3% drop in the Dow. If the Dow was extremely negative for the year, I would start using words like panic. However, the Dow is well above normal averages and is positive for the year.

No, I have not turned bullish on things. I think that want we found out this morning in the news concerning banks in France is not good. The credit problem is a global problem. Unfortunately, this is a problem in the credit markets. Every day we can wake up to a new negative surprise.

I cannot stress enough the importance of understanding risk and making sure you are not in a situation where you could lose a ton of money. There are ways to invest in a declining market and make money. If you want more information, send me an e-mail at bob@prudentmoney.com.

My concern is everyone who is listening to financial media such as CNBC or Fox news (which is fair and balanced with everything except for the stock market) who is saying this is no big deal. This is a big deal.

Sub-Prime Mortgages (Predatory Lending) Still Being Marketed

I received an e-mail from a listener about an offer that he received. Now keep in mind, he has a 6.5% 30 year fixed mortgage. This is a good note. However, he called the number on the marketing piece because it sounded like a good deal. This what the note said:

Veterans's Savings Program
You DESERVE the lowest possible payment!
Recent purchase or refinance, OK! (Ask about Cash-Out Options!)
NO APPRAISAL! NOCREDIT QUALIFYING! NO HASSLE!
NO PAYMENTS UNTIL OCTOBER!
YES, WE WILL REPAIR YOUR ESCROW ACCOUNT AND REFUND YOUR CURRENT ESCROW TO YOU!!
NO OUT OF POCKET COST TO YOU!
CALL IF RATE IS HIGHER THAN 5.%

*CALL US TODAY AND SPEAK TO A VA LOAN SPECIALIST!

This has all of the qualities of a sub-prime loan. Plus, they were recommended that he go from a fixed note to an ARM where the interest rate changes in 3 years.

The listener asked the "loan specilist" (read:salesperson) if they had anything dealings with sub-prime loans. He actually denied that they even exercise such practice or suggest such loan to any one.

Predatory lending continues.......

One of the Most Anticipated Fed Meetings in a Long Time

Today the Federal Reserve Board met to determine the direction in interest rates. Due to all of the problems in the credit markets written about week after week on this web-site, the bulls were betting on the Federal Reserve Board bailing out the markets.

Although highly unlikely, they were hoping for an interest rate cut. If not, at least there was hope that the Federal Reserve Board to acknowledge that there is a problem and state that they are open to lowering interest rates.

Unfortunately for the bulls, none of that happened. In fact, the Federal Reserve Board is still aggressively fighting inflation.

Jim Cramer has been screaming every night on his stock show that the Federal Reserve Board should bail everyone out. He literally threw a 3 year old fit on television today following the fed announcement.

There is something that the bulls do not acknowledge in the desperate plea for someone to bail out these problems so the party can continue. The fed has every right to be concerned about inflation. However, it is not the type of inflation that they typically worry about during the meetings. They are worried about ASSET inflation getting out of control.

They cannot afford to lower interest rates here. If they do, the real estate markets will ignite again and a good possibility exists that all assets (Stocks, bonds, real estate, etc) would morph into an incredible out of control bubble environment. (See China) Remember bubbles don’t end very well. It would only be putting off the inevitable.

They cannot afford to ignite the speculative spirits of the markets. Thus they are forced to stay on the sidelines and do nothing.

Unfortunately, the economy is weakening and the real estate markets are making it tougher for the Federal Reserve Board to sit on the sidelines. They have to take the lesser of two evils. They are between the ultimate rock and a hard spot. So, they do nothing.

Only a very desperate situation will motivate the Fed to lower rates.

Desperate for Business?

Every morning the first stop of my business day is http://www.minyanville.com/. In fact, I am at this site all day long. It is the best market analysis site available.

I found this article on the site this morning and just looked at my computer with disbelief. This was the ultimate "insult to intelligence" article. The Overstock.com CEO has an ingenious business plan and motto. "Buy it on overstock, then sell it on E-Bay."

“Our motto is buy it on Overstock, sell it on eBay,” Byrne said on a conference call Tuesday with investors.

"If you compare the prices of the stuff on Overstock, it is cheaper than on eBay for commodity goods and such. In fact, there are people — there are lots of people who make their living buying on Overstock and selling on eBay.”

Let's take a step back for a minute. I want to let you in on a little secret. Instead of buying the merchandise on E-bay, you can buy it direct from Overstock.com and avoid paying the additional money.

This guy is getting paid big bucks for coming up with this game plan. In a conference call to investors, is this the best that he can do? Could this be sign of the times? Is business this tough? If I were a shareholder, I would be concerned.

On a side note, the writer of the above article points out that the advice to buy it at overstock.com and sell it on ebay doesn't even work. Apparantly, the prices are lower on e-bay.

Consumer Confidence at 6 year high? Foreclosures up 58%?

Something doesn't seem right. I acknowledge that I have a negative bias on the stock market and the economy and desperately try to stay open minded. At the same time, how in the world does consumer confidence report a 6 year high with the mess that is occurring in the real estate markets?

Well the CNBC analysis says that it is because employment is so strong and the sub-prime mortgage crisis is well contained. Well, that explains that one to me. I guess??

Countrywide the nation's largest mortgage lender says that the defaults are spreading to the prime loans. The sub-prime loan crisis (clearly in the early innings) doesn't sound so "well-contained." The estimated 2 millionj foreclosures this year should stay "wel-contained."

What about that strong employment? The government actually estimates a good portion of those created jobs each month through their own analysis. In other words, they make up job growth. John Mauldin reports that 86% of the jobs that have been reported this year have been created out of thin air by the government.

The bottom line is that the government can spin the numbers at will and create a fantasy economy. The CNBC analysts can tell you don't worry about it and just go back to sleep. One analyst actually said last week that there was clearly "no reason for the sell-off." As Gordon Gecko said in Wall Street," The whole world must be off its rocker." By the way for all of you Wall Street movie fans, there will be a sequel.

Has I have written many times on this site, there are clearly big problems in the markets right now. These are foundational problems. It pays to think differently and not follow the advice of those who clearly have a lot to lose in the event that this bull turns into a bear. That would be every politician, every fund manager who can only invest for a bull market, every financial advisor who thinks that we are in a perpetual bull market, and anyone on CNBC.

Just a Correction in the Stock Market or Something Else?

With last week's stock market decline (largest in weekly drop in the Dow in 5 years), the forever bullish are claiming that this is no big deal. It is a "correction." Let's first define correction. A correction is a pause in a bull market. It is a normal decline that should create any worry.

This is the mantra of Wall Street. They made that claim through the bear market in early 2000. The problem as I outline this week in the Stock market outlook is structural. It is within the credit system. The credit system has been the foundation for this stock market bull rally that started back in 2002.

We are talking about foundation problems. If this problem worsens, there will be big problems on Wall Steet. I am not in the business of making predictions. I am looking at the data and see the problems. I just don't see how Wall Steet dodges this mess. A good proxy for this credit problem can be found in the mortgage market. The sub-prime loan crisis has been noted and written about many times. It has been a prime reason for the foreclosures.

Last week it was announced that Alt-A loans (the next level of loans up from sub-prime) are now producing more foreclosures. Then Countrywide (nation's largest lender) said last week that the PRIME loans are now starting to have problems. Prime loans are supposedly the high quality mortgages.

Be very careful and weigh the facts in the argument of correction versus the start of a bear market. For a good read on the reasoning behind the problemsm go to his link:

http://www.msnbc.msn.com/id/19935772/

Have no fears – the group who calls itself the Invincible American Assembly says that everything is under control. They are meditating calmness into the world and the stock market. I really cannot make this stuff up.

Another Bank of America Complaint

Between paying.5% on their savings accounts to offerring credit cards to illegal aliens, it also seems that Bank of America is getting a little fee happy. An over the limit fee on a savings account? That one is a new one for me. Read more.......

Thank you for the information on Bank of America. I have had an account with them for 10 years and today I think I will switch banks. Today I discovered they assessed me a $27.00 over the limit fee from my savings account. I did not know I had a withdrawal limit from my savings account. I don't recall signing or agreeing to anything that would limit the amount I could withdraw from my savings account. Can you tell me if anyone else you know has had this problem or concern? I had a previous problem with them before when I agreeed to sign up for overdraft protection. I thought what this meant was that if I had insufficient funds in my checking account it would be covered with monies from my savings account. Appparently this wasn't the case because on one occasion I was assessed a $30.00 insufficient funds fee. I don't know what to expect next from this bank. I would appreciate any advice you could give me. Also, I know you cannot indorse or recommend another bank to me but what type of services (free checking, etc.) do good banks usually offer?

From Bob - Century Bank is an excellent local bank.

Just Plain Bad Advice - Nothing Always Works All of the Time

I was reading an investment periodical that I received at my office. It was from a real estate mutual fund company. The title of the article was "The Importance of Remaining Invested." They were talking about the importance of buying and holding investments for the long-term.

The article is talking about helping your clients feel comfortable with the risk in their portfolio. If your client doesn't feel comfortable with the traditional stock/bond/cash portfolio, consider adding real estate to make it more diversified. The article was making the point that by adding real estate to the mix "the correlation between real estate and stocks, bonds, and cash may help manage the volatility in a portfolio." In other words, reduce the risk.

That might have worked decades ago. Today, that is bad advice. The average year to date return of real estate funds is -7.25%. The fund that this article promotes is down over -9% year to date. (through 7/25/07)

The problem is that a stock is a stock whether it is international, domestic, or real estate. We are in an environment that traditional diversification might just not work. Stocks have all classifications are carrying the same type of risk today.

The flaw in this line of thinking is that traditional diversification and buy and hold ALWAYS work. Just remember that nothing always works. That is why you have to think differently when investing.

Reply to my Chase Post about On-Line Bill Paying

Paul from Chase Card Services/Communication & Public Affairs wrote me in response to my blog on the listener who had problems with the on-line bill paying. In all fairness, I wanted to post his response.


Just saw your blog posting about a problem a Chase customer had making a payment and wanted to follow up with you.

We recently rolled out an initiative we are calling "clear & simple" that is designed to provide customers with information and tools to manage their credit better, avoid fees and protect their best rate. You can learn more about this at http://www.chaseclearandsimple.com/.

On the topic of payments, I'd like to point out that Chase offers a number of tools to help customers always make on-time payments:

1. Setting up free phone/text/e-mail alerts that let them know when their payments are due and/or when a payment has been credited.
2. By setting up automatic payments, customers can choose to make payments in full or minimum payments on their due dates, ensuring that their payments are always made on time.
3. By using online payments, customers can schedule their payment in advance so that it is made on the due date, maximizing use of their funds and ensuring their payment is made on time.

I hope this is helpful. Thanks for your time, and please feel free to contact me if you have questions or would like additional information.

Bob - your information is always appreciated

Who Monitors the Politicians?

I always find Congressional testimony interesting. You have a panel of elected politicians grilling someone who has taken the stand on some issue. The politicians ask the tough questions and seek to lay blame.

As I write, Federal Reserve Chairman Ben Bernanke is on the stand. The Federal Reserve Chairman has the responsibility to report to Congress two times a year. The politicians are grilling the Fed Chairman on consumer debt and of course the crisis known as sub-prime loans.

One democratic politician just made the statement that the Federal Reserve was a sleep at the wheel. They allowed this to happen. There should have been safeguards built into the system to prevent predatory lending.

Our political system is a joke as are these hearings. The blame lies with our politicians. They conveniently ignore all of these lending practices and allow them to happen for two reasons. First, it gives the economy a short-term boost. It produces economic growth. Second, these banks pay their bills. I might add that MBNA is President Bush’s second largest campaign contributor. You certainly don’t want to bite the hand that feeds you.

Even more frightening is the lack of knowledge that these politicians have regarding these issues. Much of the questioning makes absolutely no sense.

When do we get to put the politicians on the stand and ask the tough questions? When do they take responsibility? They all look shocked that this sub-prime crisis is happening. You could see this train wreck coming a mile away.

Another Example of Being Careful Making a Credit Card Payment

Dear Bob,

- In August of '04, I was moving from California to Dallas, TX and I lost my checkbook in the meantime so I couldn't send my payment to Chase Credit Card. I called them to let them know the situation and they said I can make payment by phone but they'll charge $10 to do so. Well, I was a college student at the time so $10 goes a long way. I refused and told them that I'll make the payment on-line. They said okay. I made the payment on-line and it was a done deal. Well, the next months statement said that I didn't make a payment and they charged with a late fee and everything else they could think of. I called them immediately to find out what happened. Well, they had the wrong acct number that I had originally entered. I confirmed with them that if the internet system works and they said yes. So I tried again and it showed an accepted payment. Unfortunately, the situation occurred again and the payemnt quadrupled. Every assistant I talked to did not help me at all and gave no grace, but just demanded the payment. There was no solution. Eventually the payments were so high that I couldn't make it. I left it alone and they handed my acct to the collection agency. I talked to an agent and he himself was surprised because I've had perfect credit since '98 and all of a sudden there was a tragedy. I had to transfer all funds to one credit card and continue making high payments with that card. Is there anything that I could have done, or anything I could still do in that/this situation? Thanks.

Henry

You are not going to like this answer. The bottom line is that the payment (regardless of the issue) did not make it to the account. My assumption is that the payment was never drawn from your account. If it was drawn from your account and credited elsewhere, then that would be a different story.

They look at it from the standpoint that the payment never arrived. From their standpoint you could use any excuse as a reason for not making a payment. It is unfortunate. It is a sleazy system set out to damage credit for the smallest of mistakes.

Keep the Faith

Bob

True Credit Lock Very Different from LifeLock

I had a question come up regarding the new Truecredit (http://www.truecredit.com/) credit file lock. I have commented in the past on how Lifelock (http://www.lifelock.com/) works. Lifelock is simply putting fraud alerts on your credit reports every 90 days in order to help you fight identity theft.

As a review, the law states that you may only issue a fraud alert in the event that you are a victim of identity theft or you think that you might be a victim of identity theft. It doesn’t say that consumers should just apply a fraud alert because of general identity theft concern. So, this is a company taking advantage of a gray area in the law. If you don’t have an ethical issue with it ( I do by the way) then you can do it for free for yourself.

I have always stated that Truecredit is an outstanding company. So, I don’t want you to get these two programs mixed up. Truecredit are just stating that the company will put a lock on your TransUnion credit reporting agency credit report and not all three. They are not issuing fraud alerts.

TransUnion owns Truecredit. They can easily offer this program due to the ownership. Thus, TransUnion can elect to lock a consumer’s credit file outside of whatever the law says. Is it a benefit? Truecredit doesn’t charge for it. Locking up 1 of the 3 in a sense is a false sense of security. An identity thieve can still access the other two credit reporting files. In a business of aggressive marketing, it is probably Truecredit’s way to stay up with the competition without taking the low road like Lifelock.

The Gut Feel of a Terrorist Attack

This is not the typical Prudent Money post. However, I watching Fox News and the ridiculous commentary on Michael Chertoff. Homeland Security Chief Michael Chertoff made the statement on Wednesday that he had a "gut" feel that a terrorist attack was imminent. He has caught a great deal of criticism for making these statements. The argument is that someone in his position shouldn't make these types of "fear based" statements without any factual information. He should make statements that are credible based on fact. If there is specific information, give the American public the information.

First, the homeland security agency cannot give specific information. They have to stay very vague. Think about it for a second. Let's make public everything that they know so the terrorists can be a bit more informed. They cannot share everything that they know. Second, I think that you have a guy who is bombarded with all of the risks. At the least, he wants to send an indirect warning.

I would take his "gut" very serious. This guy sees what is happening. We don't need to know the details. We just need to know that the risk is higher today than usual.

Unfortunately, people in politics want to take this and use this to their own agenda. Terrorism is a very real thing. To just pretend it is not there is the risk.

I felt led to talk about financial crisis today on the radio show. I discussed point 1 of my 3 point plan that I feel is important to have as a foundation for the journey back to prudent stewardship. As a result of that topic, I heard some gut wrenching stories today. People are facing some tough situations. If you are one of them, follow along the next few days as I talk about this plan.

Some of this is going to sound obvious. However, it is the obvious that we many times miss.

Point 1 of 3 - The first and most important place to start is in prayer and a re-commitment to God's financial will for your life. This is the starting place. It is very important to get back into the middle of God's financial will for your life. The safest place for you to be is in God’s financial will.

Fortunately, it is a process that has simple beginning. James 4:8 perfectly illustrates the process.

"Come near to God and he will come near to you."

It is that simple. The hardest part is to commit. Keep one thing in mind. You can go through this crisis in or outside of His perfect will. The crisis began when we attempted to do things outside of God's financial will. At least I know that to be true for myself. I would suspect it is true for you as well. It is important to get back to that place of peace and relationship. From there, allow God to direct you through the journey.

That journey might have trails and challenges. Fortunately, that is not bad news. It is all workable because He is guiding you while you learn and grow and become closer to Him. As you stay obedient to Him and committed to his Will, there is nothing that you cannot get through.

It is the power of relationship, belief, and prayer that ultimately heals a financial crisis.

Another Bank of America Bait and Switch

I am trying to think of how many stories that I have written about Bank of America and their slight of hand marketing tricks. From their keep the change program that pays only .50% on their savings account to their "no fees" mortgage (but you pay higher interest rates), this is a Bank that should not be trusted.

What I am writing about today, is really not new news. However, I just stumbled upon it and wanted to warn my readers about yet another bad BOA deal. Last year, Bank of America was offering a free checking account. However, free ended up being for a limited time and not as advertized. Come to find out, they started charging $ 5.95 a month for the account in February of this year. The "good" news is that they would waive the fee if you would just transfer over
$ 25 to their savings account each month which only pays .50% while a good rate for a money market pays 5%.

It is unbelievable.

A Band Aid Approach to the Sub-Prime Mortgage Crisis

We need real leaders who are going to look out for the American consumer. The banking regulators just put together new "tough" regulations to help consumers who have fallen prey to the sub-prime predatory lending practices. This was a recent headline in a CNN money article:

Subprime loans get new standards

Principles issued by bank regulators include new consumer protections; lenders should only offer loans to those who have proof they can repay.

Now that is revolutionary..... How about lending money to people based on the ability to repay it.

These new regulations do nothing but allow predatory lending to continue. One of the main components of a sub-prime loan is the adjustable interest rate. After a period of time, the interest rate can be adjusted upwards. One of the reasons for the adjustable rate mortgage in the first place is to offer a strategy to the consumer to reduce the payment.

Adjustable rate mortgages in some circumstances make sense. However, it should be used only in certain circumstances. The average everyday homeowner has no business getting involved in a loan that one day they will not be able to afford. When that rate re-sets, the mortage payment increases. Most of the time it increases past the point that the consumer can pay it.

How about some real regulations for the mortgage industry?

1) Make it tougher to get an adjustable rate mortgage
2) Make the underwriting standards very black and white - don't give lenders the ability to make the determination whether someone is credit worthy or not.
3) Stop allowing banks to issue these exotic loans

Most importantly, figure out what is going to happen to the 1,000,000's of people who are about to face this nightmare. Studies show that we are in the early innings of these loans resetting. The high foreclosure rate in America is mainly a result of these sub-prime mortages.

With all due respect to the politicians in Washington, how about doing something that helps the people who vote you into the White House and not for the people who pay for it. The finance industry are HUGE contributors to political campaigns. It woul be a setback for the industry if politicians implemented REAL solutions to the sub-prime/foreclosure crisis. (which they allowed to happen on their watch)

"Junk Mail" and why Consumers are getting a Raw Deal with Auto Insurance Rates

Auto insurance companies can raise your rates on your auto loans without informing you ahead of time. This has been a practice that federal regulation has done nothing about. The Fair Credit Reporting Act requires most companies to send a letter called a notice of adverse action to the consumer if the consumer was penalized due to a low credit score.

A group of consumers sued insurance giants Safeco and Geico and won based on this unfair practice. The case appealed all of the way up to the Supreme Court was recently reversed.

Now the reasoning for reversal really leaves you scratching your head. Justice David Souters' reasoning was that it created too much “junk mail.” He did admint it was a loophole in the system. However, he stated that the cost of closing the loophole was way too high.

So, our Supreme Court is protecting us from junk mail and allowing auto insurance companies to get away with raising rates on insurance based on some obscure credit scoring system? The cost for making it a fair system is too high? Who is it to high for?

It is a good thing that the Supreme Court is there to protect the insurance industry. It would be a shame for the industry to be forced to make a little less money sending out those “junk mail” notices to make the system work better for the consumer.

They did allow for a system to where a certain group of people would be notified. However, the system is determined and controlled by the insurance industry. Thus this is more of a smoke and mirrors fix.

Why would it be beneficial for consumers to know about the credit scoring? First, consumers should know the benchmark. A consumer should know that insurance rates would come down if credit scores were below a certain level. Second, many credit scores are low simply due to error. Statistics would show that a high percentage of consumers have enough mistakes on their credit reports to adversely effect their credit scores.

Politics are a way of life. Blatant politics are another story. When the reasoning for reversing a case that would help consumers was based on a “junk mail” problem, something else is obviously going on.

Rent -a- Credit Score - Legal Yes Unethical Yes

There is a new scheme in the credit industry that is gaining a great deal of press as of late. There are companies that "loan" you the good credit of other people in order to increase your credit score. The company has the authorization from consumers with good credit history to make people with low credit scores authorized users on their accounts.

So Joe (who has bad credit) becomes an authorized user on Sally's (who has good credit -who he doesn't know) credit card (which has an excellent track record). Sally's excellent credit history now appears on Joe's credit file thus increasing Joe's score.

As you can imagine, this has lenders in an uproar and for good reason. One company's website, http://www.instantcreditbuilders.com/, states the following in their application:

This service is not sold to defraud or scam past, current, or future creditors.

Seasoned trade lines (credit history) are NOT sold as a quick fix for those who want to cheat the system.

...inherent in the service is the potential for abuse. We will not allow it! Credit Builders will report to the authorities ANY applicant attempting to defraud the credit bureaus or creditors in any way, shape, or form! At the end of the day, if we all play by the rules we all win.

ARE YOU KIDDING ME?

This system gives consumers the ability to lie to creditors. This system is a quick fix to bad credit problems. This is an attempt to defraud the credit bureas because a consumer who is using someone else's credit is misrepresenting themselves as a person with good credit. That my friends is fraud that is created bt this company.

Unbelieveable that there are companies that will go this far to take advantage of the system.

Fortunately, FICO, the company that developed the credit scoring formula, announced today that they are making changes to put a stop to this fraud.

Look Realistically at the Price of Gas

The national price for unleaded gasoline hit a record $ 3.22 a gallon last week. That is up $ 1.05 since February of this year.

There are numerous reasons for this rise in price. There is a large amount of oil refining capacity currently offline. There is strong gasoline demand. Finally, there are lower fuel inventories.

It is estimated that this rise in price is costing Americans an additional 20 billion dollars to drive.

What can you do about it?

There are the obvious solutions such as find ways to carpool, cut back on driving, make sure that you car is running effieciently etc. You don't need me telling you the obvious. However, there is something that is very obvious that people forget to do.

Look at this rise in prices realistically and plan for it!

This is the problem. People don't plan for this additional cost each month based on the notion that prices will go down soon and or it is just ignored until the bill comes. Look out over the next 3 to 4 months and accept it is going to cost you more to drive. Figure out how you are going to adjust. Remember when you don't adjust your spending, you will create debt. Debt is the replacement for the income that wasn't there to pay the bills.

The US Government reported that we are going to se up to 10 active hurricanes this season with 3 to 5 being major. We could just be in the early innings of these high gasoline prices.

Make sure that you aware of this and make sure that you plan for it

The Barefoot Boss Promises you Riches - Don't Fall for this scheme

This irresponsible marketing award goes to www.barefootboss.com. They advertise very aggressively on satellite radio. I have found that the majority of radio advertising on satellite radio falls into the irresponsible category. It seems that they are desperate to take on advertising and anything will do.

This one goes through the story of how they will make you millions. Of course, they claim making millions is very easy. Just take these steps (claims the commercial), and you can be working barefoot from home.

They appeal to your emotions by talking about how boring and uneventful your life is right now. They talk about how big business is just using you. "You can free yourself from this life," says the ad. The good news is that they have a "free" book and DVD set to help you. It is 100% absolutely free claims the ad. You can read about the program and see if it is a fit, then they charge you 39.95 so that you can access the rest of the program.

So, you are going to pay them 9.95 for this "free" book and DVD. They call it shipping and handling. If you don't cancel by 14 days, then you are charged the 39.95 for the rest of the program. However, you never get back the 9.95.

What a deal...... for them! They are probably making somewhere in the neighborhood of 3 to $ 4 an order from shipping and handling. That is not a bad spread.

The reality is that they are peddling a multi-level marketing program for Herbal Life. I am not saying anything negative about these programs. I am simply saying that this type of advertising is misleading and a huge rip-off. You can go to a herbal life meeting for free and get all of that information.

Always be leary of the "free" consumer offers. Most of the time, they are selling you something. The problem is that the consumer just thinks it is shipping and handling.

Banks Writing Mortgages for Illegal Immigrants??

I really wish that I could make this type of thing up. Let's see..... mortgage lending is getting tougher because of the real estate bust. Lending standards are getting tighter because of all of the irresponsible lending by the mortgage business over the years. So, business is not as good and standards for lending are going up. So, what is a bank to do to make money?

Well, they can go after the illegal immigrant market. Yes, they can lend money to illegal immigrants so that they can own a piece of the American Dream while illegally residing in this country. Now, let's look past the illegal immigrant debate and issue. I just want to focus on profit motivated banks and how even for them this makes no sense.

They are going to give credit to someone without a credit score who could easily take out the note and go back to their country at a moment's notice. The bank gets stuck with the property in a real estate market that is in the beginning to middle stages of a bust. That makes no business sense at all. However, they do get to charge outrageous fees and very high interest rates to the ones who make the program work.

In Maricopa County the sheriff whose office has arrested hundreds of illegal immigrants, said banks providing these loans are taking on a risky proposition.

Well at least they are not writing sub-prime loans. After all the definition of a sub-prime loan is a loan that is given to someone who is a credit risk and has a very low credit score. Maybe in the interest of fees and high interest rates the rationalization is that the sub-prime issues don't apply here because after all the illegal immigrants don't even have a credit score.

The saddest part of the irresponsible lending practices of banks is that a legal residing resident with poor credit cannot even get a loan today.

Someone really needs to regulate these big banks.

Tricks of the Trade - Marketing Secrets of Financial Advisors

The ad reads:

Financial Playbook is a 68-page glossy magazine packed with entertaining and informative content. It is published semi-annually and is customized to feature individual agents/advisors on the cover and inside as Financial Playbook's featured financial professional.

• Your Photo Ithe advisor) is placed on the front cover
• Your article is published inside
• Generate Quality Leads
• Enhance Credibility
• Use the Power of Print

The best part is that Federal Reserve Board Chairman Ben Bernanke is on the front cover right by your (the advisor) picture.

All the advisor has to do is write a big check and they will put the advisor's picture on the front cover and publish their article inside the magazine. Incidentally, they will do this for anyone willing to pay for it.

A little misleading? It is just another example of irresponsible marketing by the financial services industry. What is irresponsible marketing? It is marketing that creates something that isn't true.

Financial Playbook is not a credible published magazine. It is not like a Wall Street Journal or Fortune Magazine. However, the public doesn't realize that to be true. The advisor is putting themselves out there as someone who is published by request of a major magazine because of their expertise.

So what would the advisor say when asked how this major magazine article came about?

Well the honest answer would be, "It is for marketing. I look credible being in a major magazine. It especially looks good with a picture of me next to Ben Bernanke. No, you can't find a copy of this magazine anywhere else. I just paid for this marketing stunt."

Do you really think that would be the answer? Be careful of the illusion.

The Reality of the Widget Salesman

Are you getting your opinions about the stock market from unbiased reousrces? Do the Wall Street cheerleaders really believe their opinions or are they just hoping eveyrthing works out?

As I sit here watching CNBC (financial television), I just stay amazed at the run away bullishness of this market. Should it be a real surprise? Just ask all of these money managers who talk about the markets on CNBC. They see nothing but clear sailing the rest of the year. Just keep in mind about the opinions of money managers.

The majority of these money managers can only purchase stocks. A bear market would be the worst case scenario. Thus, it will always be a bull market regardless of what the tape says. Besides, why would they shoot themselves in the foot and offer anything negative?

For example, let’s take the story of the widget salesman. The only thing that he can sell is widgets. Besides the money that he makes selling widgets, he also makes plenty of money as long as his clients hold onto those widgets. Well, let’s say that something happens to the widget market. Widgets lose some of their popularity. People don’t want them as much.

As a result, he will go announce that this weakness is temporary. After all, he doesn’t want to lose any current customers. Second, he will talk about what a bargain widgets are so that he can still sell them.

The take away from that story is that the salesperson can only sell stocks. The salesperson depends on widgets always being a good deal because that is his only income source.

The same applies to money managers or financial advisors who depend on stocks. Remember the opinion that you here in the media might just be desparate hope rather than a solid opinion.

Congress Proposing Legislation to Once Again Protect the Credit Industry

Let's take a look at this nonsense. First, the mortgage industry is allowed to make big bucks writing these sub-prime loans for the past 3 or 4 years. Anyone with common sense would recognize that a problem is going to be created by allowing a mortgage to be written for 100% of the home value, no money down, and no documentation nor income verification. It is a very risky loan that posses potential problems for the consumer.

Now we pay the price for the greed that has been displayed by the mortgage business. Of course, this type of borrowing has been great for the economy on the short-term. As a result, why would Congress ever step in and tighten the lending standards?

Now, Senator Schumer wants to bail out these sub-prime loan holders with hundreds of millions of dollars. So, what is he really doing? Is he proposing something to protect the American Dream or is he proposing something to protect the mortgage industry?

Think about it for a minute. This legislation will keep subprime lenders solvent by helping these mortgage holders pay their monthly mortgage payments.

How about another idea to consider. Force the sub-prime lenders to go in and reconstruct these loans for the borrower at reasonable fixed interest rates. In addition, force them to do it for free. If needed, Congress could subsize the costs of this process. How about the sub-prime lenders coming in and paying the price for their greed? As taxpayers we should not take on the burden of bailing out these home buyers. Thes subprime lenders should pay the price.

Another example of Congress watching out for big business when they should have been regulating big business a long time ago.

RENT-A-CREDIT SCORE

So, you need a higher credit score to qualify for a mortgage loan?

An internet company will increase your credit score by making you an authorized user on another person’s credit card. By being an authorized user on a person’s card with excellent credit, all of the good credit information will be transferred to your credit file.

As a result, your poor credit score will get an increase due to borrowing the credit history of someone with good credit.

There is also big dollars in it for the people who are willing to allow this company to use their credit cards by adding add authorized users. They get a hefty fee for each added authorized user.

Although the Federal Trade Commission is looking into, they have not filed any legal claims against the company. However, the Nevada Mortgage Lending Division states that anyone associated with this scheme “will be subject to administrative action and potential criminal penalties.”

Adam Wheeler who runs this unethical scheme states his business is “legal” but he conceded that “some people might say it’s unethical.” He also said he does not “condone fraud against mortgage institutions.” If clients are going to lie to lenders, he says, “that is not good.”

Well, Mr. Wheeler it is probably not good if you help those people lie to those lenders either. That is a story from the “I just can’t make this stuff up department.”