Wise Money Decisions

“Why the Credit Bureaus Can’t Get It Right” from smartmoney.com

Today the House and Senate agreed to a final version of the latest stimulus package.  The final package comes in at $789 billion.   Round it to $1 trillion.

In response Senator Joseph Lieberman said:

“This represents the beginning of turning our economy around.”

Wait a sec….. the beginning?    

I know it’s hard to keep track of things, but didn’t we pay about a trillion just a few months ago to turn our economy around? 

Or am I confusing that trillion with the trillion that we gave away for no reason?

The Mortgage Professor’s column on Monday gave a very interesting list of mortgage interest rate premiums. 

Mortgage interest rate premium is the increased interest rate a borrower will obtain on a loan by deviating from the “ideal” borrower. 

Borrowers in the best position to refinance profitably have loan balances of $417,000 or less secured by a single-family house in which they reside. They will also have a credit score of 800 or more, and have equity in their property of 20 percent or more.

Guttentag observes:

The interest rate premiums associated with deviations from this standard are larger today than I have ever seen them.  

He breaks out the increased interest rate for loan amount, type of property, loan purpose (investment property, cash-out, etc.), credit score, and equity in the property.

You can click the link above to see the numbers.  Here is a quick summary:

A conforming jumbo loan, which means a loan balance between $417,000 and $625,500 in a high cost area like mine, has a premium of 1%.

Non-conforming jumbo loan (balance greater than $417,000 in a non-high cost area):  2%

Condominiums:  0.75%

Investment Property:  1.375%

Cash-out refinance:  0.25%

Credit score 780 (instead of 800 or higher):  0.125%

Credit score 700:  1.125%

All this data is very interesting if you are considering a refinance. 

If you are considering a refinance or acquisition mortgage and you want to be a fully educated loan shopper, read everything on Guttentag’s website.  You will be much better for it.

My feeds are not working. 

I started looking into the problem and discovered that I am not alone. 

Feedburner was acquired by Google a few years ago.  Feedburner operated as a standalone service up until now.  Google is now requiring everyone to transfer their feed from Feedburner to google.  

Now all heck has broken loose.  The transition has caused all kinds of errors for all kinds of bloggers.  The blogosphere is up in arms that the mighty Google has bungled the transition.

I have contacted the Feedburner/Google people to see if they can help.  I am told it can take up to 48 hours for them to respond.  I’m certain they are being bombarded with emails and complaints right now. 

I will get my feeds fixed as soon as possible.

A reader sent a link today with the note, “I’ve thought this for sooo long.” 

The link was to an article about Suze Orman by James Scurlock of ”The Big Money.”  

This article was long overdue. 

Editor’s Note:   If you’re Suze Orman’s mom and you don’t want to see your daughter get her comeuppance in a national financial publication, then don’t click through.

You may get an error if you try to subscribe to the feeds using the links in the left sidebar. 

Feedburner, which was acquired by Google a couple years ago, is transitioning their feeds to integrate better with Google products.  There are a few kinks to iron out.

Hopefully I can get them working later today.

If you subscribe to the feed through your browser, you shouldn’t experience any problems.   UPDATE: There seems to be problems with the browser feed too.  Stay tuned.

Regularly I get emails from other websites inviting me to promote their site.  I rarely take them up on the offer. 

When I do, it is my policy to make full disclosure to my readers how I came across the site.

Today GoCollege.com asked me to mention their “Student’s Guide to Personal Finance.”  I scanned through the guide and found some interesting thoughts and statistics. 

Here is one:

Today’s plastic-based society means that both credit and debit cards are easy to come by and easy to use. The reason that these cards are so easy to use is that a large number of people want the opportunity to claim some of your future earnings.

The rationale is quite simple. As long as you owe them money, they in essence, own a piece of you and your future.

It is interesting to think of my debt as someone’s claim on my future income.  That’s exactly what it is, but I don’t often think of it in those terms.

Another interesting statistic:

“As of 2004, undergraduates had an average credit card debt balance exceeding $2,100.”

Note that this is credit card debt only.  Many students have other loans as well.

I consider myself very fortunate to have graduated with zero debt, credit card or otherwise.  In fact, through scholarships I was able to come out several thousand dollars ahead. 

I was even more fortunate to finish a master’s degree with zero debt.  I was the beneficiary of fellowships that paid me while I studied.  I have been grateful every day of my life for my good fortune.

By the time I finished graduate school, I had a new sedan and some $15,000 in the bank. 

Then I went to Stanford Law School.  All the money was gone when I paid first semester’s tuition.  I’ve had student loan debt ever since.

Finally, let me mention one other quote from the site that is consistent with my own experience:

When it comes to financial aid, we turn to the words of Kalman A. Chany:

“The theory is that money goes to the people who need it,” Chany tells Newsday.com. “The reality is that money goes to the people who best understand the process.”

I had many hard-working, needy, deserving friends in college.  Some of them had scholarships, but most did not.  Few of them took the time to understand the process.  My own experience says that taking the time to understand the process is well worth the effort.

The latest Jeremy Siegel column is one of the better summaries of the “Morton’s fork” faced by policymakers dealing with the problem of an undercapitalized banking sector.

Lately we have heard several proposals intended to relieve the banks of their “bad assets.”  The idea is the banks would be more able to meet their capital requirements, and therefore in a better position to lend, if they were not burdened with the bad assets.

The basic idea behind most of the proposals is that the federal government (read: taxpayers) put up money to relieve the banks of these bad assets.  In some proposals the government:

• Acquires the assets directly (the TARP program as originally proposed); 
• Becomes a debtholder (the actual TARP program in which the goverment holds preferred stock); or
• Becomes a shareholder (the government would hold common stock, or warrants in the case of the actual TARP program). 

Each scenario involves the participation of the government, the banks, and the banks’ stakeholders (shareholders and debtholders). 

Under any scenario the parties must determine an appropriate price for the bad assets.  However, people much smarter than I have assured me that it is very difficult to determine a market price for these assets because they are not trading in the market.

It boggles my mind that no one can figure out a suitable valuation method.  While the bad assets may not be trading now, they were trading before.  They were trading for several years.  There were valuation models.  The models may not be accurate with hindsight.  But with all the smart minds working on this problem, and with the benefit of all we’ve learned over the last few years, we should be able to come up with more accurate models that will help us peg a market value to these assets. 

On a related note, is it just me or does the so-called subprime meltdown seem like one of those stories where a man-made computer develops artifical intelligence, overthrows its creator, and turns on humanity. 

Very smart people created financial models and products that took on a life of their own.  Now no one can figure out how to stop them from destroying humanity. 

From a study released today by Javelin Strategy & Research:

• Identity theft was up 22% in 2008 over 2007.
• The cost per incident is less than $500.  That surprised me.  I thought it would be higher.
• A category they term “crimes of opportunity,” such as stolen wallets or purses, are responsible for 43% of the cases.  That surprised me.  I thought it would be lower.
• Online access accounted for 11% of cases.  That surprised me.  I thought it would be higher.
• Women are 26% more likely to be victims than men.  That surprised me.  I thought more men would be victims because criminals would target men with the thought that men are more likely to have control and access over household finances.  But that is apparently not the case.  The study surmises that more women are victims because they are more likely to have lost or stolen information during in-store purchases.
• More than 10% of victims know the perpetrator.
• Finally, victims are discovering cases more quickly.  That’s not surpring with all of the focus on identity theft the last few years.

From today’s Wall Street Journal Online article by James B. Stewart:

For the young and middle-aged, the sharp drop in their net worth is at worst irrelevant, and at best cause for celebration. Their peak earning years still lie ahead of them. They should be saving as much as they can now and putting it into the stock market at these depressed levels. Given the sharp drop that has already occurred, the long-term outlook for stocks and many other riskier assets is better than it’s been in years.