Count Down from Y2K – A Decade in Review

In researching the top ten financial news events of this decade, I came across a great list by Rosemary Peavler from About.com

Rosemary Carlson Peavler has been a college professor of Business Finance. She is a freelance writer in finance and a small business consultant. She taught at Morehead State University for 26 years. She has written for academic journals in finance for 26 years and about business and personal finance in the popular press for more than 10 years.

Her entire piece can be read here, but listed below are excerpts listing chronologically (sort of): I thought I would also insert my opinion of the result from each event – please feel free to agree or disagree!

Year 2000: Bursting of the dot.com, or technology, bubble
The Internet kicked into gear and so did online commerce and not surprisingly, a huge uptick in credit card usage. Entrepreneurs saw potential in online business. However, online business was really in its infancy. Everyone was talking about a "new economy" which referred to an Internet-driven economy.

Much of the economy was restructured as a result of this bubble, the then new-age Internet company AOL, acquired old-world media conglomerate Time Warner, to form AOL Time Warner, before removing the “AOL” from their name after the collapse. Dozens of companies filed for bankruptcy, hundreds of dot-com companies simply disappeared, and widespread collapse in the communication industry, where funds were promised for massive growth projects, resulted in the collapse of Nortel, Worldcom, and a number of other major companies.

Result: Young adult workers got a rude awakening on the loyalty relationship between companies & employees. They are looking out for themselves a wee bit more.

Year 2001: September 11 Terrorist Attacks
The 9/11 terrorist attacks were the events that helped shape other financial events of the decade. After that terrible day in September 2001, our economic climate was never to be the same again. It was only the third time in history that the New York Stock Exchange was shut down for a period of time. In this case, it was closed from September 10 - 17. Besides the tragic human loss of that day, the economic loss cannot even be estimated.

Some estimate that there was over $60 billion in insurance losses alone. Approximately 18,000 small businesses were either displaced or destroyed in Lower Manhattan after the Twin Towers fell. There was a buildup in homeland security on all levels. 9/11 caused a catastrophic financial loss for the U.S.

Result: Americans became more patient and tolerant of each other. This treatment however, only lasted a couple of years

Year 2001: Enron, the Emergence of Corporate Fraud, and Corporate Governance
Enron, one of the top energy companies at this time, and Arthur Andersen, one of the top five public accounting firms, were caught in a corporate fraud scandal that led to the bankruptcy of Enron and dissolution of Arthur Andersen.

Enron hid billions of dollars of debt from its shareholders in failed deals and projects. Further, it pressured its auditors, Arthur Andersen, to ignore the issues. Shareholders lost more than $60 billion.

This led to the passage of the Sarbanes-Oxley Act of 2002 which expanded penalties for accounting fraud and instructed accounting firms to remain independent of their clients. Other firms such as Tyco and Worldcom experienced similar scandals. These scandals shook the securities markets and investor confidence.

Result: The idea of being responsible for your own retirement funds took center stage, however, financial education during this period never gained prominence and small investors continued to chase the fast money.

Year 2002: Stock Market Crash of 2002
After a brief slide post 9/11, the stock market rallied, but began to slide again in March 2002. The market reached lows not seen since 1997 and 1998 by July and September of 2002. The corporate fraud scandals, such as Enron, along with 9/11, were contributors to this loss of investor confidence in the stock market.

Result: The average investor, with little financial training, took this stride because after the emotional beating from 9/11, things seemed to be looking a lot better.

Years 2001 and 2003 - present: War on Terror and Iraq War
After the 9/11 terrorist attacks, the War on Terror was launched in Afghanistan and the Iraq War was launched in 2003. The cost of these wars is ongoing. To date, the Congressional Research Service has approved about $944 billion for the operations overseas. This has been an incredible financial drain on our economy and it is impossible to know what the final cost will be.

Result: The mere number size of the national debt is beyond most people’s comprehension. A sense of “it doesn’t affect my day-to-day” begins to develop.

Year 2005: The Growth of China and India as World Financial Powers
The rise of China and India as world financial powers is nothing short of amazing. Economists estimate that both nations can grow at the rate of 7-8% for decades to come. China, alone, has grow at about 9.6% for the past two decades. Together, the two countries account for one-third of the world's population.

Result: Our acceptance that the goods we purchase are manfucatured in China and customer service centers originate from India becomes more prevalent.

Year 2005: Hurricanes Katrina and Rita
On August 25, 2005, Hurricane Katrina hit the Gulf Coast of the U.S. as a strong Category 3 or low Category 4 storm. It quickly became the biggest natural disaster in U.S. history, almost destroying New Orleans due to severe flooding.

Hurricane Rita quickly followed Katrina only to make matters worse. Between the two, more than $200 billion in damage was done. 400,000 jobs were lost and 275,000 homes were destroyed. Many of the jobs and homes were never to be recovered. Hundreds of thousands of people were displaced and over 1,000 were killed and more are missing. The effect on oil and gasoline prices was long-lasting.

Result: Charitable contributions for relief organizations rise and a growing skepticism that our government can react to our needs begins to take hold.

Years 2007 and 2008: Sub-prime Housing Crisis and the Housing Bubble
In the early part of the 21st century, the U.S. housing market was booming. Housing values were high. Just about anyone who wanted to buy a home could buy a home. A phenomenon called sub-prime lending arose. Individuals and families who, in the past, could not have qualified for a mortgage were able to qualify for adjustable-rate mortgages with low or no down payments and low initial interest rates.

Banks made mortgage loans to these individuals for houses with inflated values. As the interest rates rose and their adjustable rate loans got more expensive, they couldn't make their mortgage payments. Soon, large financial institutions were holding portfolios of loans that were worthless. The "credit crunch" ensued.

Result: Now it’s personal – the level of greed and sense of entitlement ranging from the individual to Wall Street becomes evident. The “buy-now-pay-later” mentality of the decade begins to yield consequences.

Year 2008: Bernard Madoff and the Biggest Ponzi Scheme in History
Bernard Madoff, who owned his own investment advisory firm, was a former chairman of the NASDAQ. In 2008, he admitted to running a huge Ponzi scheme where he paid his investors with proceeds from the investments of other clients. Finally, it all unraveled and he could not meet his obligations. In one of the largest investment fraud schemes in Wall Street history, he defrauded his investors of around $18 billion. He was subsequently sentenced to 150 years in prison.

Result: Few people could define a Ponzi scheme before – now variations of the Madoff math continue to unravel.

Years 2007 - 2009: The Global Recession and the Collapse of Wall Street
In September of 2008, a seemingly perfect storm of factors came together to precipitate the deepest economic downturn in not only the U.S., but across the globe, since the Great Depression. The great investment banks that had stood on Wall Street began to collapse due to the sub-prime mortgage crisis and serious corporate fraud. During the last months of the Bush Administration, the federal government stepped in to bail out some of these institutions in order to keep the U.S. financial system afloat.

Result: Credit card usage is down, personal savings is up, and the projected slow return of a stabilized job market makes us all think that we need to slow our consumer spending down in preparation of an unknown future.

It’s time to rip off the rear-view mirror from this decade and look ahead to the challenges and promises of a new decade. Will we be more financially literate in 10 years?

A Year of Reflection

Another year is coming to an end. Gadzooks! Another decade is also coming to an end. When did THAT happen?

I always liked this time of year – I like those news reports and articles that look back at the year’s events. I’m always struck by the number of famous people who passed away and how for many of them, they fade away from our consciousness. That part saddens me a little, but it also gives me pause to appreciate and embrace every moment we have.

I like turning off the cruise control of today’s treadmill and appreciate the blessings I’ve been given. My resolution each year is to keep trying to help those less fortunate in whatever way I can. In our “I Can Save!” campaign we offer to second graders, we outline the importance of “spending, saving & sharing.” By any measure, the “sharing” is always the best and fun part.

I’m also very tired of the gloom and doom of the Great Recession. I know jobs and the unemployment rate is going to be our greatest challenge next year. The sooner we get more people back to work the better. The sooner we can convince lenders to begin lending again the better as well.

So for at least the remaining moments of 2009, I’m going to focus on the positive stuff:

• A lot of 401K and retirement money has been recovered from the 2008 losses
  
• Personal savings rate for Americans is reported to be the highest in a number of years
  
• Housing numbers in certain parts of the country seem to be stabilizing
  
• Consumer debt is on a downward trend (though I’m always suspicious of the math)
  
• Credit card usage is on the decline – might it be possible we are developing a “save to buy” mentality rather than the previous “buy now, pay later” approach?
  
• Financial literacy is real hot topic these days – can we now convince the masses that this has to be a required topic for our children to learn?

So here’s my holiday wish and new year’s toast all rolled up – May we apply what we’ve learned from these difficult times, prepare our children so future choices are made with understanding and knowledge, and welcome the new decade with confidence, hope, and a positive sense of community spirit.

My 2 Cents About Credit Card Balances

I’ve kept quiet during the recent news releases from TransUnion and Credit Cards.com who were making a big deal about credit card balances coming down and citing Federal Reserve Statistical Releases as the reference source.

Essentially, their reporting is accurate – credit card balances are indeed coming down. What I can’t buy into is the assertion that consumers are managing their credit card balances better.

Nope – for me the only statistical release I pay attention to is the delinquency and charge off reports from the Federal Reserve. The most recent third quarter report shows credit card delinquency of 6.58% slightly down from the previous month and a charge off percentage at a historical high of 10.24%. The slight drop in delinquency make perfect sense because the charged off balances are no longer on the books.

As an old credit card guy, I played this game many times. And in order to play the game here’s what you use – simple math. Here’s the game:

1. PROBLEM: Delinquency percentages are going up – SOLUTION: Increase portfolio balances. The higher the credit card balances, the lower the delinquency percentage. Offer incentives to borrowers to transfer balances and charge more.

2. PROBLEM: Charge off percentages are going up - SOLUTION: Increase portfolio balances. The higher the credit card balances, the lower the charge off percentages.

3. ANOTHER SOLUTION: Charge off the delinquent balances sooner than the require 180 days past due (that 6 months by the way...) required by most regulators. Sure the charge off percentages will look ugly this month, but the delinquency percentage will show tremendous improvement in the next few months – and hopefully credit card balances will increase significantly, so it will all be masked anyway.

Simple math – the problem is it only works when credit card issuers are aggressively targeting customers to increase their credit card balances. It doesn’t work so great (like now) when card issuers are cutting credit lines and increasing credit score thresholds so they can prove to whomever that they are serious about reducing credit risk. You can’t hide the delinquency and charge offs behind portfolio balances in this scenario.

More simple math – with 10% in charge offs, along with cost of funds around .05%, operational costs around 5%, and now loan loss reserves probably around 7% (if you’re lucky), card issuers would need to increase interest rates to around 24% to be profitable.

Credit card interest rates aren’t going up in anticipation of the Credit Card Accountability Act kicking into gear in February – they’re going up because the math isn’t working.

And you might just see some issuers getting out of the business altogether in 2010...

The New Definition of Cash

I have to admit, I’m having a hard time believing this one.

According to a recent Western Union survey, 69 percent of American consumers are planning to give the gift of cash, check or a gift card to friends and family this holiday season. Furthermore, the survey revealed that 79 percent of consumers would prefer to receive a gift card this holiday season that could be used anywhere traditional credit cards are accepted.

Here’s what their press release said:

“Cash as a gift isn’t just practical; it’s an on-trend gift as well. According to the same Western Union survey, consumers are utilizing cash more often in their day-to-day finances, where in the past they may have relied on credit cards. Seventy eight percent of consumers find cash a smarter way to spend money. And, seventy seven percent of consumers also reported that using cash helps them stick to their budget, particularly useful when every penny counts.”

“Consumers are rediscovering the practicality and convenience of cash, and so it’s logical for an increased acceptance of cash as a gift during the holidays as well. And when it comes to sending cash, Western Union is the ‘gold’ standard,” said Jorge Consuegra, senior vice president U.S. product management for Western Union.

This sounds like a corporate attempt to create a self-fulfilling prophesy to me.

I also think we’re headed down a path where the use of debit cards and gift cards will be considered the same as “cash”, because it won’t carry the bad-boy reputation of credit cards. But it’s still plastic, and plastic is still different from cash. I’m willing to bet that a percentage of the respondents who plan to give someone a gift card this year feel that they are giving that someone “cash.” This might sound like I’m splitting hairs, but a swipe is still different that a clink. These cards are simply a tool being used to access cash – and they have associated fees attached to them that cost – yeah, cash.

On the other hand, a recent Boston Globe article indicated that a growing number of people are opening deposit accounts on behalf of others. Apparently, hundreds of consumers have already taken advantage of Citizens Bank on its “Gift of Savings’’ offer launched just a week ago, which features an extra $10 to people who open an account with at least $100 on behalf of a loved one. Service Credit Union here in New Hampshire opened at 5 a.m. on Black Friday with special deals like a three-month CD with 10% interest. The bank sold 2,224 CDs in three hours, about 20 times the normal daily volume.

So maybe Santa has an ATM on the North Pole after all….

Happy Cyber Monday!

As the closely-watched Black Friday weekend winds down, a National Retail Federation survey conducted over the weekend confirms the expected: more people spent less. According to NRF’s Black Friday shopping survey, 195 million shoppers visited stores and websites over Black Friday weekend, up from 172 million last year. However, the average spending over the weekend dropped to $343.31 per person from $372.57 a year ago. Total spending reached an estimated $41.2 billion.

According to the survey, nearly one-third (32.2%) of shoppers purchased toys, an increase of 12.9 percent from last year. Additionally, more people purchased sporting goods (12.6% vs. 11.4% last year), personal care or beauty items (22.4% vs. 19.0%) and gift cards (21.2% vs. 18.7%). The most popular purchases were of clothing (0.9%) and books (40.3%), which remained nearly unchanged over last year.

Apparently more shoppers headed out for bargains while it was still dark outside – proving that the effects of turkey stuffing wear off rather quickly. According to the survey, nearly one-third of shoppers (31.2%) were at the stores by 5 AM - good grief.

As millions of shoppers gear up for Cyber Monday, one-fourth of Americans shopping over the weekend (28.5%) were shopping online – that means with some form of plastic.

So, as you prepare to embark on apparently the most non-productive output day for the American worker, here are a few sites to consider on your quest for the perfect deal.

Gottadeal.com – their motto is, “Why Pay Retail?” and claim to update their site several times each day

PriceGrabber.com - an Experian company

CyberMonday.com – powered by Shop.org which is a division of the National Retail Federation

Happy Thanksgiving & Happy Shopping!

So here we go – Black Friday is almost upon us. Arguable the biggest shopping day of the year – at least the shopping day with the most hype. Well, given the Great Recession, there are some signs that things a wee bit different this year…

1. According to NRF’s 2009 Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch, U.S. consumers plan to spend an average of $682.74 on holiday-related shopping, a 3.2 percent drop from last year’s $705.01.

2. Though Americans were less inclined to purchase gift cards last season, the popular gifts retain their spot at the top of the list among gift recipients. According to the survey, 55.2 percent of adults would like to receive a gift card this holiday season, with clothing (48.8%), books and DVDs (48.6%) and electronics (33.2%) among other popular choices.

On the flip side, a recent poll by Consumer Reports revealed this about gift cards:

1) Most people don't want them: While 46 percent of people plan on buying gift cards, only 15 percent said they want to receive them as gifts.

2) 25% of the people polled haven't used the ones they got last December: During the 2008 holidays, about half of adults received a gift card, but one in four hadn't redeemed at least one of the cards as of last month.

3) 65% of adults who received a gift card in 2008 typically spend more than the value of the card, up from 58 percent in 2007.

4) Store-specific cards may limit gift choices: Forty-one percent of those who have unused gift cards from last year said that they hadn't found anything they wanted to buy.

5) Many cards carry fees: Consumers may have to pay an upfront fee to purchase a card, but there are also monthly "inactivity" fees that can slash the value of the card if the recipient doesn't use it within a specific time frame.

This will be less of a concern next year when The Credit Card Act of 2009 goes into full effect. It prohibits gift cards issued by banks or retailers from expiring for five years; and bans inactivity fees for the first 12 months. But the Act won't cover cards purchased this holiday season.

So Black Friday is coming whether I like it or not. And gift cards are going to play a big part of shopping this year whether I like it or not. So I guess all I can do today is to offer you something fun. Click on this video and enjoy “Straight No Chaser”… and relax….

Online Banking Is a Must Now

We’re about to enter a new year and a new decade. It’s funny about new decades – they also seem like a fresh start – time to put the bad things of the previous decade in our memory chest and look forward to what the next 10 years will bring.

Remember Y2K? Seems like yesterday that many people were calling for the end of civilization. I remember thinking as a grade school student that when the next century arrived, I would be 43 years old and that seemed so far away. Now I’m wishing I was 43 again – particularly with the knowledge I’ve gained over the last 10 years.

So what will this new decade bring in terms of personal money management? One new direction I’m recommending is a change in attitude about online banking. I think we need to now view this as a necessity in our money management approach and no longer a luxury or “cool tool.” And with technology improvements and “apps”, mobile banking places the information right in your hands, anytime, anywhere.

With the changes in credit card usage and availability compounded with a higher level of debit transactions, we need to be more aware of bank balances sooner and not wait for the paper monthly statement. With the crazy configuration of overdraft fees and holds on transactions, you might be racking up unnecessary fees and losing money needlessly.

And since the use of plastic is an integral part of our world now – from subway tokens to coffee purchases – you better have a good idea what’s in your account before you swipe. And let’s not forget the fraud and card compromise potential with all of this swiping.

Here’s what I’m suggesting to kids that they do each morning:
· Brush your teeth
· Run a comb through your hair
· Eat a good breakfast
· Check your text messages, tweets & Facebook page
· Check your bank balance

Now go off and embrace the new decade and all of the opportunities it presents!

Don't Be a Lab Rat

Amid mixed economic signals this month, banks have kept annual percentage rates on their credit card products unchanged this week, leaving the national average APR on new credit card offers steady at 12.28 percent, according to CreditCards.com

However, recently banks have indicated their desire to “experiment” with changes to the terms and conditions for their card products – ahead of the new regulations on the not-so-distant horizon. Translation: you better be reading the fine print material in your mailbox.

Annual fees for credit cards are a rarity today, but more cardholders may soon have to decide between paying them or forfeiting their cards. Bank of America this month said it is "testing" annual fees of $29 to $99 on select customers starting next year. Customers were chosen based on "risk and profitability," but the company has not explained how it decided who charged $29, versus $99, or anything else in between.

Citigroup also notified a "small number" of customers in August that they'd be charged new annual fees.

These “experiments” come as the credit card industry searches for ways to make up the revenue it stands to lose as a result of new regulations. As part of the sweeping new reforms that go into effect in February, banks will be limited in how and when they can hike interest rates and fees.

This has left card issuers to examine their portfolios for accounts that aren't very profitable - or so they claim. For example, the type of account most sited is those cardholders who never carries a balance -- and never pays late fees or financing costs.

However, the interchange fees from the transactions should at least account for the cost to carry the account on the books, so I’m not convinced that these accounts are unprofitable – translation – that they lose money. They just don’t make as much money as those accounts that carry balances.

I’m seeing stories of folks who get these notifications who say, “I’m just closing them out now.” If those closed accounts have high credit limits, that action negatively impacts your score – hence the point of an earlier post. Credit scoring needs to go – at least not be the deciding factor in lending anymore.

To be continued…..

Teens and Their Money

In their 18th semi-annual national survey published by Piper Jaffray called, “Taking Stock with Teens,” they reported that total teen spending on fashion related items increased by two percent on a year-over-year basis and six percent sequentially, a notable improvement from the mid-teens percentage decline measured in the prior survey.

Surely the recession must be over now!

This spring, a collaborative team of research analysts the team visited 12 cities across the United States, surveying approximately 1,200 students with an average age of 16.3 years. In partnership with DECA (an international association of high school students), Piper Jaffray captured online survey responses from an additional 10,000 students with an average age of 16.2 years.

"We believe the fashion industry is in the early stages of a new cycle with traffic and conversion gradually improving as teenage consumers look to replenish key items in their wardrobes after under-spending on the category over the past three years," said Jeff Klinefelter, senior research analyst. In addition to year-over-year and sequential increases in fashion budgets, the survey found other spending trends such as shopping frequency improved versus spring and fall of 2008.

Do you still think that children are not a target for retailers? Arguable, the group with the least amount of financial education makes the best segment to work on that old impulse-buying, “gotta-have-it-now” mentality.

But wait, it gets better.

Piper Jaffray also surveyed parents, and the results indicate that spending on themselves and their teen increased sequentially and year-over-year. Apparel spending by parents for their teens was $1,141 compared to spring 2009 at $915 and fall 2008 at $1,085. Parents alluded to the fact that they felt they had to spend more on their teenagers because jobs for teenagers were more difficult to find and therefore, they can’t earn enough to support their lifestyle.

And the lawmakers think that the problem is credit cards ….

Will Credit Scoring Begin a Slow Death?

Recently, my credit card company arbitrarily reduced the credit limit on my credit card account. After spending an inordinate amount of time weaving through the automatic phone prompts, I finally reached a human being who told me that my credit limit did not support my income.

“Really? And how do you actually know what my income is?” I asked. Never have I ever asked to update my income information nor any changes to my employment I have been a loyal customer of this account since 1995 – almost 15 years. Never late. Never over-limit. Carried balances. In short – I am a profitable account for them. . She could not answer my questions – because she was simply using a rubric to adjust credit limits on their accounts. This is an example of today’s loan officer?

I went on to tell her that I have a 30-year credit record, am a homeowner with plenty of equity, have has the same employment for eight years – previous employment was 13 years, and carry a savings balance. In other words, if you use the old-school “Three C’s of Credit” – I am a responsible borrower who has demonstrated a worthiness to sustain the credit line.

No dice. Not only was I thunderstruck by this response, I realized that now, my credit score has been adversely affected because the proportion of available credit to my card balance has been reduced – through no fault of my own. I am the same borrower today that I was before this action, but because some robot changes my credit line – and as such my score – I am now less “worthy.”

Credit scoring has yet to be put to the test in a poor-lending environment. Delinquencies are on the rise, foreclosures are continuing, unemployment levels are at 26 year highs. What this means is that credit scores for a lot of people are being affected. And without the common-sense lending approach of lenders who use to rely on experience and instinct, I’m not sure how credit becomes available again to help the economy turn around if we don’t abandon credit scoring and return to the “Three C’s” of lending.

More importantly – who’s left in the lending community that can do that anymore?

The Credit-Debit-Prepaid Card Message is Getting Messier – Part II

So if you’ve taken the time read to Part I, thanks for coming back for, what Paul Harvey used to say as, “….the rest of the story.”

Perhaps you’ve been reading some recent articles about how some of the major banks are reviewing their overdraft policies and fees.

For example, beginning Oct. 19, Bank of America will no longer charge its usual $35 overdraft fee if a customer's account is overdrawn by less than $10 in a single day. It will also limit the number of overdraft fees it charges to four a day, rather than the current 10. U.S. Bank will also waive fees if an account is overdrawn by less than $10 and will limit the number of overdraft charges to three a day. Wells Fargo and Chase will stop charging fees if an account is overdrawn by less than $5. Wells will limit its overdraft fees to four a day, while Chase will stop at three. All subsequent transactions for each bank will be denied.

BofA, Wells and U.S. Bank will allow customers to opt out of their automatic overdraft-protection programs, meaning that customers can choose to have transactions rejected at the cash register if there are insufficient funds in an account. Let’s see how teenagers like that option the next time they buy a quarter-pounder at Mickey D’s and their card is rejected.

I think card issuers should charge overdraft fees for those transactions that place the deposit account in a negative balance. The fee allows the transaction to go through and saves the customer the embarrassment of having the card REJECTED at the register. It’s the consequence of not knowing what’s in your checking account.

However, as noted in Part I, when a previous merchant places a hold on the debit transaction without your knowledge causing future transactions to place the checking account in a negative balance and hence accumulating overdraft charges, that’s another story.

Somewhere in this equation, the cardholder has to have some responsibility in all of this. So here’s a thought.

How about we all get in the habit each day that after checking our Facebook page, and the tweets we follow, how about checking the balance of your account each morning and review the transactions that cleared the night before? Online banking is no longer a luxury, it needs to become part of our daily routine in order for us to manage who charges what in this world of swipe and run

The Credit-Debit-Prepaid Card Message is Getting Messier – Part I

I was in a meeting last week with colleagues from the financial services arena. Each of them told a story about a family member or friend who recently ran into the nasty overdraft fee business from their financial institutions that are beginning to get some media attention.

During one of the stories, the individual mentioned that the person opened a separate debit card for cash purchases during the week such as gas, coffee, etc. I stopped her and asked whether in fact the person opened a checking account with a debit card attached or was he actually transferring money to a pre-paid account. The answer: it was a checking account and he transfers money each week for these “cash” transactions. He is actually budgeting his money by managing his spending.

The story went on to describe that at one particular convenience store, the store placed a $75 hold on the debit transaction of $3.50 (coffee and a bagel). This hold essentially placed the checking account in an overdraft situation and every small purchase after that racked up a $35 overdraft fee – a total of over $150 in fees!

Should he have used a pre-paid, re-loadable card instead? Maybe, but many of those have a slew of fees as well and they don’t carry the fraud protection of debit & credit cards.

Some of the large banks are now offering the customer the option to opt out of the automatic overdraft feature in order to avoid the fees that are getting so much attention. So in this case, that would mean that after the $75 hold was placed, every subsequent transaction would be rejected at the merchant. Like that one better?

The point is, we have to know more about the rules of plastic more than ever – and we have to help our kids understand the differences. The trouble is – we can’t even use the same semantics! Remember that in telling the story, my colleague said the person opened a “debit card.” I just recently received a $30 rebate from Staples from an item I ordered during the summer. The rebate came in the form of a pre-paid card with the words, “Debit” right on the front of it. And we expect kids to keep it straight?

Here’s a great article from Liz Pulliam on pre-paid cards and their fees.

The Lost Decade

I’ve been hearing a lot lately that his decade will come to be known as the “Lost Decade”. It’s a label being attributed to how we’ve managed our finances during the past 10 years. Here are some stats:

1. The S&P began 2000 at 1,469 and is now 27 percent lower at 1,068. This decade trails only the 1930s as the worst in the modern investing era
2. In 2000, consumer credit outstanding in the U.S. (excluding mortgage loans) was in the vicinity of $1.5 trillion dollars. Now it’s in the neighborhood of $2.6 trillion
3. The Personal Savings Rate at the beginning of the decade was in the 2.5% range and we know that for most of this decade, this measurement was either at zero or was a negative number (except for the past few months when the mattress seemed like a better option).

I guess it’s a little hard to argue that this boom decade we experienced has really put us in a hole. Now with unemployment reaching early the 80’s level of double-digits, tha national debt at numbers our forefathers could never have comprehended, and an economy whose success and health is primarily located on the backs of consumers, maybe we are lost.

Who would have thought that Y2K would take 10 years to boot up?

Here’s a great article from Dave Carpenter, an AP personal finance writer http://www.miamiherald.com/business/breaking-news/v-fullstory/story/1242836.html

Top Ten Financial Myths Held by 14-21 Year-Olds

Last week, the Consumer Federation of America (CFA) released a new survey revealing how parents view their responsibility, competence, and chances for success of financially educating their children. Little more than half (53%) of a representative sample of American parents (with children under 18 at home) surveyed, indicated that they were “very confident” their children will leave home knowing how to manage money.

As stated in their press release, “… only 73% said they were “very capable” of providing this instruction. And little more than half (53%) said they were “very confident” their children will leave home knowing how to manage money, credit, and debt.”

They also released the Top Ten Financial Myths Held by 14-21 Year-Olds

1. I don’t have to worry about credit at my age.
2. Bad credit can’t keep me from getting a job.
3. All loan companies have the same rates.
4. All credit cards are alike.
5. The job of financial advertising is to tell the truth.
6. It’s OK to bounce a few checks.
7. It’s OK to make minimum payments on a credit card.
8. Paying late occasionally can’t hurt my credit.
9. Fine print isn’t important.
10. Young people don’t have credit scores.

To see a video of the “Top Ten Financial Myths”

Discount Tuition

A week or so ago, I was in a meeting with some financial aid administrators from local colleges. We started talking about this year’s admissions and what they were seeing from families and students relative to the current recession.

At one point, one of the gentlemen turned to the other and asked, “Do you guys discount your tuition?” The other fellow replied, “Yeah, we have to – everybody does.” This intrigued me so I asked them for an explanation. Here’s what they told me.

They said that for the past few years, they have “discounted” their tuition by offering larger amounts of scholarships to students in order to attract them to attend their institution. Okay that makes sense. But they went on to say that parents like the “bragging rights” of saying that their kid received a large scholarship to attend the school – implying that the kid is something special and the school really coughed up the money to get the kid to attend.

Not really. What the schools are doing is inflating the tuition cost, “providing” larger scholarships giving the appearance of a good subsidy, and getting families to pay the tuition to attend their school.

My question to them was, “You mean to tell me this is like the MSRP of a new car? ” The answer: “Exactly.”

My next question was, “Why not lower the tuition for everyone and the price to attend is the real price.” The answer: “Then parents wouldn’t feel the pride of their child getting into a “prestigious” school.”

I have to admit this is clever marketing and sales. Don’t ever try to tell me that higher education is not a business. It’s always about the dollars.

We still have a long way to go …..

Now About the Housing Market…..

I know – you’re sick and tired of hearing about the housing market and its impact on our economic revival. I bet you never want to hear the words, “sub-prime lending” or “credit default swaps” or stuff like that ever again.. You probably don’t want to read another blog about it either, but before you take off, here’s a personal story from me.

My Dad passed away in 2008. Like many others in his generation, he only owned one house which was built in 1955. It’s a small four-bedroom (yes, four), 1,300 sq. ft. cape in a central New Hampshire community. It sits on a typical town lot with an additional lot in the back yard. On the same street is an elementary school. Only one family has lived in that house – mine.

As an old banker who has sold plenty of bank-owned properties back in the day, I look at this property that I am now selling and think this is the perfect “starter” home for a young family. Well built, good neighborhood, school nearby, added lot for the children to play, etc. etc. And yet, because of the financial culture we’ve lived in for this decade, here’s what I’ve learned:

• Most young couples want to live in the suburbs – the idea of a property in town is out of the question
  
• 1,300 square feet is simply not enough – “Where would the plasma TV go?”
  
• “The driveway only fits one car!”
  
• And I won’t even mentioned the comments that made my blood boil.

Funny thing is, given the fact that lenders have clamped down on loan qualifications (see this blog post in February), and down payment requirements, most young couples don’t have enough disposable savings to meet the requirement. One couple in their mid-thirties would like to have my Dad’s home but can’t come up with the 10% down payment of $17,000. And even if they could, their debt load is so great that they couldn’t maintain the property even if they got the loan.

So I guess I’m just wondering how the housing market is going to bounce back with this level of unemployment, deteriorating credit histories, tighter credit standards, and a growing list of foreclosed property. And what about buyers' expectations?

I’ll keep you posted on the progress of selling my childhood home.

Will Layaway Be a Key to Changing the Spending Culture?

The whole idea of layaway started in the ‘30’s – consumers who saw something they wanted but didn’t have the money to buy it would put a down payment on it and pay the merchant periodic payments until it was paid for. Then the merchant would release the item to the customer.

Of course, that was before credit cards and the whole buy-it-now-and pay-for-it-later culture that we’ve been in for the past 15 years or so. Add in our growing level of cynicism and memories of retailers suddenly going out of business (remember Circuit City last Christmas?) and you can easily see why layaway has gone the way of the do-do bird.

In 2006, Wal-Mart discontinued its layaway service saying that “the layaway process has really become very obsolete." Wal-Mart said demand for the service had dropped off, as consumers increasingly rely on credit cards and gift cards to pay for purchases. The idea of waiting to complete a purchase was no longer attractive.

Not so fast.

While economic conditions are beginning to look up, Kmart realized that the tough times aren't over yet and some families may be experiencing anxiety in regards to making back-to-school purchases. From school supplies to new clothes, back-to-school shopping is an added expense that can strain an already tight budget. Kmart's layaway program enabled moms to plan ahead for worry-free back-to-school shopping. Moms can use layaway to reserve "hot" back-to-school items early, pay over time and pick them up in time for school.

Of course, there is--you knew it was coming - -a website that will let you buy just about anything you want on layaway: Check out eLayaway.com. As it says on its site, it "allows you to buy the products and services that you want by paying for them through manageable monthly payments that you set." They have a calculator that will let you figure out the purchase price over 3 to 13 monthly payments. Payments are automatically deducted from your bank account every month. The fee for the service is 1.9% for every $100 you spend. Once you've paid for your TV, shoes, your fishing reel -- you can buy about anything -- then it's delivered.

Shopzilla has a new campaign called. “Layaway Black Friday.” You have to wonder that as the new credit card rules kick in during the coming months, will we migrate to a save-to-spend mentality?

Curious minds want to know…..

Back to School and the Power of Parents

It’s that time of year already – back to school. With the abundance of “teachable moments” these days, will this be the year when parents step up and insist that schools include financial education as part of the school curriculum? In light of the current economic condition, can we agree that a financially educated populace would have mitigated some of the devastating results of the current recession?

It might surprise you to know that New Hampshire is the only state in New England that has a graduation requirement for Economics. And embedded in the curriculum framework for that requirement is a standard for personal finance. The details are posted on the NH Department of Education’s website under the Curriculum Frameworks for Social Studies.

And yet, exactly how this requirement is met is left to the discretion of each school district. In many cases, since Economics falls under the Social Studies discipline, this curriculum is often taught by history teachers with little training in economics. Compound this with a lack of assessment testing for social studies and we’re left with a wide disparity within the state on how our children are taught any elements of money management.

Parents hold the key to this. There is a hierarchy to education and school boards take their marching orders from the parents in their communities. If parents want a higher emphasis on personal finance in the classroom, then they need to tell their school board. The state requirements and frameworks are in place; school boards do not need to reinvent the wheel to accomplish this. Their role is to manage and allocate resources to accomplish the desires of the community.

Resources. This word is often used as the argument on why we can’t do something. However, when it comes to the topic of personal finance, the argument is weak. There are vast amounts of personal finance curriculum available to educators and school districts that are either no cost or low cost. At the Jump$tart Coalition Clearinghouse, there are well over 700 types of curriculum and teaching materials – 45% of which can be downloaded for free. We at NH Jump$tart know from direct experience that teachers want to teach this valuable life skill to their students. We train over 150 teachers each year at our annual teacher conference. If teachers want to teach personal finance and there are plenty of available teaching materials to accomplish that, then what is the problem?

The realities of today have created the perfect teaching moment to have with our kids. Show them that old-school thinking of not spending more than you make, saving for a rainy day, and pay yourself first are the best ways to get through good and bad times.

Kids are facing a more financially-complex world than we ever could have imagined. Having a strong understanding of personal finance is critical to their future. Parents: the power to make a difference is in your hands.

Prom Season - Circa 2009

Prom season is in full swing and some families may be affected by the loss of money in their wallets. The country’s current economic situation may not have been foreseen when initial prom planning occurred, but like everything else these days, reality can sometimes hit hard. Many may have been asking themselves, “How much did they spend on that dress?” It is a fact that students and their families do spend quite a bit of money on Prom, but to what, exactly, is this large sum of money going?

For girls, the main expense is the dress--along with other extras such as manicures, pedicures, hair styling, tanning, make-up, and flowers. This year some girls spent well over $300 on a dress for Prom. Some may have spent much less than $250, but in most cases, the dresses seen at Prom usually came with a considerably large price tag. Accessories are also an additional expense. This category may consist of gloves, tiaras, jewelry, shoes, purses, etc.

Another prom cost is grooming, which includes manicures, pedicures, styled hair, make-up and tans. Some girls may spend as much as $100 to simply get their hair highlighted and styled for the special event. A manicure costs around $20, and a pedicure costs around $25. Needless to say, these extra costs add up.

For boys, renting or buying a tuxedo or suit can be quite costly. This year, some boys spent around $100 simply to rent a tux. If someone decided to buy a suit to keep, it may have cost them upwards of $180 on sale. Added costs may include ties or bow ties (around $12), hats, belts ($30), shoes ($45), and other accessories.

For all prom-goers, flowers, transportation, and dining are additions to the total expense.
Regarding transportation, some teens rent limousines to get around for the night. For a smaller limo, each person in a group of six may spend around $60, if the group splits the cost. Renting a larger limo will cost even more, depending on the number of passengers and hours of usage. Some students prefer not to overburden themselves with the extra cost and, instead, use their own vehicles. In that case, the price of gas would be their main expense.

Needless to say, Prom has its expenses, but, of course, everyone enjoys a bit of luxury once in awhile. A fun time is usually had by all who attend, and memories are made.

The Science of Lending Money

As we are painfully aware now, there is a complex science to lending money. In the old days, though it was still a science, it also had an element of art. Why do you think one of the original Three C's of Credit was "Character"? Lenders had to evaluate the trustworthiness of an applicant during the loan interview. It wasn't a science - it was an abstract ability to decide whether you felt the money you were about to lend would be paid back as agreed.

Of course, in those days, the funds that bank received in order to make loans came from bank deposits. It was pretty simple - the more money you took in deposits, the more you could lend out.

Things are different today. Here is a video that visually captures how the current credit crisis evolved. I introduced it yesterday at our annual MoneySmarts teacher conference and the teachers told me that it is succinct way to help kids understand the complexity of the terms being thrown around in the news. See what you think.

One final point - whenever we get out of this recession, we need to remember the flow of money will have to be some variation of this. The old days are not coming back.

The Credit Card Crossroad

I’m a guy who has managed credit card portfolios from almost the beginning - (well not really the beginning – I’m not THAT old for Pete’s sake). My beginning is from the mid-80 – when credit cards really started to take off. As such, I was very interested to listen to these reports about how the new administration wants to "protect credit card users."

We forget that the genesis of credit card usage was the early 80’s during that last real recession. S&L’s were crumbling, the real estate market was deteriorating and interest rates were at historic highs. The Prime Rate was in the 16-17% range. There was virtually no investor market for loans, so banks could only make money on the interest rate spread between what they paid in deposits and what they earned in loans. With deposit rates near the prime rate, they were few opportunities for banks to lend money unless borrowers were willing to borrow in the 20% range.

Congress made some sweeping changes to credit card regulations which allowed banks to offer credit cards on a more liberal basis. Remember, this is at a time when the technology didn’t support it very well. Does anyone else remember when merchants had to look in a paper book, issued weekly by the bank, to see if the credit card number being presented was good?

As technology improved and point-of-sale authorizations became electronic and easier for merchants, the acceptance of credit cards in our daily commerce grew and grew. And so did the profits. Managed appropriately, credit cards can be very profitable but it is a delicate balance which requires simple math. If the delinquencies grow and losses increase, the situation can be masked by increasing portfolio balances. This is because credit card issuers are evaluated on their percentage of losses against their total outstanding balances. The higher the losses, the more balances you need to keep the percentage the same. Simple math.

How do you increase portfolio balances? By increasing credit lines, lowering the credit standards, improving technologies to encourage more usage. Before long, an entire cultural shift occurred when credit cards became part of our daily buying habits and the collective debt levels increased. By the time the Internet arrived in the late 90’s, we were quite used to buying stuff with plastic and the prospect of using that plastic to buy stuff throughout the world using our own computer would propel us to the debt-ladened society we are today.

Along the way, the regulators and consumer advocates have attempted to “help” the consumer by requiring more credit card disclosures. The reason we now have the “fine print” disclosures is that the government has forced the credit card companies to increase the amount of disclosure information over the years. To now call them on the carpet and demand easier disclosures is a wee bit disingenuous in my view.

Regardless, I cannot argue that change is needed. But for me, the change needs to start at the fundamental cultural level – changing this buy now, pay later mentality. And of course, financial education remains the best defense while Congress, the regulators, and the credit card issuers all try figure out how to play nicely in the sandbox.

Do We Believe Yet?

After 10 years of preaching (or screaching depending on your prespective), it really stikes me these days how financial education is being promoted as essential for Americans to survive in the current economic climate. Chairman Ben Bernake said that we need to sharpen our financial skills - especially in the current economic crisis. Here's a recap of what he said today: http://www.msnbc.msn.com/id/30308921/


See, I actually believe that financial literacy is essential regardless of the economic climate. And, I think I have made the point in the past that financial education, though most likely would not have prevented this crisis, it certainly would have made it a tad bit softer. Which is why we continue to fight the fight to have personal finance a required course in schools.

Only 3 states in the United States have this requirement. Do we believe yet that the time has come? I actually think we may lose ground on this front. I'm reading all kinds of articles about school districts having to cut back on teaching staffs in order to meet budget requirements. Federal and state mandates restrict what teachers can do in the classroom. I get the circular - chicken vs. egg argument - but when do we reach the point when we as parents say that preparing our children to be financially savvy is better for them then knowing how to calculate a quadratic equation?

Playing the Game Means Keeping Score

One of the things I battle as part of the natural course of aging is staying aware of the speed of change. And with all things associated with getting older, speed keeps getting faster.

So too with the today’s world of credit. So here we are, in a fairly significant recession, and I’m thinking things will be like they were during the last significant recession in the early 90’s. Not so fast old man.

Today’s lending is credit score-driven. There has been too much investment in technologies and innovation to go back to the days of lenders considering the “character” of the old three “C’s of Credit.”

Nope – it’s all about the score. As people react to the recession by curtailing impulse buying and other spending, we need to be careful that our effort to cut spending doesn’t adversely affect our credit standing at the same time. To emphasize the different financial world we’re in these days, setting your credit cards aside and paying only with cash may be a great way to help rein in spending, but it can actually hurt your credit scores.

Read this interview of a pal, Liz Pulliam Weston, who is one of my favorite experts on credit scoring.http://www.msnbc.msn.com/id/30074146

In Case You Think I'm Way Off Base....

It's easy to be a town crier - "the sky is falling!" and all that. I've been saying that the job market will soon be turning evil for younger people and that an employers market will soon be upon us - just like when I graduated from college in the late '70's (egads - can it really be over 30 years?)

Anyway, that employers market helped to frame my generation into thinking that working 80 hours a week was necessary because in the beginning, if we didn't work them there would be a line of people waiting to take our jobs who would. As time went on, we thought the insane hours were leading to a first-class ticket up the career ladder.

Simultaneously, we gave our kids everything and rewarded them for everything. This is the generation that received a trophy for playing T-ball. It was all about making our kids feel good because we felt guilty for being away so much at work.

Now they're entering the workforce after going to college and racking up some serious debt. It's a rude reality and there is nothing we can do to take it away this time. Click on this segment from tonight's Nightly News with Brian Williams.

April 7: This year's college graduation class, the largest in American history, is entering the worst job market in modern history. NBC's Maria Menounos reports. http://www.msnbc.msn.com/id/3032619/vp/30095684#30095684

It's "I Can Save Week!" - Can You?

Last year, we decided that for the first time since our existence here in New Hampshire, we would develop an initiative for elementary school children. We call it, "I Can Save!" and this year we partnered with Fidelity Investments to tour various elementary schools throughout the Granite State.

We will be visiting second graders and after showing a brief presentation about needs & wants, we will be giving them Moonjar moneyboxes.

Winner of a 2004 Global Learning Initiative Award for Educational Excellence, each Moonjar consists of three moneyboxes (Spending, Saving, and Sharing), a family guide to get started, a passbook to record deposits and withdrawals, and a NH Jump$tart elastic band to hold the assembled boxes together.

I'm beginning to think that changes to the spending culture we now live in (which took almost 20 years to cultivate) can only be done with the next generation on consumers - today's elementary school children. Can they get us back to a lifestyle of not living beyond our means - saving money to buy stuff instead on buying now and hope to pay it back later - and an approach that focuses on the future rather than the present. Not sure - but that's what we're trying to do with the "I Can Save!" tour.

Saving - Spending - Sharing. Concepts we can all live by.

Can YOU Have the Talk?

Parents and kids talking about money. Now that times are challenging, it seems that more attention is being paid to this very specific topic. I have been pleading with parents for years to talk to their kids and to help them to lean the importance of being financial literate. Who knew it would take the worst economic condition since the Great Depression to get people’s attention.

Read this article and the over 40 comments – it’s a study into the culture of how and why we’re in the situation we’re in. http://consumerist.com/5184101/whats-harder-having-the-money-talk-with-your-kids-or-your-parents

Credit Card Limits On the Downslide

There seems to be growing outrage by some borrowers who are being notified by their credit card company that their credit lines are being reduced. This specific group that I am referring to is that group of borrowers who pay off their balances in full each month, never miss a payment, never come close to charging up the maximum limit on their credit card accounts, etc. etc.

These borrowers, with presumably very high FICO scores, are understandable upset by this action and perceive it as a negative consequence for being responsible. The truth is that the action really has nothing to do with them. Like the famous line in the movie, “Casino”, “…it’s always about the dollars.” Let me explain.

Credit card issuers have to account for the available credit line amounts for each of their credit card accounts. The aggregate amount of the unused lines has to be identified and the corresponding amount of cash has to be set aside as a reserve. This reserve impact the available amount of new money that the issuer can use for new accounts. For example, if your credit card account has a $5,000 limit and you presently have a balance of $1,000, the issuer has to make sure he sets aside $4,000 in case you go out on a shopping spree. That $4,000 that cannot be given to another customer.

It’s in the issuer’s best interest, particularly in this current climate, to reduce the total unused credit in order to have enough cash to meet operating expenses and to set aside cash for anticipated loan losses. Accounts that pay off their balances each month or use their credit card infrequently will be targeted first. In these uncertain times, you should keep a close eye on this – you never know when you might need that credit line for an unexpected emergency or to fill in a cash flow gap.

It’s always about the dollars….

Credit Scoring to a New Level

In a recent survey by Match.com, 84% of the respondents said that a person’s credit score is now an important element in determining whether they should begin a relationship. Remember the days when someone would say, “He/she’s not much to look at, but has a great personality!” I guess love is a little more complicated today.

I never thought as I pound the pavement extolling the virtues of financial education, I would include relationships as a reason for understanding credit scoring. I guess as long as it gets young people taking the time to understand the impact of a good credit score; I have to say – whatever.

Yet, as an old-fashioned romantic, if the day comes when prospective couples begin disclosing debt-to-income ratios before accepting a dinner reservation – I’m going to have a problem. I may be a little over the top most days regarding financial education, but I don’t think Cupid should carry a calculator….

http://multimedia.boston.com/m/22016000/find_love_with_your_credit_score.htm?pageid=3

When the Credit Markets Thaw

Today we will hear about the government’s plan to buy up the toxic assets from various banks. The idea is that this will allow banks to begin lending again. Examples being reported in the media are small business loans, capital loans, mortgage loans, and education loans. I still don’t have answers to my over-riding question.

What credit standards and qualifications will be used to lend money going forward? Will the sale of these “toxic assets” really mean that people can borrow money again for houses, cars, credit cards, student loans? I’m not convinced.

Don’t get me wrong, I think getting these toxic assets off the books is a good idea – we did it before during the S&L crisis in the late 80’s; we experienced it here in New Hampshire in the early 90’s when the FDIC came in and took over many of the well-established banks and liquidated their toxic assets. The process over time, works.

No, I’m talking about two things – reserve for loan losses and credit standards. When banks sell their loans to the secondary market (like mortgage loans), there isn’t a need to set aside money for loan losses because they don’t own the loan (the investment banks like a Lehman Bros or Merrill Lynch owned then – hence their demise). They do however; many times own the loan portfolios for their equity loans, consumer loans (auto & personal) and credit cards. The delinquencies on these portfolios are also rising and will most likely be the next shoe to drop. To protect themselves, banks have to set aside enough cash to account for their projected losses on these portfolios (called loan loss reserves). This in essence, reduces the amount of available money to lend for new loans.

As far as credit standards are concerned, we live in such a credit-scored world, it’s fair to assume that credit scores are universally declining due to the unemployment rate, higher delinquencies and foreclosures / repossessions. Will these folks be locked out from borrowing new money? Will lending institutions be forced to reduce lending standards to accommodate this growing set of borrowers? If not, will increased lending to only those borrowers who meet a higher standard be enough to lift the economy from its present state?

Curious questions from a former lender….

A Wake Up Call for the Class of 2009

In another 6 weeks or so, we’re going to start seeing the wash of commencement ceremonies on college campuses across the nation. Towards the end of May, we’ll be seeing on the news a video compilation of all of the impressive commencement speakers from former Presidents to celebrities, to journalists to sport heroes. And the theme will be something like, never stop dreaming – reach for the skies and follow your potential.

OK, so here’s the deal. Unemployment right now is over 8% - who knows what it’s going to be by Memorial Day. There are also 1.5 million college students from the Class of 2009 graduating this year. Get the picture?

You are now going up against applicants with a great deal more experience than you and possibly, a lot more motivation to take a lower paying job. That doesn’t bode well for you if your plan is to send out resumes, apply through online postings, and follow the process that we have come to expect when it comes to finding a job.

Nope – this year college graduates need to focus on folks who already have jobs to help them get in the door. And I’m not just talking about that 90’s thing we used to call “networking.” I’m talking about talking – talk to everyone you know – the dentist, doctor, pizza delivery guy, hair stylist, friends, family members, former bosses, etc. Anyone who might know someone who knows someone who might get you in the door.

Like it or not, this year it’s going to pay to know someone, so start talking.

It's LifeSmarts Day in New Hampshire!

Today is the 6th annual NH LifeSmarts State Championship. I LOVE LifeSmarts because when you find content that appeals and engages teenagers, you’re on to something. LifeSmarts does that. LifeSmarts is a powerful educational opportunity that teaches teenagers in Grades 9-12 to be smart, responsible, and successful consumers.

Today’s competition will be an exciting seven match elimination tournament using a game show/quiz bowl format. The Question Masters for the State Championship are Kelly Ayotte, NH Attorney General; Jerry Little, President of the NH Bankers Association, Joe Murray, Director of Public Affairs from Fidelity Investments; and Scott Guild, Director of Economic Education from the Federal Reserve Bank of Boston.

Six teams compiled the top scores and earned the right to meet for the state crown after several weeks of study and on-line competition. The State Champion team will travel to St. Louis to compete in the National competition in April, with all major costs being defrayed by NH Jump$tart, through the generosity of the NHHEAF Network and Sovereign Bank. In addition, Southern NH University will give each member (4 players plus 1 alternate) of the winning team of the NH LifeSmarts Championship a $5,000 renewable scholarship should that student choose to attend SNHU.

LifeSmarts focuses on five key areas of consumer knowledge teens need to function safely and profitably: Personal Finance; Health and Safety; the Environment; Technology; and Consumer Rights and Responsibilities. Teens gain a solid understanding of their rights and responsibilities and workplace protections, and develop teamwork, self-esteem, verbal communication skills, leadership abilities, and at the same time have fun competing.

Come and watch the action at Robert Frost Hall at Southern NH University today from 9:00 am - 2:30 pm.

Who Will Be the Boss Now?

Jobs, Jobs, Jobs. The biggest fear I had last August was the issue of the job losses that were being predicted for the fourth quarter of 2008. Even those predictions never came close to the 8.1% level reported Friday. My fears had everything to do with the correlation of our economic health to consumer spending. If people aren’t working, then spending goes down and the economy begins its wobble.

This reminds me of my own experience in the early 80’s when unemployment went over 10%. At that time we called it an “employers’ market.” Now in retrospect, it also defined a generation of workers (yes, the Yuppies) that believed that working 70-80 hours a week was the way to pay your dues in order to climb up that corporate ladder. The result was the necessity of a 2-income family, young parents trying to hold it together by working these insane hours, never saying “no” to the boss, raising a family and figuring out who you were – all at the same time.

In those days, employers would tell you that if you didn’t like something, feel free to leave because there were “10 people waiting in line waiting to take your job.” Now compare that to say, 5-6 years ago when college graduates were receiving signing bonuses even before they received their degree!

I’ve got a feeling that we’re headed back to that “employers’ market” mentality. It will be a world where the boss tells you what to do, what to wear, when to leave, and much you will earn. For those who have been working in the best of times these past 15 years, it’s going to be an adjustment to learn how to keep your gripes to yourself and keep your job.

Turning Back the Clock

Yeah, this is the weekend where we lose an hour of sleep. So what? According to the news, we aren’t sleeping anyway. And if we don’t pick ourselves up pretty soon, we won’t be sleeping for a long time.

My father always had an interesting expression for longing for the “good ol days”. During those conversations, he would say, “If only we could turn the clock back.”

Well if we could, what year would you like to revisit? Just for the purposes of this post, how about if we choose 1999? That might have been the best economy I experienced in my adult life. Why?

• The NASDAQ increased by over 85% that year
• The unemployment rate was at an 8 year low (4.1%)
• Interest rates were at their lowest levels in 30 years
• The Dow Jones closed at 11,000 at the end of the year
• Personal bankruptcy filings declined to 1.2 million filings
• Dot-com’s were sprouting all over (does anyone remember the Super Bowl ads that year?)
• People were buying RV’s, boats, campers, in record numbers
• A whole new industry was created surrounding the pending doom of Y2K

Things came crashing down just before 9-11 and then took a hit after that tragic event. But we came back, and we enjoyed unsurpassed prosperity for most of the decade. Sure we created problems and greed reared its ugly head. The point is, we have a history of taking a blow, picking ourselves up, and move on. We will do it again – I know it.

Sometimes turning the clock back and taking a peek isn’t so bad after all…

"Just a Few Questions, Your Honor..."

Yesterday the US Treasury announced the much anticipated details of the Obama loan modification plan. This program is the broadest program to date targeting foreclosure prevention. The Home Affordable Refinance program is projected to provide government assistance to 7 to 9 million homeowners. The mortgage modification plan is focused on homeowners that have a solid payment history and have their loans owned or serviced by Fannie Mae or Freddie Mac.

The new government refinance program is expected to help homeowners that are unable to refinance in a traditional manner due to significant losses in home equity. The economic depreciation of most housing markets has driven loan to value ratios much higher than the customary 80 percent required to refinance.

Millions of borrowers are facing pending hardship because of job loss or resetting adjustable-rate mortgages. The Home Affordable Refinance program is designed to efficiently renegotiate these mortgages into less risky 30-year fixed-rate loans taking advantage of low mortgage rates to lower monthly payments.

Early details of the government mortgage modification program include these eligibility guidelines:

• Mortgages were originated on or before January 1, 2009
• Loans must be first-lien loans on owner-occupied properties
  Principal balance must not exceed $729,750. Higher limits for owner-occupied 2-4 unit properties
• Borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship
• Property owner occupancy status will be verified; no investor-owned, vacant, or condemned properties
• Incentives will be provided to lenders and servicers to modify at risk borrowers who have not yet missed payments
• Loan modifications will begin immediately and be available until December 31, 2012. Loans can be modified only once

Here are my questions:

1. How easy will it be for homeowners to find out if Fannie or Freddie owns their mortgage? When was the last time you tried to get a final payoff of your mortgage? Be prepared to have your patience tested.
2. What is the definition of a “solid payment history?” Never been late? Currently no more than 30 days past due? How about “Now current, but was 90 days past due in the last 12 months.”
3. How will the borrower’s credit report be impacted? Back in the day, when I did a zillion loan modifications in the early 90’s, we actually had to change account numbers on the loan record so that the new loan terms would be accurately reflected on the borrower’s credit report going forward. (With credit scoring so essential in today’s lending world, this is a key question for me.)
4. How quickly can this get done? Will Fannie / Freddie freeze the credit reporting of the loan while it travels through the modification process?
   
   I’m just asking….

Let's Hit the Lottery!

According to the Massachusetts State Lottery, as of 1:00 pm yesterday, 3,500 tickets a minute were being sold for the $212 million jackpot, so you shouldn't be surprised to hear the odds of winning the jackpot were 1 in 175,711,536

Have these folks heard there is a recession going on? Yeah, I know – I hear all of the rationalization – “I’m helping the economy,” “I so down in the dumps that I need to try something,” What if I hit it big – then I don’t have to worry about my job.”

Look, do what you want – it is still the United State after all and we are free to do as we please. My point here is to watch how your kids are processing your behavior.

Kids love lottery tickets – for them it’s their first class seat to success. Why do you think online gambling was such a hit a few years ago on college campuses? Before you blow $100 on lottery tickets and then tell your kids you can’t afford to buy a pizza this week – think – think – think.

It bears repeating and repeating and repeating, These times are teachable moments – good & bad. Remember – your kids are watching you….

The 2009 College Graduate

Man, with all of the gloom on the news lately and this constant reference back to the 90’s when these various market indicators were at the current levels, I started thinking about the kids who will be graduating from college this spring. What will their job prospects be? With their student loans beginning repayment, how are they going to do?

I decided to look back 11 years and see what the 1998 college graduating class faced. Internet commerce was beginning to take off, Y2K was 18 months away & President Clinton was facing impeachment. Those were crazy and uncertain times too.

Take a moment and read this article from 1998. Those graduates are now 32 & 33 years old and have been working in some pretty good times. What advice would they give to this year’s graduating class?

http://articles.latimes.com/1998/aug/20/news/mn-14945

Parents - It's Time to Speak Up!

In the president’s FY 2010 budget proposal that was unveiled this week, President Obama proposes extraordinary increases in the programs that best serve students, and takes the most important programs out of the appropriations process. It also includes some striking changes in some of the federal student aid programs--most notably, the elimination of the Federal Family Education Loan (FFEL) program--by the beginning of the 2010-11 academic year.

The budget proposal supports a $5,550 Pell Grant maximum award in the 2010-2011 school year. The Administration will index Pell grants to the Consumer Price Index plus 1 percent, in order to account for inflation in this sector. In addition, the Administration proposes to make the Pell Grant program mandatory to provide a regular stream of funding and eliminate the practice of "backfilling" billions of dollars in Pell shortfalls each year.

The FFEL program "needlessly costs taxpayers billions of dollars" and has "subjected students to uncertainty because of turmoil in the financial markets," according to the budget proposal. The president’s budget recommends the elimination of the FFEL program and the origination of all new loans through the Direct Loan program. The budget proposal estimates a savings of more than $4 billion a year, and reinvests it in aid to students. Collections and servicing of loans would be outsourced to multiple private sector contractors.

What the heck? The FFEL program did not “subject students to uncertainty because of turmoil in the financial markets” - the uncertainty came about when the auction rate security markets went in the crapper. Are we to believe that the measly $5,500 FFEL loan maximum causes stress to students and families when the average tuition is over $25,000?

The elimination of the program also means that local entities, like our valued NHHEAF Network, would no longer be handling student loans. All new loans would be originated through the Direct Loan Program. Folks, the Direct Loan Program is administered directly from the Federal Government. Do you really think the Government can handle your child’s student loan effectively and efficiently? This is a nightmare waiting to happen.

One more thing – the idea of having the loans serviced by a number of servicers will create a nightmare for your kids when it comes time to start paying these loans back. How would you like to receive multiple monthly bills for each of the loans you take out (2 per year) for each of the 4 years you went to school? Who gets paid first? Who answers your questions? Ugly, ugly.

And why it is that we continue to talk about Pell Grants, and tax credits, and loan programs, but there is never any discussion about reducing tuition costs? How is it that colleges & universities get a pass on that?

Parents – it’s time to step up and contact your Congressional delegation and make your voice heard.

In Defense of Our Local Banks

What troubles me a little these days is that the doom & gloom from the media and public anger against the “banks” is dragging down the good practice and reputation of your local bank. Are we reaching a point where the local banker will have to wear sunglasses and a baseball cap as a disguise to go to the grocery store?

Much of the crisis in the financial sector can be traced directly to “investment banks.” Oh sure, there have been regular banking institutions that have participated in questionable loan practices, but it’s unfair to paint the entire system with a broad brush. So what is an investment bank? Here’s my definition:

Financial institutions that help corporations issue stocks and bonds in order to raise money. Unlike regular banks, they do not accept deposits or make loans. Examples of investment banks: Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers (oh yeah, they’re all gone).

The complex thing here is that the mega banks like Citi, Bank of America, etc. also dabbled in investment bank activity and as such, made a ton of money like everyone else and now many of the investment decisions are being questioned. It also doesn’t help that the greed of the big players is being played out on the world media stage.

Yet, I still maintain that it is unfair to do a tribal hate dance on all of our banks. Here in New Hampshire, our banks and credit unions are very strong and willing to lend money to qualified borrowers. Noticed I said “qualified.” This is how they lend their money. This is how they have always lent their money. In the past few years, because of competition with sub-prime lenders and other non-bank lenders, borrowers demanded that their banks give out loans even though they did not qualify under formal guidelines. Those loans ultimately ended up in the investment market - by investors driven by their own greed.

I’ve been angry about this for over 10 years. And it has created a culture where we have stop saying “No” because we found new ways to say “Yes”. But let’s not lump our local banks into the mix as we, as a nation, look to affix blame and enact change.

It's a Bird! It's a Plane! It's a Gift Card!

Industry analysts say some $9 billion in gift cards sold last year still have not been spent. These days, a lot of people would rather have a few extra bucks in their pocket than a shopping spree at a book store.

Here's the good news: several websites are now offering cash for those unused cards. Sites like www.Giftcardbuyback.com , www.PlasticJungle.com and www.Swapagift.com are just a few sites that will buy your cards. Just punch in the value of your gift card and it will tell you how much you can get for it. You won't get the full value of the card, but it is still money you can spend anyway you like.

Promotional gift cards have had significant appeal to retailers looking to attract new consumers, but one of the major shortcomings about the form of plastic is that most card holders remained anonymous. This made it impossible for merchants to promote to the card holders and drive redemption rates. A new media platform successfully tested with a regional shopping mall could re-write those rules.

Currently in beta testing from a provider called Dukky, the new media platform is expected to deliver redemption rates up to 30% higher than traditional coupons or direct mail promotions, according to Scott Couvillon, president of Dukky.

The new platform allows consumers to choose from a group of targeted gift cards within one direct mail or Internet offer. Consumers are prompted to activate only the offers they plan to use, and direct which future offers they want to receive. Each card includes a unique activation code for individual consumers, which allows the retailer to track interest and redemption. The cards also are printed with the bar codes that correspond with the retailers’ internal POS systems. The retailer gets to know you faster this way.

Click here to list of listing of state laws regarding gift cards. It pays to be informed.

http://www.consumersunion.org/pub/core_financial_services/003889.html

1997

The news reported yesterday that the Dow fell to its lowest point since 1997. So I thought I would go back in time and see what life was like in 1997. Here are some of the things I found:

• Unemployment in the United States was 4.7%
• Over 1.3 million Americans filed bankruptcy that year. (By comparison, over 2 million Americans filed in 2005)
• This year’s college freshmen were 7 years old
• England handed Hong Kong to China
• Scientists cloned Dolly the sheep
• A mass suicide in which 39 members of a "Heaven's Gate Cult" in California killed themselves thinking they would be sent up to a spaceship behind the passing Hale Bopp comet. Strange and sad story.
• OJ Simpsons loses civil suit for wrongful death
• Timothy McVeigh is found guilty of bombing
• Mars Pathfinder lands on Mars
  Princess Diana was killed in an automobile accident
• The comet Hale-Bopp is first spotted. It was considered to be the greatest comet in the 20th century. About 80% of Americans saw it without a telescope.
• 4 New York City police officers assault Haitian immigrant Abner Louima while in custody.
• Fashion designer Gianni Versace was murdered
• Tony Blair becomes prime minister of Great Britain in a landslide election victory ending 18 years of Conservative rule.
• On 2 July, the devaluing of the Thai baht triggered off the currency crisis, which devastated the many Asian countries' economies in ensuing months.
• Titanic opened in 1997 and became the BIGGEST Total Box-Office Film ever in film history with over 1 Billion dollars and also became the movie with most Academy Award totaling 13
• Harry Potter was published in 1997 and written by J.K. Rowling, inspired millions to read.
  Mother Theresa of Calcutta died a week later after Princess Diana, Sept 1997
• Madeleine Albright was sworn in as Secretary of State, becoming the first woman to head the State Department
• Pokemon the major kids’ game was released to the U.S. and swept the Nation with its great gaming fun. Kids still love to play Pokemon games all over the world
• Camel cigarette brand removes Joe Camel from its advertising because opponents claim Jo Camel causes cigarettes.
• Green Bay Packers beat the New England Patriots in the Super Bowl 31-27.
  

Oh yeah, NOW I remember why I hated 1997….

Pain vs. Patience

Over the weekend, I watched an Today show segment that describes available houses for sale around the country that were labeled “real deals” at under $300,000. It struck me that homes less than $300,000 were considered a “deal.” Let me see, a 20% down payment on a $300,000 home is $60,000 for a conventional mortgage loan; leaving a $240,000 mortgage to repay. Hmmm…..

Later on, there was a segment on middle aged children having to move back with their parents because they had lost their jobs and subsequently their home, and had nowhere else to go.

In that story, the parents (the older ones) were thrilled to have “their” family back together – it reminded them of days gone by when their children were young. Over time, however, the house was feeling more cramped with two families squashed inside. The middle aged children remarked that they felt like failures.

As the story went on, it was revealed that the lost home was over 5,000 square feet and the children used to be in the mortgage business and by their own admission, “the money was rolling in.” It’s a story that is being repeated over and over across the United States.

These two stories got me thinking about this current economic crisis and whether we in fact, will actually change our behavior, or are we just waiting out the storm so that we go back to our previous behavior? Once the dark clouds pass, and the money rolls back in, will we go back to 5,000 square feet homes and large mortgage balances? Are we going to learn anything from this mess?

Is it pain or is it just patience?

Caveat Emptor or Bust!

Things continue to change. If you are collecting unemployment benefits in certain states, you won’t be receiving a check – you’ll get a debit card. (Technically, you’re getting a stored-valued card, but that’s post for another day…). Suddenly, the plastic generational behavior kicks in and here I go talking about what you’re getting in to. Yeah – that financial education thing.

The issuance of debit cards can save the state a lot of money – and it’s good business for the financial institution.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JP Morgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards. Some banks even charge overdraft fees of up to $20 — even though they could decline charges for more than what's on the card. (That’s why they call it a stored-value card dude!)

Another 10 states — including the unemployment hot spots of California, Florida and South Carolina — are considering such programs or have signed contracts. The remainder still uses traditional checks or direct deposit. In 2003, states paid only $4 million of unemployment insurance through debit cards. By 2007, it had ballooned to $2.8 billion, and by 2010 it will likely rise to $10.5 billion, according to a study conducted by Mercator Advisory Group, a financial industry consulting firm.

The banks say their programs offer convenience. They also provide at least one way to tap the money at no charge, such as using a single free withdrawal to get all the cash at once from a bank teller. But the banks benefit from human nature, as people end up treating the cards like all the other plastic in their wallets.

In these times, it’s all about the dollars. And personal responsibility.

Caveat Emptor – Let the Buyer Beware Good article. http://www.msnbc.msn.com/id/29286993/

The Old 28/36

One element of the Homeowner Stability Initiative announced yesterday got me thinking about debt ratios.

One element of the plan calls for a shared effort to reduce monthly payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower's monthly mortgage payment is no more than 38 % of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31%. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification.

Back in the day, the standard underwriting formula for approving mortgage loans was known as the 28/36. Borrowers were qualified for the loan if the proposed new mortgage payment equaled 28% of their gross monthly income and their total monthly payments (including the new mortgage payment) did not exceed 36%. This analysis in effect, controlled the amount borrowers could borrow which translated to the type of property they were buying. Of course, they had to have acceptable credit and a required down payment of at least 20% (10% with PMI insurance).

As we know, for the last 15 years, that type of loan analysis fell by the wayside. If a borrower had a pulse, and a job, he/she could get a mortgage loan by following one of the myriad scoring matrices. This resulted in way too many borrowers buying homes beyond their means and hence the issue we are now stuck with.

It will be interesting to see what the underwriting practices will be in the future. Will we go back to a debt/income ratio analysis or will we create new scoring models that will remain untested until the next cycle. Stay tuned.

Stimulus & Pizza

Under the President's stimulus plan which is expected to be signed today, millions of workers will receive about $13 extra in their weekly paychecks as part of the up to $400 tax credit per worker, and $800 for married couples filing taxes jointly. The money will not come in a check, like last year, but instead it will be distributed weekly in paychecks.

The stimulus plan also includes a $2,500 college tax credit, a sales and excise tax deduction on a new car, and first time home buyers are eligible for $8,000 in tax credits.

Thirteen dollars? Awesome! Now I can finally get back to eating that large stuffed-crust pizza every Friday night…

As long as I have a coupon.

The Foreclosure Deja Vu

Recently, I watched the CNBC special, "House of Cards" which provided a timeline of decisions and actions within the housing financial arena that culminated in the perfect storm of financial chaos we seem to be in right now. If you haven't seen it, take it in. You can see the airing times on their website http://www.msnbc.msn.com/id/29163182/

In the beginning of the special, they show the ugly side of foreclosures - the affected lives, the way properties are left behind, the impact on neighborhoods, etc. It brought me back to the days when foreclosing on homes was my job - back in the mid-80's and the early 90's. It has been almost a 20-year cycle since we have seen (at least here in New England) a large slew of foreclosures compared to the 8-year cycle from the '80's-90's. And in that 20 year period, we have raised a generation of young borrowers who received loans from lenders and a system that did not say no - they found ways & programs to say "yes". And everybody made money.

Here's my question about this current cycle - will there be a consequence to the borrower who has experienced a foreclosure? We know that when the bankruptcy laws changed in 1986 and these new loan programs came out in the mid-90's the consequences of filing bankruptcy went away. You no longer had to wait 7-10 years before you could borrow money again. Will those folks currently having trouble be able to get loans when "the credit markets open"?

If not, then this recession will most likely last a longer than current predictions. If they are able to get loans again in the near term, then can we at least try to protect ourselves from this happening again by emphasizing financial education to our kids?