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