Real Estate, The Economy, and News: Loans

Showing posts with label Loans. Show all posts

Friday, July 22, 2016

ZestFinance to Use Search Data in Calculating Credit Scores

Traditionally, a credit profile is derived by looking at a potential borrower's history of paying back loans. Whether from car loans, credit card usage, or a mortgage on a home, the more an individual can show that they have paid back borrowed money in the past, the lower their interest rate will be on a new loan. However, there is the issue of the Catch-22 of credit: without any credit history, it is very difficult to get your first loan on the path to a good credit profile. Some companies have started including monthly rent payments in their calculations. In partnership with Chinese search engine Baidu, Hollywood credit firm ZestFinance will be using a potential borrower's internet search and shopping history to calculate their credit score, as described in James Rufus Koren's L.A. Times article.

Nontraditional means have been used in the past to calculate a potential borrower's credit, especially when that borrower has never borrowed money, but this will be the first time using search data. ZestFinance has focused on borrowers with little credit history from the very beginning and is confident that the sheer size of Baidu's engine will make them succeed where no one has ever dared venture before. The company will be breaking out in both the US and China, underwriting loans through the companies Basix and JD.com, respectively.

In addition to using the search data in calculating credit profiles, behavioral data gained from analyzing search history can help the company to avoid fraudulent customers. With enough data, ZestFinance believes they will be able to statistically determine the likelihood of a borrower paying back their loan in a certain time frame. One example they give is that for some reason, potential borrowers who fill out their loan application with proper capitalization are more likely to pay back their loan than a borrower who writes in all capital letters. They aren't sure exactly why this correlation exists, but they believe that enough research will enable them to create fair assessments of a borrower's credit profile.

Some believe that this system will be unfair, because how can anyone really tell if someone will pay back a loan based on what they look up online? However, if this is the system that enables the majority of those people who were previously refused loans to start down the road to good credit, then it may be worth it. In fact, ZestFinance believes their system will be fairer than current non-traditional calculations in that it can allow people with no credit history to have a decent interest rate, whereas before, they had to choose between paying exorbitant rates or missing out completely on the chance to develop their credit profile. As Douglas Merrill, a ZestFinance executive, says, three out of four Chinese citizens lack the financial history to have a fair credit profile. In exchange for a small, carefully limited, loss of privacy, credit could be gained more easily by everyone, and for most, that's a pretty simple trade.

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Friday, June 3, 2016

CFPB Proposes New Regulations on Payday Loans

In an attempt to avoid situations in which borrowers get stuck in an endless cycle of debt, the Consumer Financial Protection Bureau (CFPB) released a set of new proposals this Thursday to regulate the market for payday loans and certain types of credit known as being "debt traps." James Rufus Koren, in his L.A. Times article, discusses the new rules and the effects they may have on the economy.

A payday loan is a special type of loan with very high interest rates that is made on the condition that the borrower will pay it back as soon as they receive their paycheck. Unfortunately, according to CFPB Director Richard Cordray, lenders often make the loans knowing that borrowers can't pay them back and will end up stuck in a never-ending cycle of debt. The new rules aim to limit the number of loans a consumer can take out in a year and make the lenders review the finances of potential borrowers much more thoroughly before making a loan. In a healthy credit market, lending and borrowing money should be a win-win situation. Both parties, not just the lender, should benefit from the transaction, and that is the situation the CFPB is trying to remedy.

Lenders have been outraged by the proposed changes, claiming that it will make their business more costly and will cause most of their loans to become unprofitable. The CFPB has responded that it isn't looking to put lenders out of business. Rather, the organization is trying to make sure that customers don't get stuck in debt traps, where they pay off a loan just to find out that they need to take out another loan to have enough money for day-to-day living costs. The new regulations will force the lenders to do in-depth analysis on income and living expenses to determine whether they will be able to make the payments every month without running out of money.

Already, the CFPB has enacted similar regulations for banks and mortgage lenders, but payday lenders may be right in complaining that the new rules are unfair or insensible. Many claim that the process will add time and cost, which hurts everyone. Under current practice, a borrower can walk into a loan branch and leave 20 minutes later with a $250 loan. A detailed analysis of "take-home pay" and expenditures would probably add a lot of cost in the form of fees, which could drive away potential borrowers. Those borrowers could end up going elsewhere to find their loans.

It is likely that the new regulations will naturally stop some people from getting loans. Some people worry about where those people will have to turn to make ends meet. Perhaps some will be forced to get a handle on their finances and will end up much better off in the long-run. Others will have to go to pawn shops or family members for help. Still others may turn to installment lenders, which are not covered under the new rules. The installment lender gives much larger sums of money, with smaller monthly payments over a long period of time, but the borrowers often end up paying more in interest on the loan than the actual value of the loan itself. Analysts believe that the regulations will help somewhat, but only in that they will stretch the debts out onto a longer time line, rather than reducing such debts altogether.

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Friday, July 31, 2015

How to Build, Maintain, and Repair Credit

Credit is a necessity in this day and age. Without a good credit score, it can be almost impossible to get a loan, buy a car, or purchase a house. But what can you do if you have little to no credit? How can you get started? Well, according to David Lazarus, in his L.A. Times article, stepping into the world of credit scores and debt payments may not be as difficult as it seems.

Lazarus' sources show that over half of all American consumers have subprime credit scores. 26 million consumers have no data on file with credit companies and 19 million have information that is so outdated that it is almost useless by lenders. These Americans are unlikely to get a loan at all, and if offered, the rate on the loan will be much higher than those provided to others with better records. Lazarus focuses on two main problems: an inability to begin establishing credit and difficulty improving a low score.

There are a few types of loans that are designed to help new borrowers to start to build credit. A credit score is based on borrowing money and paying it back. So, the easiest way to establish credit is by getting a credit card from a store or a bank and using it. The key to the card is to use, not overuse. Build credit by having a balance on the credit card and paying off the balance on time each month. In this way, a lender can see that their money is in good hands. In general, when a lender gives you money, it is because you have a history of on-time payments. In fact, some credit reporting companies such as Experian and Equifax consider monthly rent payments in calculating a credit score.

After you have shown that you can handle a credit card, other loan options, such as "credit builder loans" are available, Such loans, which tend to be less than $1,000, are offered by credit unions as another path by which borrowers can show that they can be trusted. This type of loan is very interesting in that it is based specifically around building credit, rather than providing a borrower with needed money. With a credit builder loan, a designated amount of money is locked in a savings account by the lender. When the last payment has come in from the borrower, the money is released. While it would be just as easy for someone to save up their money by putting a designated amount aside each month, this "loan" allows a saver to build their credit score in the process.

As for those who have already borrowed more money than they can pay back, Lazarus assures them that all is not lost. However, do not let it get so bad that debt collectors come calling. Once the collectors show up, a mark on your file appears that will stay for up to 7 years, affecting your credit score and ability to get a loan. To avoid collection agencies, you can try working out a payment plan with your lender. Contact your creditor immediately if you think you will be behind on your payments.

If your score has already taken a hit, recovering can be difficult, but not impossible. Lazarus suggests that the first step is to get a copy of your credit report and begin paying off outstanding debts. As you pay off more debts, potential lenders tend to trust you more and more. After 7 years, the black mark on your record will disappear, which will bring your score up, but what can you do in the meantime? The best thing you can do, according to Lazarus, is just get your finances in order and avoid accruing more debts. Other than that, he assures those with bad credit that with enough time and good financial planning, things will get better.

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Tuesday, May 19, 2015

FICO Introducing Alternative Credit For Those With Poor or Nonexistent Credit History

4/3/15 - Individuals with low credit scores struggle to get a credit card, or to obtain a mortgage or other loan. Some see this as a fair system, especially since a low credit score usually means that the individual has a history of late payments or outstanding balances. It only makes sense that those with sketchy credit history should be trusted with more credit less readily. However, what about people without any credit history? A recent L.A. Times article discusses the options available for such individuals.

To build up a credit score, someone gets a credit card or loan, then pays back the loan on time, so as to show the credit company that they can be trusted. The length of a person's credit history is a substantial factor in determining how much money a bank or credit company would be willing to lend them. Unfortunately, without credit history, it can be difficult to get a loan in the first place. Without that first loan, the aspiring borrower can't build up a history of timely payments, and will therefore be unable to get a loan. This seemingly endless cycle has many newcomers wondering what to do.

Fortunately for young, first-time borrowers, Fair Isaac Corporation, known for its FICO credit score, has been working together with LexisNexis Risk Solutions and Equifax to create an alternative system for determining credit scores for individuals with little to no credit history. According to their research, someone with a good record of paying utility bills on time would also likely pay credit card bills in much the same pay. Using payment history instead of credit history, this system will create alternative credit scores and provide them to the top credit card issuers. Fair Isaac has yet to release information as to which banks have decided to participate in this program.

This currently unnamed new program is not meant to replace the FICO credit score. Instead, it will provide information only to credit card companies, in order to give credit-less consumers, usually young people, the opportunity to get a credit card and start building up their credit. Once credit has been built up through a history of timely payments, the consumer will be able to rely on the standard FICO credit score in order to get a mortgage or other loan.

According to a representative of LexisNexis, all collected data will be protected under the Fair Credit Reporting Act, so everyone involved will be able to dispute negative events on their credit reports, such as disputed bills. This system appears to have positive effects for all involved. New borrowers will be able to get credit cards with much less of a struggle. Banks will gain access to millions of previously non-existent customers and their interest payments. It's a win-win situation for everyone.

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Costco - American Express, Partnership to End in 2016

2/20/15 - For years, American Express was the exclusive credit card of Costco shopping centers throughout North America. Costco's most recent contract with American Express is set to expire in March 2016, and the companies have been unable to come to a mutually beneficial agreement for renewal of that contract. Costco Wholesale Corporation has since announced the upcoming split, and according to an article by E. Scott Reckard and Dean Starkman, of the L.A Times, Costco is close to finding a replacement as their sole credit card provider.

Since Costco only accepts one type of credit card, customers are forced to either pay via cash/check or use that type of credit card. This gives that credit card company a huge amount of business, since shoppers at Costco generally buy products in bulk and don't usually carry enough cash to pay for such a large quantity of goods. One of the big reasons for Costco's break with American Express, according to Reckard and Starkman, is a desire for lower swipe fees. If Costco, or any other company for that matter, is able to get cheaper rates from one credit card company versus another, they will almost always choose the one with lower prices.

Even though the partnership with Costco accounted for about $94 billion in revenue for AmEx, analysts state that based on Costco's new terms, the economics did not make a renewal the sensible move. Some of that money comes from interest on pending credit card balances, but the vast majority comes from actual spending by credit card holders.

Over the years, in an attempt to keep up with other companies, AmEx has offered rewards, special deals, and even lower fees, which has kept it relatively competitive. Unfortunately, AmEx's stock has been on a decline recently, a trend which has not been helped by the upcoming break with Costco. On the plus side, American Express claims that it has plans to reinvest in other companies, as well as to focus on its current partnerships.

The split is having a far worse effect on American Express than it is on Costco. Costco pretty much has the ability to choose its own rates, since the company that gets the partnership will be gaining much more business. A year ago, Costco switched to the Capital One Master Card in its Canadian branches, and has felt little ill effect from it. The only issue seems to be customers' reactions. How difficult will it be to change cards? Would it become easier for shoppers to simply pay in cash, which might reduce the benefit to the new credit card company? Only time will tell.

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Hackers Gain Access To Anthem Database

2/6/15 - Over the past year, several major retailers, including Target, Home Depot, and Michael's have been victim to the cyber-attacks of hackers. The most recent target on a lengthy list of such data breaches was Anthem Blue Cross, a major health insurance provider. Chad Terhune discusses the consequences of this hack in his article in the Los Angeles Times.

While Anthem states that hackers did not gain access to credit card information and health records, they were able to access much more. From name to date of birth to Social Security number, it appears that these hackers now know most of the personal information belonging to up to 80 million individuals who have health insurance through Blue Cross.

The sheer amount of personal information gathered by the hackers is enough to be quite certain that identity theft is a likely outcome. The personal information could be used by the hackers or others to open new lines of credit, or possibly even to access and empty existing accounts. Anthem warns any who have had coverage in the past and any who are currently covered by Blue Cross to keep a watchful eye on their financial accounts, in case identity theft is the main goal of these hackers.

One of the more upsetting parts of this situation for many is the fact that the stolen information wasn't even encrypted. It's bad enough that the databases got broken into, but a lack of encryption on the stored information means that cyber-criminals have easy access to the data within those databases. In fact, Anthem was even forced to pay a fine of $1.7 million in connection to allegations by the federal government that a weakness in their security left clients' personal information open to attack. Why hasn't Anthem learned its lesson?

Anthem, along with many other companies, need to develop better safeguards and protection mechanisms to make sure that only authorized parties are able to access personal information. For a company as large as Anthem to have left data unprotected multiple times in less than two years is just irresponsible. Sure, there are hackers that can make their way past any defenses, but better protections will at least slow them down, maybe even enough to stop some of them altogether.

This is a crucial time for Anthem, due to the thousands of people trying to enroll in coverage under the Affordable Care Act. They will have to be very careful dealing with this issue, in order to convince their clients not to look elsewhere for a health insurance provider. While Anthem has dealt with the attack through the proper channels, by contacting the FBI immediately, most people would still be more comfortable trusting the large company with their information if Anthem underwent a massive overhaul of their security systems. Such a project could prevent future breaches and make all involved parties much happier.

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Home Equity Used For Long-Term Investments

12/12/14 - A decade ago, before the Great Recession hit in full effect, it was common for people to take out a line of credit on the equity of their homes. This “quick cash” was spent non-productively, used to buy groceries or spent on vacations, rather than being used as an investment. Over time, people began to cease such “wasteful” ventures and have slowly been learning to use Home Equity Lines of Credit (HELOCs) in a smarter manner. In his article in the Los Angeles Times, Kenneth Harney describes how a recent increase in the use of such lines of credit is a good thing for the economy.

Although such HELOCs were once a way for people to pull money out of their homes for regular expenses, people have generally learned not to jeopardize the equity of their homes unless investing in something safe. For example, most of those who took money through a HELOC used it to make improvements on their homes, or to pay off higher-interest debts, such as those on credit cards. Both of these provide long-term benefits for the home-owner. Thus, it is shown that tapping into home equity is not always a bad thing. For those who make smart investments using the line of credit, home equity can be used and quickly earned back.

Until recently, most home-owners were wary of HELOCs, remembering the negative consequences that had arisen from the use of such funds for day-to-day expenses. Now, though, equity lines are up 21%, which, according to Harney's sources, could mean that people are starting to become more confident in the economy's stability. With less fear of economic collapse and an improvement in equity and interest rates, more home-owners consider a line of equity to be a “safe investment.”

Besides a stabilizing economy, HELOCs have become safer because of a crackdown by lenders. Lenders have become more careful as to who they lend to, making sure that credit scores and financial reserves are up to par. As Harney concludes, now is the time to look into home equity lines of credit. Such money, if used right, could have a dramatic economic impact, both personally and nationally.

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Credit Unions Providing Home Loans

11/21/14 - While home loans were once the responsibility of major financial institutions like banks, the post-recession mortgage loans have slowly but surely been making their way into the realm of the credit unions. Such credit unions have been amassing members, and currently own over 8% of all mortgages, three times as much as were owned before the Great Recession. Lew Sichelman's L.A. Times article goes into how these credit union loans can actually be preferable to those provided by “standard” institutions.

Credit unions, which are member-controlled, provide an alternative to common loan institutions that commonly increase the cost of a loan through miscellaneous fees. Anyone can join a credit union, and their non-profit standing keeps people interested in their loans, especially with our currently troubled housing market. During the recession, while many lenders pulled back and restricted the loans they were willing to grant, credit unions stayed open, making their loans available to those whom they deemed a worthwhile risk.

These lenders are different; they are run by the people. Every member has a say in how the union should be run, and this is a big part of why credit unions have been increasing in success. While mortgage loans were once a minimal area of focus for credit unions, new interest has led to mortgage loans encompassing over 40% of all loans provided by such institutions. The interest rates on credit union loans may be the same as those from other lenders, but a more personal touch of a credit union appears to be one of the factors drawing in new customers. Borrowers, of late, tend to have more faith in them, rather than in the banks and other lenders that once held the vast majority of mortgages and other such loans.

Although they are still relatively new to most, credit unions are gaining ground as they accomplish various goals. The common mortgage loan from a credit union is the normal, 30-year fixed rate, but many of these institutions have been applying innovative new techniques to make these loans more manageable. From ways of scheduling your mortgage so that you finish at a specific time, to loans that reset their interest rates to market level every five years, credit unions have developed ways to make their loans as consumer-friendly as possible. All in all, a standard banking institution may be great, but credit unions might be an option for many potential borrowers to seriously consider.

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FHA Set To Re-institute Quick-Flip Restrictions

11/14/14 - The Federal Housing Administration, a federal agency involved in providing mortgage loans to real estate investors, is set to reinforce restrictions that were lowered in 2010 in an effort to help the weak housing market. These restrictions set a minimum of 90 days for investors who wish to buy a home and “flip” it, by fixing it up and reselling it. The 90 day period between buying and selling is meant to prevent the selling of poorly-fixed houses for “hyper-inflated” prices. On the other hand, forcing flippers to hold onto a house for 90 days raises their costs, which they then have to incorporate into their selling price. An article by Kenneth Harney of the L.A. Times investigates the positive and negative aspects of the FHA's restrictive 90-day flipping period.

By waiving the 90-day flip period in 2010, the FHA enabled investors to buy, fix, and sell houses quickly and at lower cost, thus allowing first-time home-buyers to more easily find homes in a lower price range. These quick-flips benefited both investors and buyers, lowering prices across the board. Because of the decreased restriction, over 100,000 homes were revitalized and sold, thus improving the housing market.

This improvement is the reason for the FHA's reinstitution of the 90-day flip period. The waiver program has done what it was meant to do: it stimulated home sales, thus stabilizing the market and allowing newcomers the chance to become home-owners. The program has worked relatively well so far, but such a program always has its possible dangers.

In the past, before the 90-day period existed, investors would commonly resell seemingly well-maintained houses, which were nothing more than run-down homes with a fresh coat of paint. This would lead to buyers defaulting on their mortgages, and the FHA would be forced to cover the losses. By forcing investors to take at least 90 days in fixing the houses for resale, the sellers are encouraged to actually do a decent job on the construction.

Whether the restrictive 90-day period is a good or bad thing is a matter of opinion. Yes, forcing flippers to hold onto a property for longer than they need to would raise sale prices, but allowing quick-flippers to sell dilapidated properties at synthetically-high price would also hurt the housing market. The main point addressed in Harney's article is this: whether you like it or not, the FHA has made its decision. The waiver program will stop at the end of December, and the 90-day resale period will come back into practice at the beginning of 2015.

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Low Supply + High Demand = Price Increase

10/31/14 - Southern California rental costs are on the rise, and there's nothing we can do about it. According to a recent study cited in Tim Logan's L.A. Times article, rent prices throughout the Southland are poised to rise over 8% in the next two years. This is due partially to a surge in job growth as well as a shift from home ownership to rental.

While Southern California has long had issues in providing enough rental housing, the recent rise in demand is far surpassing the rate of new construction. The study shows that vacancies remain roughly the same, since the higher rent prices, combined with roughly unchanged income, make for a situation in which renters can't afford the cost of renting.

This trend, predicts the study, will lead to the mass exit of industrial jobs from Southern California. Without affordable housing, businesses can't afford to remain open or open new factories in the Southland. Logan's source even compares California's current stance to that of Detroit in its heyday: a strong housing market, which could fail as soon as industrial jobs move elsewhere.

As Logan discusses in the article, this future failure could be prevented with the right policy initiatives. From lowering restrictive and costly requirements on new construction to speeding up the approval of building permits, Logan presents evidence that shows how policy-makers could make housing more affordable and, at the same time, keep jobs close at hand.

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Credit Scores Now to Include Rent Information

9/26/14 - An individual's credit score is one of the largest factors affecting their ability to get a mortgage or other type of loan. Unfortunately, your credit score is determined mainly from the payment of debts: credit card bills, loan payments, etc. Even if someone has paid their rent on time every month, or has made routine payments on their cable, cell phone, or utilities bills, all of which should be a good indicator of reliability and credit, this information is nowhere to be found on their credit profile. In an L.A. Times article, Kenneth R. Harney describes how two national credit bureaus: Experian and TransUnion, have recently started including rental payment information in their determination of an individual's credit scores.

Up until recently, there was nothing that required landlords or phone and cable companies to report payment information to the credit institutions, nor was there any system to make this reporting of data feasible. While the reporting of this payment information is still voluntary, a newly created connection between these credit bureaus and an online service called RentTrack has made it much more convenient for rental property managers to report payment information from their tenants' records.

According to Harney and a study by TransUnion, this addition of rental payment information can have a dramatic effect on a renter's credit score; in some cases, their scores increase up to 10 points. Furthermore, this research showed that even the shift from renter to home-owner can raise scores considerably. With the RentTrack system, as well as another system called ResidentialCredit, tenants in any situation benefit from the ease and reliability of electronic tracking of their payment information.

While the RentTrack system currently only keeps information on rental payments, Harney believes that it will just be a matter of time before telecommunications, cable, and utilities information make their way into the system. While RentTrack is the main service mentioned in the article, some other companies, such as Equifax and ECredable.com, also hold information regarding utility payments, rental data, and more, which can be given to a mortgage loan officer for use in determining an individual's credit and determining whether they will qualify for a loan.

As Harney concludes, while an individual's credit score was once based solely on mortgage and credit card payments, that is no longer the case. As such, we may soon witness a new trend: even those individuals lacking “traditional” credit information will find it possible to become first-time homeowners.

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Buying vs. Renting: Pros and Cons

9/19/14 - Prior to the Great Recession, the question of buying versus renting was never really an issue at all. If you could get a mortgage, then buying was the best way to go. Even after the housing market crash, there was still plenty of interest in buying rather than renting. If people had some money to do it, then buying was generally their course of action. However, with real estate prices, especially in Southern California, on the rise, and very few “bargain homes” available, potential buyers are being much more careful in deciding whether they really want to enter the market. In a Los Angeles Times article, Tim Logan discusses the potential positive and negative aspects of either buying or renting.

The decision is a hard one for many. Yes, the housing prices have gone up dramatically, but the interest rates on mortgages are lower than they have been in years. Renting makes it easier to pick up and leave, but owning a home has a huge payoff in the long term. According to Logan, a survey of renters showed that most do plan to buy, but are unsure as to how soon. Furthermore, some statistics presented by Logan show that, over the span of seven years, buying can cost you over 20% more money than renting.

The prices of homes are not the only thing deterring potential buyers. It's all about location, location, location. In some areas in Southern California (Lancaster, San Bernardino, etc.), foreclosures make the monthly mortgage payments lower than average rent payments. In other areas (San Marino, Newport Beach, etc.), the return of seven-figure price tags make rent much more affordable than mortgage. Besides the costs of homes and apartments in certain areas, differences in construction choices can limit a home-hunter's options. For example, some areas are busy building new apartment buildings, while others are designing condos and houses. If there are very few houses available in your area, then buying might not be an option. According to Logan's sources, new construction has been mostly for rental properties, likely due to developers' fears of another housing crash.

Apparently, members of the younger generation are statistically more likely to want to rent, not yet willing to “tie themselves down” to something like home ownership. However, even “prime” first-time buyers (married, early 30s, income of at least $95,000) have lately become hesitant toward buying property. Logan's sources claim that this hesitation is due to the housing crash. These first-time buyers witnessed the colossal blow that the recession made on their parents' financial situation, and are leery as to how good of an investment home ownership really is.

As Logan states, this hesitation can be a good thing, preventing buyers from jumping into the realm of home-ownership without the necessary means to make their monthly payments. By making sure that they know what they are getting into, this new, more realistic, outlook of buyers will hopefully prevent another crash in the near future.

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Banks Held Responsible for Housing Market Crash

9/12/14 - Three of the country's largest banks have been facing all kinds of financial and legal repercussions in the aftermath of the housing crash that contributed greatly to the Great Recession. Bank of America, who, in 2008, bought out a couple of failing firms: Countrywide Financial Corp. and Merrill Lynch & Co., are now suffering the consequences of “the worst deal in banking history.” An article by Jim Puzzanghera and Walter Hamilton, of the L.A. Times, described the various legal problems and penalties that Bank of America, JPMorgan Chase & Co., and Citigroup Inc. have had to face over the past year.

Even between BofA's record-breaking $16.65 billion settlement, JPMorgan Chase & Co.'s $13 billion settlement, and Citigroup Inc.'s $7 billion settlement, these three penalties only make up a fraction of the total amount gathered from such financial institutions. According to Puzzanghera and Hamilton, approximately $125 billion in settlements related to the financial crash have been paid by the six largest banking institutions alone. While some of BofA's penalties are due to the pre-recession actions of Merrill Lynch and Countrywide, every bank has problems of its own.

Out of the many billions of dollars paid in penalties and settlements by these banking institutions, over 50% of this money goes to several federal agencies, including the Securities and Exchange Commission, as well as a few states that were most affected by the banks' practices. California by itself has been designated $300 million from the settlements to help reimburse two of its largest pension funds: the Public Employees' Retirement System and the Teachers' Retirement System. The rest goes toward “ consumer relief,” which involves write-downs of mortgage principal or reductions in interest rates on the mortgage. According to Puzzanghera and Hamilton, rates could be reduced to as low as 2%.

While many people and federal institutions blame Bank of America for many of the practices that contributed to the housing crash and the Great Recession, others feel that it is unfair to punish BofA shareholders for the actions taken by executives and employees at Merrill Lynch and Countrywide. While criminal suits against Angelo Mozilo, the former Countrywide chief executive, have been dropped since his involvement didn't quite “rise to the level of a crime,” many prosecutors are continuing to pursue civil cases against him in the hopes of finding some way of holding him responsible for his actions and the actions of his employees.

Now that these proceeding are, for the most part, done with, investors can hopefully breathe easier in the coming future. According to experts, these penalties will only affect the current quarter, and that by the third quarter, profits should be back up to their usual levels. While it is great that these financial institutions are being held responsible for their decisions, I personally am skeptical as to how these penalties are going to have a long-lasting effect on pulling us out of the Great Recession. I guess we will just have to wait and see.

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Account Fees, Money Down the Drain

9/2/14 - While certain checking accounts can be cost-free, the vast majority of checking account holders are forced to pay penalties, fees, and monthly maintenance charges. Apparently, as described in an article by E. Scott Reckard, of the L.A. Times, based on information from a personal finance website called MoneyRates.com, average costs of owning a checking account are on the rise, and there's not much that any of us can do about it.

While more than one-third of all checking accounts were fee-free at the end of 2012, recent statistics show that such accounts now encompass only 28% of the total checking accounts, while the rest are drowning in new increases in “maintenance costs.” Average monthly costs for such accounts are now over $12, meaning such account holders have to pay around $150 a year just to keep an account open. Throwing away $150 a year for no real reason doesn't seem like such a good investment.

While the above statistics come from MoneyRate's surveying of 100 brick-and-mortar banking institutions, Reckard presents further evidence that a large percentage of checking accounts in credit unions and online banking institutions get through each month without any maintenance fees. According to Reckard, as much as two-thirds of all such online checking accounts are free to the user, and yet individuals still seem hesitant in trusting their checking accounts to such institutions.

People tend to dislike change, and it appears that many consumers would rather stick to a checking account they have had for years rather than shop around for an account with fee-free options, such as those for students and seniors. However, from rises in overdraft fees to a startling increase in the amount required to open a new checking account, new fees and raised prices may actually hurt banking institutions in the long run. Once individuals begin to see that the costs for accounts through such “traditional” banks are prohibitively high, we may begin to see an abrupt shift to more “unconventional” online accounts in the search for lower fees, reduced charges, and a general decrease in expenses.

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High End Home Sales: On The Rise

8/15/14 - Recent housing statistics show that, while the housing market as a whole has been at a bit of an impasse, home sales on the upper end of the spectrum appear to be steadily increasing. In the aftermath of the Great Recession, lenders have become more cautious, preferring to fund mortgages for borrowers with cash on hand and access to credit, as compared to the average American home-buyer. This split between buyers has led to a split in housing sales, thus resulting in this recent trend of increased million-dollar home sales, especially in California. In an L.A. Times article, writer Tim Logan discusses this phenomenon and what it means for attempted rebuilding of California's housing market.

Logan looks into how first-time buyers, what with much stricter loan regulations and a not-so-stable jobs market, are having trouble taking their first step into the realm of home ownership. On the other hand, wealthy investors, with available cash, are more able to benefit from current low interest rates. While average California housing prices are getting toward the high six-figures, it appears that from the San Francisco Bay Area to Southern California, seven-figure home sales have become more common than ever.

Even for older home buyers, of the “Baby Boomer” generation, purchases of homes with seven-figure price tags have become all the more prevalent. For these buyers, looking to downsize, the cash that they gain from selling a large house goes into the purchase of a high-end condominium, such as those produced by City Ventures, which go for around $1.5 million on average. However, while these buyers pay all cash for such properties, Logan presents statistics showing that 70% of recent million-dollar home sales in California were accompanied by a mortgage, illustrating the way in which buyers are taking advantage of historically-low interest rates.

Logan shows throughout this article how beneficial the current housing market is – at least, for wealthy, high-end buyers. Even for the average buyer, although they have more difficulty getting loans, these low interest rates can help them to purchase homes on the upper end of the housing spectrum, since low interest rates mean more affordable monthly payments over the course of a mortgage. Thus, while this article shows that lower interest rates have been helping those with cash on hand, individuals looking for a fancier home or an investment property, perhaps lenders will soon enough loosen their grip, allowing for the average home-buyer to also benefit from these lower interest rates.

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Saving Versus Spending: The Ultimate Conundrum

8/8/14 - In times of financial hardship, it is quite common for individuals to build a wall around their finances, to save rather than invest, and statistics show that consumers have been squirreling away any extra cash on hand, ever since the Great Recession first hit. With low interest rates on savings accounts and constant fluctuation of the stock market, it appears that, at this point in time, consumers have little choice but to pad their checking accounts rather than risk losing their savings. An article by E. Scott Reckard of the L.A. Times discusses the economic implications of this phenomenon of consumer saving as opposed to spending and investing.

Before the Great Recession hit, the average American was known for extravagant spending, for commonly over-drafting his/her checking account, and for holding very little savings in a “just in case” account. After we were hit hard by the economic downturn, it seems as if consumer saving has gone into overdrive, as if to compensate for their previous lax attitude toward their finances. While this new development in consumer saving is helping individuals to ride out the ups and downs of economic recovery, this situation does not bode well for continued economic stabilization.

According to Reckard, about two-thirds of economic recovery is represented by consumer spending. Thus, if consumers are saving rather than spending, the recovery is doomed to slow, maybe even halt altogether. With more individuals holding onto money rather than funneling it back into the economy, businesses have less capital on hand to hire new employees. While employment-to-active-searcher rates have improved markedly in past months, the so-called employment-to-population rates are still suffering, and these high rates of unemployment make people want to save even more, in fear that one day their employment might also be terminated.

Thus, while this new development is helping consumers to pay off debt and to learn to keep a “rainy day” fund, this cautious practice of high saving and low spending is not having such a great effect on the economy as a whole. However, as Reckard states, with inflation going down and income going up, it may just be a matter of time before consumers decide to invest once again. All in all, the main message is this: consumers have turned their manner of economic thinking on its head. While these sudden increases in responsible spending and lower rates of overdraft should be celebrated on the individual level, the economy now needs to find some other way to help its recovery.

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