Credit Economy

Many top economists point to recent data that indicates were are headed into another year of foreclosures fueled by mortgage delinquencies. But interestingly enough, several others believe that the homeowners who are expected to become foreclosure victims are just bluffing.

That’s because much of the data regarding foreclosure predictions relates to mortgages and mortgage market information that has to do with loans made to people who no longer have positive equity. Negative equity is a condition that happens when the home is no longer worth what is owed on it. Commonly referred to as “being underwater” or “upside down” in the mortgage, it means that if the homeowner sells their house to a typical buyer they still won’t get enough money from the sale of the home to pay off the mortgage. They’ll be left with no extra cash from the home sale but will still have a mortgage debt to deal with, so they are in a very difficult situation that usually leads to foreclosure.

Right now there are millions of people who owe more on their homes than what those properties are worth, and it is this gigantic group of homeowners that many economists say will soon enter foreclosure. Others see the situation differently, however, and they point out that a substantial number of these negative equity loans are held by homeowners who still have enough income to make their mortgage payments.

They are more likely to wait out the mortgage market storm in hopes that prices of homes will improve, which could reverse their situation and again give them positive equity. Instead of losing the home that they have invested so much time and money in – and where they have memories and a sense of security – many experts think they will do whatever it takes to make their payments on time. They won’t take a foreclosure and walk away from their homes just because of negative equity, these market watchers say, but instead they will keep making payments. That will prevent the next wave of foreclosures that other predict, they believe.

Banks and other lenders have been doing lots of foot dragging since the beginning of the foreclosure crisis. But now they are being more aggressively urged by government regulators to do loan modifications for homeowners, as the Obama Administration presses lenders to do more to stop foreclosures. One of the programs involves doing a trial loan modification. Loan modification is a process that gives the borrower more lenient and flexible terms for repaying their debt. A typical loan modification might result in lower monthly payments, for example, or a cheaper interest rate or longer repayment period.

During a trial loan modification phase the homeowner is given a chance to prove that they can make payments in a timely fashion. They are awaiting a real loan modification, in other words, and are going through a trial period during which the lender will determine how well they perform. If they do their part the lender will proceed with a more permanent modification once the probationary phase is over.

Many people already have wrecked credit when they enter into a trial loan modification, but some still have good credit. The problem is that some of these people with decent credit risk losing their valuable FICO score rating because once they agree to do a trial loan modification the lender notifies the credit rating agencies, which then penalize the borrower with a lower FICO score.

A code is placed on the credit report – indicating that the homeowner is only making partial payments. Of course partial payments may be part of the agreed upon plan that is negotiated between the lender and the borrower, but credit reports do not really discriminate. They just deduct points, and some homeowners have seen their scores drop by as much as 100 points during a trial loan modification period, according to data compiled by the Treasury Department.
The bottom line is that even an experimental or trial period loan modification can damage your credit, so if you are able to resolve your mortgage payment problems without resorting to modification it may be best for you. Otherwise you could wind up with a low credit score, and those with lower scores have a harder time getting loans – which can make things go from bad to worse during a financial crisis.

Generally speaking, the main thing an average consumer needs to know about the value of the dollar is that when the dollar loses value compared to other currencies, American products are cheaper for foreigners to buy. When the dollar gets stronger, on the other hand, those foreign products or imports are cheaper for Americans to buy.

But you do not have to be a big international investment banker to participate in the currency markets. If you are planning a trip to Europe two years from now, for example, and you expect that the dollar is losing ground compared to the value of the Euro, you might want to convert some of your American dollars into Euro now. Stash those Euro notes and if your prediction is right then you might get more buying power while on your vacation two years later.

For example, if the Euro is worth $1.50 that means that something worth one Euro will cost $1.50, while something costing 1,000 Euros will cost $1,500. So if you notice that the Euro is worth $1.50 but you believe the dollar is going to continue losing value, you could go to a bank and convert $1,500 into Euros. The teller will give you 1,000 Euros. But if the value of the dollar plummets in relation to the Euro and it starts costing $2 to buy one Euro, then you just made a 50 cent profit. You can take your Euros back to the bank and convert them and you’ll get US $2,000 for your 1,000 Euros – a profit of $500.

Some people do that kind of thing if they are planning a trip to a foreign country and expect the currency values to change significantly before they set sail on their trip. When the dollar lost value during the 2008 credit crisis, for instance, Canadian tourists flooded the USA to take advantage of cheaper shopping and vacations. That’s because the Canadian dollar – which normally buys less than an American dollar – was suddenly worth about $1.50. So those Canadians were basically getting a 50 cent discount on everything they bought in the USA. Similarly, lots of Americans like to go to Mexico – where US dollars are usually worth more – because they can spend the same amount of money and get a much more luxurious vacation.

So keep tabs on currency values and if you notice a huge discrepancy that makes the dollar strong against the other nation’s currency, you might want to consider visiting that foreign land on your next vacation. Or if the dollar is really weak you might want to invest in stocks or bonds in a country that has a stronger currency and economy in order to get a better return on your investment.

Visa cards have not always been around, although that may be hard to believe in this day and age when they are carried by tens of millions of people in more than 200 nations worldwide. Visa plastic is used to charged hundreds of billions of dollars each year in the USA alone, and global transactions total more than four trillion dollars. There are more than two billion Visa cards currently in circulation, and the Visa company handles 10 thousand transaction per second, including both credit card and debit card transactions.

Visa was first launched back in 1970 under the corporate name of National BankAmericard Inc., and the company’s founder and CEO came up with the new name – Visa – about six years later. BankAmericard soon changed its corporate name to Visa, a brand name that caught on fast because it was simple and catchy while also being very easy to pronounce the same way in any language. The blue and gold logo of the company was created and now it is recognized immediately around the globe. Approximately 29 million merchants – both online and offline – now accept the Visa card from their customers and clients.

Then in the early 1980s the credit card company invented the ATM bank card or debit card, offering 24-hour access to customer’s bank accounts. That innovation changed the way people bank, and over the next several years Visa’s presence across the planet grew – as did its revenues. By the late 1990s Visa was doing more than a trillion dollars a year in business and was well on its way to becoming a $4 trillion enterprise responsible for about 60-70 percent of the world’s credit card business. In 2008 Visa hit another major milestone in its company’s history, successfully going public on the New York Stock Exchange with the largest initial public offering in American stock market history. Recently the stock was trading for more than $80 a share, about 25 percent higher than it was during the months after it was first offered to investors.

Many real estate and mortgage finance experts now predict that a whole new wave of foreclosures is about to hit. But instead of being fueled by the risky subprime mortgage loans made to consumers with lousy credit that instigated the original mortgage crisis, they say that this next phase of credit turmoil and foreclosures will be due to prime loans – those made to people with excellent credit and higher than average assets and income.

One of the reason this is expected to happen is not because the original loans were too exotic, not carefully scrutinized by underwriters, or that they were pushed on people who could not afford them. But things have changed within the past months and years, and now many people who were in the prime category are now on shaky financial ground. With tens of thousands of layoffs across the country, lots of people who were in great financial shape a year or two ago are now stuck in a situation where they have no income at all – and no way to pay a hefty monthly mortgage bill.

As a result a new breed of foreclosure homeowners – those who are in the upper middle class echelon and who own luxury properties in the nicest neighborhoods – is forming across the USA. Unless the employment picture improves, real estate watchers believe that millions of homes may go into foreclosure within the next year or two, as prime loan borrowers fall on hard times and default on their mortgage obligations. This is a shift in historic terms, because over the past 100 years most people who experienced a foreclosure were from the lower-income set, and their homes were in less desirable locations. But no longer are foreclosures limited to dilapidated houses owned by people who make less than average income. The new foreclosure profile is starting to look like a fancy home in a great neighborhood, owned by someone with a track record of exceptionally good credit and higher income.

Payday cash advance loans are considered too expensive to make them legitimate, according to many consumer protection agencies and some lawmakers. That’s because while typical loans carry interest rates that are in the 5-10 percent APR range – and high-priced credit card cash advances often charge steep interest of 18-25 percent APR – these payday loans routinely charge about 350-400 percent to their customers.

Payday loans are special loans that let the borrower take out a cash advance on their paycheck – before payday. They get charged high interest rates for these fast cash loans, which are then repaid once the person gets their paycheck. So most people who use these payday cash advance loans are between paydays but just need some quick cash to bridge the gap and get some money in their pockets until the next check from their employer comes.

Because a person might pay $15 to get an advance of $100 for a couple of weeks, the loans appear to be convenient – and they often times are. Many people who use them do so to avoid missing a payment or they use them to cover a check that would otherwise bounce. Missed payments and bounced checks can be very expensive – and if one bounced check costs $25 or more but it can be stopped with a $15 cash advance payday loan, then that can seem like a bargain.

But critics complain that most of the people who use these loans are already in the lowest income brackets and have little or no savings to fall back on in an emergency. They wind up paying extraordinary rates, which pushes them deeper into poverty. And many people get in a bad habit of relying on payday loans between each and every paycheck, which means they are paying a very stiff fee and losing a considerable amount of their income due to interest debt.

The controversy continues, but meantime financial planning experts advise that consumers not use these loans if possible because they are just too expensive. The money spent to borrow this kind of loan could be saved to create an emergency saving fund, which is much smarter financial budgeting plan.

The Federal Housing Administration (FHA) has been one of the biggest sources of affordable loans for Americans, especially in the wake of the credit crisis and mortgage meltdown. The agency, which is part of the Department of Housing and Urban Development, insures mortgage loans made by banks and other lenders to protect those lenders from losses resulting from foreclosures and mortgage delinquencies. Because the FHA offers insurance as a kind of backstop, lenders are able to charge borrowers less for their loan – including smaller down payments, closing costs, and other fees.
But now the FHA – which insured nearly a third of all new mortgages made in the USA in 2009 – says it will increase the premium it charges for its mortgage insurance and require bigger down payments from those borrowers who do not have good enough credit.
 
Those wanting to use an FHA mortgage will have to start paying an insurance premium of 2.25 percent, whereas the premium used to be only 1.75 percent. That will raise the monthly payment of borrowers slightly, which is probably not going to be too much of a hurdle. But what may be more of an obstacle to home ownership is the new plan to reduce the amount of money sellers can contribute to help pay for buyer closing costs. They used to be able to pay up to six percent of those costs, which was a huge perk for buyers, but the FHA plans to slash that amount by 50 percent. Regarding credit scores, the FHA has raised the score needed to get its best deals – which involve only having to pay about three or 3.5 percent down to purchase a home.

Those with scores below 580 will now have to pay a much larger down payment. But those familiar with the FHA say that this new FICO score rule will not present a big problem to the average borrower, because already the average score of the typical home buyer who uses an FHA loan is in the mid-600 range. Meanwhile the agency said it will strengthen oversight of lenders to make sure that they comply with all FHA regulations, a step that might help to reduce lender fraud and more foreclosures.

If you want to buy while you’re on the go, then a new wireless credit card application is just what you’ve been looking for to help you power shop. The innovation application lets cardholders make mobile credit card payments through their iPhone or iPod Touch device. The transactions work like those done when you shop online, by authorizing payments that are then made through financial services such as PayPal that are attached to or affiliated with your personal credit card account. So if you see something you want to buy but you left your wallet or plastic at home, just reach for your cell phone to complete the transaction. Meanwhile the person you are paying may also be using their own brand of high-tech wireless credit card application, because there are also new ways to accept cards through a mobile credit card terminal – as opposed to the old fashioned way of swiping the card on a desktop device or writing up the card ticket and imprinting the card number manually.

That’s right. You can use an iPhone or similar type of cellular device to swipe your customer’s credit cards and do mobile credit card transactions. The software application works over any Internet connection and allows retailers or other merchants to process card purchases instantly while at outdoor conventions, construction sites, street fairs, or while walking down the beach. That means more convenience for doing business away from a traditional office or storefront setting, and already there are about five million merchants using the new application that works through a computer chip imbedded in the mobile phone.

Wireless credit card transactions can be done from anywhere – which helps merchants accept credit card payments and verify them without having to have access to a phone line or tie up the telephone lines in a busy store or other business environment. Merchants or others who accept credit cards can use wireless credit card applications to transact business over a Blackberry or iPhone, for example, instead of having to use a conventional credit card swiping terminal connection.

With the economy suffering and unemployment percentages reaching historically high double digits, it is naturally getting much harder for people to keep up with their bill paying, and that means a spike in credit card defaults and late payments.

According to recent industry research and statistics gathered from card companies, the rate of credit card defaults in the USA rose to record highs in 2009, in lock step with similarly high unemployment rates.
Bank of America, which is the nation’s biggest bank – and one of the top credit card issuers in the USA – reported that its own default rate jumped to more than 12 percent. That represented a climb of more than 10 percent when compared to the previous year, but in the prior year the employment picture across America was also more robust and rosy. Meanwhile American Express also saw double digit credit card default rates, a confirmation that as the impact of the recession hits home and more people get pink slips at work, the debt crisis at major credit card companies also worsens.

Other big lenders like Capital One, Discover, and JPMorgan Chase also noticed spikes in the volume of defaults, and the longer the unemployment rates stay within double digit territory the more industry observers say we should expect to see double digit defaults rates, too.

Of course these statistics do not take into account all the people who have made late payments, gone over their credit limit, or reverted to making only the bare minimum monthly payment instead of trying to actually pay off their credit card debts. But we do that in 2008 the average savings rates for American households fell into negative territory for the first time since the Great Depression. That means that people spend more than they saved, and that is always a recipe for debt crisis – regardless of what may be happening with the unemployment outlook.

To stop the flood of credit card defaults, in other words, the nation needs to create more jobs so that cardholders will have enough money coming in to make up the vast amounts going out in the form of expenses and debt repayment installments.

When the cold miserable winter weather is still in the air and nobody is looking at homes for sale because of the frigid temperatures, ice, and snow, it is a good time to phone your Realtor and prepare to sell real estate. Buyers who have been patiently waiting all winter soon grow restless, and at the first signs of spring they will rush out to browse and buy homes. Miss that first wave of buyers and you may wind up waiting a whole other year just to get a nibble, because in a slow market the buyers are few and far between. A better strategy is to plan ahead and be ready to put your real estate on the market in time to capture the seasonal sales surge that typically happens in most markets – those with normal climates – during the first 4-6 weeks of springtime.

But to list your house as soon as the daffodils come up, it is first necessary to prepare it for showing and marketing. That means that you want to have all of your repair projects and cosmetic touch-ups finished before your Realtor lists it – or before you start showing the house if you are going to sell as a FSBO (for sale by owner).  That’s not a bad thing, though, because once the buying and selling season gets underway you will have a much harder time finding contractors who have time to accept your jobs – and those who can fit you in will be charging their higher seasonal rates.

So do your background research while the weather is still bad and be prepared to set your price so that it is competitive with other listings. Then make a list of things you can do to add curb appeal and value to your home – such as painting it, replacing cracked window panes, and sprucing up the landscape. Then you’ll be ahead of the pack when the buyers come out to play, and that should improve your odds of getting a quick sale at a higher price – whether you go the FSBO route or decide to hire a professional Realtor.