Category Archives: Credit & Debt

For small businesses, loans are plentiful as long as they’re plastic-backed

For small businesses, loans are plentiful as long as they’re plastic-backed

By Paul Smalera

From CNN Money

FORTUNE — On Monday Federal Reserve Chairman Ben Bernanke took up the growing issue of lack of lending to small businesses by banks, and the havoc it’s causing in the economy. Lending to small businesses contracted by $40 billion for the first quarter of 2010 as compared to 2008. Only a third to half of small businesses were able to secure a loan or line of credit in 2009. And Small Business Administration lending all but disappeared in June, thanks to the end of a popular stimulus program. Because of the dry-up, Bernanke said small businesses “have had difficulty obtaining the credit that they need to expand and, in some cases, even to continue operating.”

But while banks have closed the window for small business loans, they’ve happily opened the back door to any business that wants that money in the form of a credit card loan. According to a Fed report, that business is booming. For small business credit cards — whose terms are generally worse than regular bank loans — 75% of all applicants were approved, in some cases probably by the very same banks that denied their loan applications.

There’s nothing inherently wrong with credit cards or the fact that small business owners rely on them. Indeed, 80% of small business credit card users, according to the Fed, pay off their cards every month. But the economic recovery is pinned to job creation, and job creation is pinned to entrepreneurship and small business owners having the confidence to invest in and grow their businesses over the long haul.

But long-term thinking isn’t possible with credit card financing. The most common SBA loan carries a minimum term of seven years. Credit card lines, as many consumers and small businesses discovered during the financial crisis, can be yanked overnight.

That banks and our government are set up to push the latter over the former speaks volumes about the state of our economy and its path to recovery.

Sign office lease, turn on electric, apply for credit card

Banks are pointing to two reasons for the drop in real loans: lack of collateral and a renewed sense of risk aversion. For lack of collateral, business owners who were once able to borrow against assets — mostly their land or building, but also equipment — have seen their property values plunge along with everyone else. As far as risk goes, Bernanke says banks have complained that regulators are getting in the way of their making good loans. And increased capital reserve requirements have affected banks’ abilities and rationale for where they deploy their capital.

For business owners though, those problems are academic. When they need to get together money to keep going, and the loan isn’t there, there aren’t many options that don’t involve plastic.

Although it’s mostly small and medium sized banks that make small business loans, it’s behemoths like Bank of America (BACFortune 500) and J.P. Morgan Chase (JPMFortune 500) who issue the most credit cards.

Small business owners, who employ half of America’s working population, have long realized that the big banks are generally ill-equipped or disinterested in reviewing business plans for their café, fabrication shop, or Web design firm, and then figuring out how to price a loan that would allow owners to smooth out their income, make payroll, and buy that new computer, while having a predictable monthly payment.

Instead of having ready cash, businesses are being turned away by small and medium banks and pushed into the arms of the behemoths. And the big banks — who have every economic incentive to do this kind of pushing — are in turn pushing business owners into fee-generating credit cards and credit card debt. Moreover, big banks aren’t content with a financial system that already encourages this — they’re now actively making the case that all of this is a good thing.

In a new study commissioned by the American Bankers Association, it’s claimed that credit card usage by small business owners helped create 1.6 million jobs throughout the economy over the past several years. Small business credit cards, by the way, are completely exempt from even the modest protections that the CARD Act, passed last year, offers consumers in the form of APR changes and penalty fees.

Reading through the ABA study, it quickly becomes apparent that there’s nothing special about credit cards that helped create those jobs. All the credit cards did was exactly what a safer product, like a small business loan, would have done: enable businesses to invest upfront in order to handle more customers, take more orders, place bigger orders themselves, and hire new employees.

No matter what happens with financial reform, or whether the Obama Administration finds the political muscle to reauthorize the Small Business Administration stimulus package, the essential fact of our country’s dependence on credit is not likely to change anytime soon.

Getting the economic incentives right — steering customers to the financial product that makes the most sense for them, not the one that makes the most short-term profit for the bank — is essential if the economy is going to grow. Right now the system encourages loans, as credit cards, that are the easiest for the bank to dispose of, and the hardest for customers to escape from, rather than ones that will bring the customer rather than the banker the most benefit.

Women’s World Banking Brings Credit To The Third World

Women’s World Banking Brings Credit To The Third World

From Forbes.com

Mary Ellen Iskenderian remembers the moment when she discovered her purpose in life.

As a child, her parents often took her to visit her father’s family in Turkey where she saw, for the first time, people living in utter poverty. She remembers thinking, “I don’t want to spend my life looking the other way.”

She hasn’t. After graduating from Georgetown University and Yale with degrees in management and international finance, she worked for 17 years for Lehman BrothersLEHMQ – news – people ) and an affiliate of the World Bank–largely in Eastern Europe and the Soviet Union–linking newly freed entrepreneurs with sources of capital. In 2006 she became president and CEO of New York City-based Women’s World Banking (WWB), a global network of 40 microfinance institutions and banks in 28 developing countries.

Committed to the “double bottom line” of financial returns and social progress, WWB offers credit, insurance and savings products that enable low-income women to build assets, guard against risk and provider better opportunities for their children. In the process, WWB enables its partners in microfinance to evolve from donor-dependent charities into self-sustaining financial institutions. “We know the poor can be economically savvy about juggling what little they have,” Iskenderian noted during a presentation at the recent 14th Annual Wharton Leadership Conference, whose theme was “Leading in a Recovering (and Even Rebounding) Economy.” “When someone trusts low-income women with capital, often for the first time, they can become agents of their own change.”

Mission Drift
In 2008 Women’s World Banking released a widely cited survey showing that if microfinance groups did not specifically target women, the percentage of female clients dropped sharply as the microfinance institutions evolved from donor-funded charities to regulated financial institutions. The phenomenon is called “mission drift,” and it occurs when organizations shift their focus toward higher-income (and supposedly less risky) clientele and away from low-income customers, which in many developing countries means women.

Iskenderian wants everyone to recognize the damage, unintended or not, caused by mission drift. Recently, a WWB publication uncovered another effect that hurts women: As organizations shift their focus to for-profit services, a marked decline occurs in the number of female staff members who might better understand the needs of women entrepreneurs.

To illustrate this aspect of mission drift, WWB developed a tool called the Organizational Gender Assessment, which was launched with a large microfinance institution in Bangladesh called ASA. The OGA uncovered policies that clearly affected mothers employed at ASA, such as a requirement that staff members at all branch offices work late into the night managing loan recovery and overdue payments.

ASA regularly rotates its field staff among the branches as a way to prevent fraud. Yet while most male loan officers are not responsible for child care, most of the women officers are. With the OGA survey in hand, ASA realized how its rotation policy was disrupting these women’s family lives. And after determining that rates of fraud were extremely low among its female staffers, ASA altered the transfer policy for certain women to allow them six years in one branch, rather than four.

The focus on mission drift among financial institutions comes at a time when a fierce worldwide debate is raging about microfinance and its future. In 2008 investors plowed $14.8 billion into microfinance, up 24% from the previous year. The microfinance industry now holds more than $60 billion in assets, according to The Center for Financial Inclusion. And, adds the World Bank, for the first time, most of the money in microfinance comes from private investors, including pension schemes and private equity funds, rather than governments. “There is definitely a risk of new shareholders switching microfinance institutions’ missions from alleviating poverty to chasing volumes and profits,” notes Maya Prabhu, head of philanthropy at the U.K. private bank Coutts & Co., who advises wealthy clients on investments in microfinance.

Falling into the ‘Red Zone’
Interest rates vary widely across the globe. But those that draw the most concern tend to occur in countries like Nigeria and Mexico, where the demand for small loans from a large population cannot be met by existing lenders, according to a recent article in The New York Times. The average interest rate in Mexico, for example, hovers around 70%, compared with a global average of roughly 37% in interest and fees. Mexican microfinance organizations can charge such rates because people are often so in need of cash that they will accept any terms offered to them. Occasionally, interest rates spark political intervention. In Nicaragua, President Daniel Ortega became outraged when rates began to reach 35% in 2008. He announced that he would back a microfinance institution that would charge 8% to 10%, using Venezuelan money.

Muhammad Yunus, a Bangladeshi banker and Nobel Peace Prize winner whom many experts regard as the founder of microfinance, has said that interest rates should be 10% to 15% above the cost of raising money, with anything beyond that range amounting to a “red zone” of loan sharking. Yet by that measure, 75% of microfinance institutions would fall into the red zone, according to a March 2010 analysis of 1,008 micro-lenders by the MIX, a website where more than 1,000 microfinance companies worldwide report their own numbers. Many experts label Yunus’ formula as overly simplistic and too low, and fear that a pronounced backlash against high interest rates will prompt lenders to retreat from the poorest customers.

Yunus is famous in the microfinance community for founding the Grameen Bank in his native Bangladesh. By 2006 the bank had disbursed more than $5.3 billion to borrowers, 96% of them groups of women. Yunus has said he decided to lend mainly to women because they were more responsible about repaying loans, and because families benefit more when women control the money.

The debate over microfinance and mission drift has intensified as some researchers maintain that there is more to developing an entrepreneur than providing credit. “Credit alone is not a panacea,” notes Jonathan Morduch, a professor of public policy and economics at New York University. “The boldest claim for microfinance–that it can single-handedly eliminate a large share of world poverty–outpaces, by a long distance, the evidence accumulated to date.” At the same time, however, analysts like Morduch emphasize the success of microfinance groups that combine lending with other initiatives, such as education and health care.

Charting a Path Forward
That model, as it turns out, is where Iskenderian is pushing WWB to go.

To put its stamp on what Iskenderian calls “the next 30 years” of microfinance, WWB is moving into a broad array of products and services for women, including savings, insurance and financial education. “Loans and credit was the model for the first 30 years of microfinance,” she stated. “Savings is the future, the missing piece in climbing out of poverty.” Currently, WWB is sponsoring research on the use of mobile phone technology and ATMs as ways to provide low-income women with banking services.

As another example, poor women have traditionally managed risk in very risky ways: by relying on their husbands, pulling children out of school to work, or selling productive assets such as livestock or equipment. WWB has published a paper highlighting alternative ways for women to manage such gambles using gender-sensitive micro-insurance. For instance, women can choose another beneficiary if they don’t think their husbands will protect the children properly after the woman’s death. In Colombia the life insurance offered by one company pays monthly benefits that can only be used for the purpose of educating the children for two years after the death of a parent, in order to reduce the pressure on the surviving parent to pull children out of school.

This year WWB announced that it has received an $8.5 million grant from the Bill & Melinda Gates Foundation to research, develop and, in conjunction with four of its network member microfinance banks, offer products and services that will promote savings in Latin America, Africa and Asia. To educate the public about saving, a portion of the grant will support the creation of a “social soap opera” in the Dominican Republic. Because low-income women often tend to believe that saving small amounts of money in formal financial institutions is not worth the effort, notes WWB, the soap opera will feature stories highlighting responsible management of money. WWB will work on the project with Puntos de Encuentro, a Nicaraguan NGO with experience in using TV serial dramas to change cultural attitudes.

Through the soap opera, WWB will not only illustrate both positive and negative money management practices–and the consequences of these actions–but will follow up with a communications campaign that will use the buzz created by the soap opera to encourage people to save more money through formal bank accounts. If successful, the program could have a ripple effect across much of Latin America and the Caribbean.

“It’s not always size that makes the difference in [microfinance],” Iskenderian said. “People make the difference with their energy and their resolve…. Single individuals and the choices they make have a tremendous impact on the world.”

Sam’s Club tests small business loans

Sam’s Club tests small business loans

By Catherine Clifford

From CNN Money


NEW YORK (CNNMoney.com) — Sam’s Club, the members-only wholesaler owned by Wal-Mart, is testing out an online program to offer discounted loans to its small business customers.

The program is essentially a white-label arrangement with Superior Financial Group, the nation’s most active Small Business Administration lender. Superior Financial, based in Walnut Creek, Calif., specializes in loans of $5,000 and $25,000, often made through the SBA’s “express” program for smaller loans.

By applying for the loan through Sam’s Club as a member, small businesses will get $100 off Superior Financial’s loan packaging fee (typically $350 to $450, after the discount) and 0.25% off the market interest rate. Sam’s Club gets a $50 referral fee for each loan funded.

The new Sam Club’s venture launches amid a bleak credit landscape for small companies. Banks have slashed their lending portfolios and credit lines, leaving many companies scrambling to find the capital they need to operate. “Unable to find credit, many small businesses have had to shut their doors, and some of the survivors are still struggling to find adequate financing,” a recent government study concluded.

That’s one motive for Sam’s Club to wade into the lending market: If customers are strapped for cash, they don’t shop.

Small businesses “are a big portion of our business, so if we can help small business, that helps us,” said Hiren Patel, director of financial services at Sam’s Club.

Rival wholesaler Costco has tried three times to pair up with small business lenders. “The results have been underwhelming in each iteration,” said Joel Benoliel, senior vice president at Costco (COSTFortune 500). Costco linked up with Key Bank in 2000, American Express in 2003 and Capital One 2007.

“The assumption is that there is this big need, and we are all about small business as our members, so we have really, really tried over the past decade,” Benoliel said. “In each case, the main problem was the same: we had low member approval rates.”

Businesses that already have an established relationship with their bank tend to apply for loans with that bank. Those looking to apply for a loan through an alternate avenue aren’t typically the most attractive customers.

“Maybe they will have success where we didn’t,” Benoliel said of the new Sam’s Club venture. “The lending environment is entirely different since the last time we tried this in 2007.”

The Sam’s Club arrangement is an open-ended pilot program. “We will monitor on a monthly basis, report back to our executives on a quarterly basis, and see where we want to go with this,” Patel said.

What’s a double dip? No one really knows.

What’s a double dip? No one really knows.

By Nin-Hai Tseng

From CNN Money

FORTUNE — Here’s what we know about double dip recessions: The economy shrinks. Then grows. Then shrinks again. It’s essentially a hilly economic recovery (or battle) where the ebb and flow of growth strangely takes a W-shape.

Beyond that, no one can agree on what a so-called double dip is, whether or not we’re about to have one, or even if we’ve ever had one before.

Even the most sophisticated economists can’t agree what the term “double-dip recession” technically means. The National Bureau of Economic Research (NBER), which includes a committee of academic economists that officially declares the beginning and end of recessions, does not have a separate designation for the phenomenon. Economics 101 courses don’t spend much time studying it, either. According to a Factiva search, the term first started appearing regularly in the media in 1980.

Despite its sketchy historical record, economists, politicos, columnists, and just about everyone with an opinion on the economy is speculating about a possible double dip today. We’re heading into a double dip recession! We’re going to avoid a double dip for now!

This week, economist Nouriel Roubini tweeted that there was little difference between a US double dip and “growth so anemic (1.5%) that [it] will feel like a recession even if it’s not formally one.”

Many economists define a recession as two consecutive quarters of negative GDP growth. Can it be possible to have economic expansion – albeit small, as Roubini notes – during the second part of a double dip? NBER, which has yet to formally declare an end to the U.S. recession that formally started in December 2007, believes a double dip would essentially be one continuous recession with a period of growth occurring and then back to a downturn.

The historical record

As if that’s not vague enough, the double dip gets even murkier. Follow if you will.

According to the NBER, a double dip has never actually happened. It says the closest the US economy has been to one was in 1980 and 1981. The bureau found that those periods were marked by two separate recessions that occurred close in time.

Not surprisingly, some economists disagree.

Economics professor Sung Won Sohn of California State University, Channel Islands acknowledges that while the definition of double dip isn’t always clear, the U.S. economy did undergo a double dip in the early 1980s partly due to spikes in oil prices and the U.S. Federal Reserve raising interest rates before the economy had a chance to fully recover.

Sohn says a double dip occurs when an economy recovers briefly before it begins to fall into a recession again. It’s not necessarily one continuous recession with a blip of growth somewhere in between, as NBER says. In fact, he believes a double dip also happened around the time of the Great Depression. Just as the U.S. economy was recovering in 1936 and 1937, it slid back into a recession as interest rates rose. Sohn believes there is a 30% chance today’s economy will slip into a double dip.

Clearly, the game of declaring a double dip is fuzzier than calling a recession, which has its own quirks. The NBER considers several economic factors when it identifies a recession, but most (not all) downturns have included two or more consecutive quarters of declining real GDP.

Many economists agree the U.S. came out of a recession in June or July of last year when the economy returned to growth, but NBER has yet to corroborate that. Nariman Behravesh, chief economist at IHS Global Insight, says the dating of recessions is a “judgment call.”

He says a double dip recession today, whereby GDP falls back to negative levels, is unlikely. He gives it no more than a 20% chance.

Nevertheless, growth will likely cool next year amid an already weak economy. Behravesh predicts growth will likely slow to 3% to 3.5% this year, and then to about 2.5% to 3% in 2011 as government stimulus spending wanes and the U.S. dollar strengthens amid Europe’s debt problems.

The slip in GDP may not put us in double-dip mode. But then again, what really does?

Financial Reform and You

Financial Reform and You

By Matt Quinn

From Inc.com

You can be forgiven if you’re having trouble figuring out what the financial regulatory reform bill means to you. Reportedly logging in at over 2,000 pages, even if it were fully public and finalized, you’d have to take a sabbatical from work to plow through it. Some time in law school would probably help, too. Still, some details – and speculation – have emerged that hint at how small business will be impacted.

Swipe Fees

If you’re a merchant that does a lot of credit card transactions, there are some provisions that are likely to benefit you, according to the New York Times. Under the current bill:

The Federal Reserve would have the authority to ensure debit card transaction fees paid by merchants are “reasonable and proportional” to the cost incurred for processing the transaction. However, the amendment only covers fees charged by the banks involved and not the fees charged by payment networks like Visa and MasterCard. The amendment also does not apply to small banks.Merchants can offer discounts for certain types of payments – like offering a discount for the use of cash or a check – but can’t favor one network over another. Card issuers have to give merchants a choice of more than one network to process debit or credit transactions. Theoretically, this should open up competition and drive down fees.

Rulemaking Input

The Times also reports that an amendment inserted by Senator Olympia Snowe of Maine would require the Consumer Financial Protection Bureau established by the bill to consider how any proposed regulations would affect the cost of credit to small businesses. Small firms would also get input into any rulemaking that would have “a significant economic impact on a substantial number of small entities.” It’s unclear at this time how “significant” and “substantial” are being defined.

The Trickle Down Effect

Those are some of the provisions that more or less directly reference small businesses. However, the bigger impact is likely to come in the form of a trickle-down effect, or the dreaded unintended consequences. Right now, these types of impacts are pure speculation but you’re likely to hear about them the most as the debate over the legislation rages on.

One area of particular interest to small businesses is how venture capital could be affected. Matteo G. Daste, attorney at law firm Buchalter Nemer in San Francisco, told Inc.com that venture capital funds with over $150 million in assets might fall under the regulatory umbrella of the Investment Advisor Act of 1940. If a VC fund falls under the act, “its business model might be challenged,” warns Daste. And though $150 million sounds like a decent chunk of change, it may not be enough to justify the cost of compliance with the act for VCs. Could that mean fewer funds? Smaller funds? What might that mean for more capital intensive start-ups seeking funding?

The consensus of bankers and the economists they employ is that the new banking regulations will increase the cost of doing business for banks, which will in turn make credit more expensive for everyone else because they’ll just pass along the costs. The bill “will tend to raise the cost of credit to American consumers and businesses and limit its availability to smaller firms and less credit worthy individuals,” Milton Ezrati, an economist with money manager Lord, Abbett & Co., told the Wall Street Journal.

There are also fears that the new legislation and all its regulatory requirements could drive the banking industry to consolidate, as smaller banks might be crippled by the additional costs or have a hard time raising required capital. Fewer banks means less competition, which in turns means customers suffer in the form of – you guessed it – higher costs.

Those higher costs are arguably worth it if the legislation can effectively prevent or minimize the damage of future financial crises. But whether the current bill can do that, of course, is still open to debate.

How to Improve Your Credit Score

How to Improve Your Credit Score

Tips for understanding and repairing a poor credit rating

By Karin Price Mueller

From Entrepreneur.com


Until your business has been around for a few years and has established a solid financial history and track record of its own, your personal credit rating will be linked to your business.

“Banks and other credit institutions look at small businesses–and particularly new small businesses–as the personal fiduciary responsibility of the owner,” says Stan Lewczyk, a SCORE counselor in Orange County, Calif.

It’s almost impossible for new businesses to be approved for business loans, lease agreements, credit lines and other financial transactions without relying on the credit history of the owner. As such, you need to make sure your personal credit is as solid as possible.

For that reason, it’s important for business owners to make sure their personal credit histories are sparkly clean, and if they’re not, owners must take steps to improve them. Here’s how:

Check Your Credit
You can get a free copy of your credit report from each of the three major credit bureaus: Experian, Equifax and TransUnion. It’s important to get all three because the reports can vary.

The best way to get your free credit report is to visit annualcreditreport.com, a site created by the three credit bureaus as part of the Fair and Accurate Credit Transactions or FACT Act. Other sites offer “free” reports, but they usually require you to sign up for a monthly service to get your free report.

Next, check your credit score, which is a number lenders will look at to classify you as a borrower. Your credit score is a number calculated by a formula, based on your credit report, and the higher the better. (Because each of your credit reports will be slightly different, your credit scores will be different, too.) One popular score, the FICO score, ranges from 300 to 850. A newer scoring model, called VantageScore, runs from 501 to 990.

For the most part, these credit scores are not free, but you can order them directly from each of the credit bureaus’ websites (experian.com, equifax.com and transunion.com).

Improving Your Score
Once you check your credit reports and scores, you’ll see where you stand and what you need to improve.

Fix mistakes: If there are errors on your credit reports, you can dispute these with the credit bureaus, and within 30 days they have to investigate. If your report is accurate today, that’s great, but make sure you check at least once a year to ensure new errors don’t arise. “Business owners have both the obligation and the right to review their credit report to assure that erroneous entries don’t keep their FICO score from being as high as it should legitimately be,” says Andrew Samalin, a certified financial planner with Samalin Investment Counsel in New York City.

Pay on time: You can’t take away the dings on your current credit report. Only time, and making sure you pay on time in the future, will help. Thirty-five percent of your FICO score is based on your payment history, and lenders want to know they’re going to be paid. “Past experience has shown that the way a small business pays its bills is closely linked with the way a business owner handles his or her personal consumer credit,” says Marcus Bishop of FICO. Going forward, make sure you pay on time.

Lower your balances: Make an effort to keep your personal credit balances as low as possible. Your credit score takes into account the amount of credit you have available compared with how much you’re using. The less you’re using, the better for your score.

Keep older accounts: Your length of credit history is another factor. Keep your older credit cards open so you have a longer history to share.

Limit new credit: If you open up too much new credit at once, it will negatively impact your score. You don’t want to appear desperate for money.

Use a variety of credit types: Showing a successful history with different kinds of borrowing, such as a mix of credit cards, installment loans and mortgages, can raise your score.

Make good credit your mission: There are plenty of online tools available to guide you as you try to improve your credit. Check MyFico.com, Quizzle.com and SBA.gov for help. “Good credit–even if your business doesn’t depend on it day to day–is like insurance in some ways,” says Quizzle spokeswoman Ann-Marie Murphy. “You may never need to use it, but it’s sure nice to have available should you need to fall back on it.”


Karin Price Mueller is an award-winning personal finance and consumer writer. She’s a columnist for The Star-Ledger and regular Entrepreneur.com contributor. Mueller lives in New Jersey with her husband, three children, two guinea pigs and one Beta fish. Whatever they don’t eat goes into her retirement savings accounts. You can read her work at www.KarinPriceMueller.com.

What Wall Street reform means for your mortgage

What Wall Street reform means for your mortgage

By Tami Luhby

From CNNMoney.com

NEW YORK (CNNMoney.com) — Predatory lending would likely become a thing of the past if proposed regulatory reform rules are put into practice. And that may mean that mortgages get more expensive and more difficult to get, lenders warn.

The new rules, which Congress is expected to vote on this week, require that financial institutions ensure that borrowers can afford to repay the mortgages they are sold. Lenders would also have to tell borrowers the most they might pay on an adjustable rate mortgage and explain that payments will vary when the interest rate changes.

“These rules should help make sure people aren’t put into mortgages they can’t afford,” said Julia Gordon, senior policy council for the Center for Responsible Lending.

Additionally, the comprehensive reform package would also ban banks from offering incentives to steer borrowers into costlier loans when they could qualify for cheaper ones, a controversial practice that fueled the subprime lending boom.

And it would prohibit prepayment penalties for adjustable rate, subprime and other risky loans and limits them to three years for traditional loans. This would help prevent borrowers from being locked into expensive loans.

More work to get a mortgage

While bankers and consumer advocates differ on the bill’s impact on mortgage availability and cost, one thing is for certain: It would take more work to get a home loan.

While the bill doesn’t specify downpayment size or creditworthiness, consumers would likely need some savings and a good credit score if they want to land a loan. This shouldn’t be seen as a tightening of credit but as a return to prudent lending standards that existed before the recent housing bubble, experts said.

Gone would be the days of no-doc or stated income loans. Mimicking the current lending environment, borrowers would have to fully document their income with pay stubs, tax returns and the like.

This isn’t to say that the self-employed or small business owners wouldn’t be able to get home loans anymore. They’d just have to provide documentation that they can afford the mortgage.

“It’s a little more work for the consumer but when they take out mortgage debt, there’s a much higher degree of certainty that it’s not disadvantageous to them,” said Barry Zigas, director of housing policy for the Consumer Federation of America.

Other exotic loans, such as option adjustable rate mortgages, which allow borrowers to pay what they like but greatly inflates the principal balance, would be harder to come by. Lenders would be likely to stick with the more conservative fixed-rate or certain adjustable-rate loans.

Borrowers, however, would still have to be on their guard and thoroughly read through their paperwork and make sure they understand the terms of the loan, experts said.

Of course, many lenders are already putting these practices into place in the wake of the mortgage meltdown. But these rules are meant to codify them once the housing market picks up again.

“They are just basic, common sense rules of business and of fairness,” Gordon said.

Standards: To be determined

If the bill passes, it may be another 18 to 24 months before lenders and consumers fully realize its impact. It will likely take the mortgage industry’s proposed regulator, the Consumer Financial Protection Bureau, nine months to come up with the new rules and then more time for the industry to institute them, said John Courson, chief executive officer of the Mortgage Bankers Association.

The regulator also could decide to set standards on downpayment size, credit scores and total debt-to-income levels, Courson said. That would have a big impact on consumers.

Financial institutions warn that increased regulation — and potentially greater legal liability — could make it harder and more expensive to obtain a loan.

“The concern is there will be less choice for borrowers,” Courson said.

Understanding the Financial Crisis for Kids and Grownups

 

It is so easy to forget what really happened to cause the financial Crisis situation we are living in today.  Sometimes a good reminder as well as a ‘visual’ helps…especially with regard to explanation we give our  kids.  Leaving our kids unaware of the facts is NOT using it all as a powerful learning experience, which is exactly what it is and should be.

Record low mortgage rates, but are they beneficial?

By Colin Barr

From Fortune Magazine Online

Mortgage rates hit a record low this week, but few people will be taking advantage.

Freddie Mac said Thursday the going rate on a 30-year fixed rate mortgage fell to 4.69%, its lowest level since the company started keeping track 38 years ago.

The news comes as investors have been shunning stocks in favor of bonds, especially those backed by the federal government. Money has flowed out of stock funds and into bond funds for seven straight weeks, while surging demand for U.S. Treasury debt has taken the yield on the 10-year Treasury note down near 3% — a level last seen in the meltdown of 2008.

Lower mortgage rates, of course, make it cheaper to buy a house. But with unemployment stubbornly high, wages stagnant and tax incentives expiring, few people are taking the plunge.

New home sales tumbled to an all-time low last month (see chart above), and economists at Capital Economics in Toronto say another round of house price declines is waiting in the wings.

“Once home sales fall back to fairly depressed levels, house prices will start declining too,” economist Paul Dales wrote in a note to clients this week. “By the end of next year, we think they will be at least 5% lower.”

Though lower prices obviously will be good for buyers, a second leg down means our long national housing nightmare — think foreclosures and bank failures — is far from over.

College students discuss credit card basics

College students are often faced with many things they want or need but can’t afford. Many turn to credit cards to help pay for these, but oftentimes they don’t know what they are getting into financially. This video asks random college students about their understandings of credit basics. Some of their responses show that they don’t always realize the importance of paying off credit cards to avoid debt.

Video by CreditCards.com