Another Shoe

It has never been clear to us common folk what mortgage-backed securities look like when Wall Street sells them. A pessimist would say something like, "Those guys would sell ANYTHING regardless of its investment merit."  One trick seems to be to come up with a clever name, like Bear Stearns High-Grade Structured Credit Strategies fund.  Do you know what that means? Neither do I.  High-Grade is a nice sounding name but high-grade compared with what? And what is a structured credit strategy?

What it means is whatever it says in the prospectus that was given to investors, and that may not have much similarity with its name. A relatively small specialty in the legal profession creates these many-paged documents that the average investor never reads.  Even professional investors are probably relying more on what the salesman tells him about the safety of the product than in specific wording in the prospectus. Yet, when the fund heads south and investors want to sue to get their losses covered, you can bet the Wall Street firm will say, "This was properly disclosed in the prospectus."

Then comes along the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund. What this means is that the fund can go borrow more money than just what investors put into the fund and buy more mortgages.  Word has it that these kinds of funds routinely borrow $9 for every $1 in equity. That means that a fund can start out with $100 million in investor money, borrow $900 million and buy $1 billion in mortgages.

Now let's assume for the moment that each mortgage does not exceed 90% loan-to-value, more conservative than the 100% financing widely available.  That means that the equity behind those mortgages is only $100 million. It doesn’t take a rocket scientist to tell that a modest decline in property values and an increase in the foreclosure rate can destroy most of the equity in the fund. 

And then there's that $900 million of money that some lender probably wants back. Depending on what the credit agreement says, the lenders might have some ability to step in and TAKE enough mortgages to cover its loans, and that may mean the investors get wiped out.

At this point, Bear Stearns has indicated that it will put $3.2 billion (gag!!) into the first fund mentioned, hoping to stave off collapse. But it looks as if the leveraged fund investors are on their own and that they will suffer significant losses.

That's another shoe, and I think that there are still others around.

Stay tuned.

For more information, check out http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aYDTeHYnV3ms 

Funny Money Friday: The Daily Show's Tips for Students with Credit Cards

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

We've covered credit card tips for students and graduates several times here at CreditBloggers. In one post, we made a case for not having any credit in college. In another, we had three warnings for college freshmen. We even have a whole section of Credit.com devoted to helping college students start on the right foot financially.

But none of our advice is quite as funny as Demetri Martin's in his latest Trendspotting segment for The Daily Show. Click here and then on "Trendspotting - Credit" to watch for yourself:

Happy Friday!

Brookfield Lending: Portrait of a Loan Scam Company

If you stumbled across the Brookfield Lending website while searching for a loan, you probably wouldn't think twice.

It's nicely designed, with flash navigation and lots of photos. There's all sorts of warm and friendly text, including a reference to them being "one of the fastest growing credit brokers in North America."

But if you were to apply with this seemingly authentic lender, it would be a nightmare. Brookfield Lending is a cover for an advanced-fee loan scam. If you contacted them, they supposedly approve your loan and would ask you to wire a deposit or insurance payment. After you sent your hundreds or thousands of dollars, you'd never hear from them again.

We heard about this latest loan scammer directly from a branch manager with the Better Business Bureau. He had called our offices to warn us about this particularly convincing scam. A quick Google search turns up the real story of Brookfield lending. The Ripoff Report has 13 reports from consumers about these fraudsters. 

The Brookfield website offers a rare opportunity to study an advanced-fee loan scammer up close. When you start digging around the site in more detail, it is easy to spot some warning signs:

• No VeriSign or Trust-e security seals at the bottom of the page. Check out the bottom of E-loan or Credit.com for an example. Nearly every authentic online retailer posts these important online security certification.
• No physical address. They don't even refer to being in one state or area.
• Typos in the text of the website.
• Not compatible with Firefox internet browser.
• No meta tags on the website. The page has no title in the top left of your browser window, a basic web marketing element used by established companies.
• No application. Most online lenders have actual online applications to process your request. Always check to see that these applications are on secure (https) pages.
• Only email contact. A real lender would offer multiple ways to contact them, not just an online email form.
• Better Business Report. Brookfield has a report with the BBB. It is only when you read the details that you realize the BBB is trying to warn you that they're a fake company. A closer reading shows that "It is the position of the Bureau that Brookfield Lending Service's advanced fee loan offer is deceptive and misleading."

Take a look at the Brookside Lending website for yourself. Hopefully, it can help you learn how to avoid other scam lenders in the future. And tell your friends and family about this dangerous loan fraud. If you want to read more about advanced-fee loan fraud, this FTC article is a great place to start.

And if you are contacted by a lender asking you to send money in exchange for a loan, DON'T DO IT! Instead, immediately report your case to the Federal Trade Commission, Consumer Affairs and Phone Busters in Canada (usually where the funds are sent). You may also want to share your story with your political representatives, state attorney general, local news media, friends and family.

Update: Here's another bad lender to add to the list: Kennedy Advantage Plus. We received a call from a customer who had sent these fraudsters $1,600 for a $10,000 loan.

Making Money with 0% Credit Cards: Is Free-Credit-Card-Capital for You?

The Wall Street Journal recently ran an article on the pros and cons of using balance transfers on 0% credit cards as a source of investment capital. It raised more questions for me about what I'll call "Free-Credit-Card-Capital" (FCCC) than it answered, so I did some research and spent some time thinking about this investment idea, which can be as easy or complicated as you want to make it, if you're cut out to have anything to do with it at all.

Before you read any further … if you aren't good with details or deadlines, if you owe money on your credit cards, if you live paycheck to paycheck, if your credit picture isn't pretty … then this is not a good investment option for you. Don't ask for trouble.

If it's any consolation, FCCC wouldn't work for me, either! I have a knee-jerk negative reaction because I'm disorganized and feel it's likely that I'd mess up. I'm also a worrywart, so even if I set up automatic payments for the required monthly amounts, I'd fret that something would go wrong and my interest rates will go up across the board, while my FICO score would tumble. But that's me.

How You Can Benefit from Free-Credit-Card-Capital
The first step is finding some FCCC. It's important that you choose the right card. You want one that offers the 0% balance transfer come-on -– and does not limit your use of those handy convenience checks for transferring balances from other credit cards. You want to be able to cut a check to yourself for FCCC purposes with no strings or fees. If there's a balance transfer fee associated with the transaction and/or if the card issuer will treat it as a cash advance, it's not worth considering the card for investment purposes. Similarly, if the introductory term is short, find a card with a longer term, ideally a year.

Even if the fine print doesn't raise any red flags, I recommend calling the customer service number to ask about the convenience check policy before you apply for the piece of plastic. Assuming everything checks out, if you choose carefully, you'll soon get the card and the check.

Once you get the check, invest your FCCC in a low-risk savings or money market account, where you can earn in the range of 5%, say at an online bank or via your credit union. Don't put the money in the stock market, because you won't be able to keep it there long enough to weather any economic storms that might sink the Dow.

Key, of course, is remembering to make required monthly minimum payments on the credit card and to pay back the total of what you've borrowed before the card's introductory rate expires.

Don't use your FCCC card for purchases. Why? Because they're quite likely to be billed at a high rate. Even if you intend to pay off the balance right away, and even if you send in enough to cover the purchases, the lender will credit your payment against what you owe at  0% … while the debt at the higher rate grows by a hefty amount, month after month.

As for the interest you earn in the process, that's yours to keep, minus the assortment of dear old income taxes you have to pay. The more FCCC you can access, the more you'll earn. This has led some folks to use a strategy known as "App-O-Rama," where you apply for multiple credit cards at the same sitting, hoping that your applications will be approved and your credit limits will be high … before your FICO score reflects the increased lines of credit in your name and the multiple applications. On the assumption that your FICO score is high, you may be able to amass a larger pot of FCCC than you thought possible. But please watch out!

"App-O-Rama" Warnings

1. Be sure you know what you're getting yourself in for with each card before you apply. Cards that treat FCCC balance transfers as cash advances should be ruled out. Ditto for cards that charge balance transfer fees.
2. Take advantage of automatic payments or come up with another way to be certain that you'll never be late or miss a payment. For some, a spreadsheet might do the job. Whatever. You want to make sure nothing will go wrong. Otherwise, you'll end up paying a lot in fees and a higher interest rate –- across the board, for years to come.
3. Don't build up an FCCC fund if you'll need additional credit in the near future, for example, to buy a home. You don't want your FCCC mucking up the works and making your mortgage more costly.

If you want more information about FCCC, I highly recommend "0% Daredevils Chase 'Free' Cash," by MSN Money's personal finance columnist, Liz Pulliam Weston.

Have you used free credit card capital to make money? Please tell us about your experiences!

Dump Your Debit Card?

The Privacy Rights Clearinghouse is recommending you dump your debit card. Their main concern is that if your debit card is used fraudulently, your card issuer can take up to two weeks to get the stolen funds into your account while they investigate. In the meantime, you may bounce checks or be unable to pay other bills. Their fact sheet goes into great detail as to the dangers of debit cards, especially for those purchases where no Personal Identification Number (PIN) is required.

If you're vigilant and catch fraudulent use of your debit card, you're not likely to be held responsible for the purchases under the card associations "Zero Liability" policies. With Visa's Zero Liability policy, for example, you won't be responsible for fraudulent charges to your Visa Debit card unless by chance the thief used your PIN number and the transaction was processed on a network outside Visa's network. Even then, you would still be protected under the Electronic Funds Transfer Act rules which limit your liability to $50 if you report a loss or theft promptly. 

Visa also requires its card issuer members to provisionally credit your account within five business days, rather than fourteen, and reports that many issuers will credit the victim's account within 24 -- 48 hours. Bank of America, for example, offers credit within the next business day if your card is lost or stolen and used by a thief.

Mastercard also offers Zero Liability for most transactions, though I don't have any more details than those listed on its website, since my calls to clarify its requirements for provisional credit were not returned.

I respect the PRC a great deal, and their fact sheets (some 50 plus) are excellent, but I'll confess I still use a debit card for some purchases. They do have a point, though, if you can use a no-fee credit card and pay it in full each month, do you need a debit card?

If you do use a debit card, I recommend you:
1. Talk to your issuer and find out their policy for provisional credit if it is lost or stolen, and
2. Monitor your account online and set up alerts for unusual activity on your account (most issuers offer this service these days).

What do you think? Do you use your debit card or dump it?

Credit Card Foreign Transaction Fees: What You Need to Know Now

If your summer vacation will take you out of the United States, it 's worth it to take the time to figure out which piece of plastic you're going to use where. While the safety and convenience of getting to say, "Charge it!" are well-known, there's another benefit to using a card overseas: The exchange rates credit card issuers use are usually quite favorable and hard to beat.

The foreign transaction fees, on the other hand, can be a costly, unwelcome surprise.

Almost every credit card issuer charges extra for purchases made outside the United States. Both MasterCard and Visa have a 1% processing fee and most banks add on additional fees of their own, which are generally a percentage of cost of the transaction in US dollars. For example, say you did lunch in Milan for 100 Euros, which translated to $125.00 US. The foreign transaction fees would be charged on the $125.00 amount.

A recent survey of credit card issuers by Heshan Demel, one of my CardRatings.com colleagues, found the following foreign transaction fees:

• American Express - 2%
• Bank of America - 3%
• Chase - 3%
• Citibank - 3%
• Washington Mutual - 1%
• Wells Fargo - 3%
• Capital One - No foreign transaction fees
• Discover – No foreign transaction fees … but this card is rarely accepted overseas

Before You Go

Call your card issuers and find out what their current foreign transaction fees are. While you have them on the phone, it's a good idea to mention that your travel plans will be taking you out of the country, so that your international charges aren't inadvertently declined as part of a card issuer's fraud protection program.

Did You Take a Trip Last Year?

You may be due a refund if you paid any foreign transaction fees between February 1, 2006 and March 8, 2006. Without admitting to conspiring to set and conceal foreign transaction fees, the following major players in the credit card industry have set up a $336,000,000 settlement fund: MasterCard, Visa, Diners Club, Bank of America, Bank One/First USA, Chase, Citibank, MBNA, HSBC/Household, and Washington Mutual/Providian. Click here to find out if you're eligible for a piece of this hefty refund pie.

Watch for Special Promos

Always be on the look out for special credit card promotional offers. For example, last week Citibank launched the brand new Citi Chairman American Express Card. This card is targeted to Smith Barney and Citi Private Bank clients and boasts no foreign currency transaction fees until January 2009.

Happy Travels!

Any tips or thoughts on using your credit card overseas? Please share your thoughts!

Curtis Arnold, is the Founder of CardRatings.com, a website that provides ratings and reviews of over 20,000 credit card offers.

VantageScore and Equifax Risk Score 3.0 Also Exclude Authorized User Accounts

With all this recent controversy about changes to FICO credit scores, it is interesting to note that there are other credit scoring models that have always excluded authorized user accounts. According to an Equifax press release, the VantageScore and Equifax Risk Score 3.0 have never included authorized user accounts in their score calculations.

"Being an authorized user on someone else's account does not demonstrate an individual's ability to pay their credit obligations. For this reason, it does not make sense to include authorized users in the calculation of a credit score," said Lisa Zarikian, who leads Equifax Predictive Sciences and was a member of the team that created VantageScore.

If you recall, the VantageScore is a new credit scoring system developed jointly by the three credit bureaus in order to better compete with FICO. Announced in March 2006, the VantageScore has a very limited reach compared with more established credit scoring systems.  VantageScores became available to consumers online last June and use a scale from 501 to 990.

Equifax Risk Score 3.0 is a business scoring model designed in 2004 by the bureau for business clients.  You can read a brochure about the score online here.

Funny Money Friday: FICO the Terrible

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

There's a lot of name calling going on in regards to Fair Isaac's recent decision to stop counting authorized user accounts. A lot of consumers are hopping mad about the negative impact this change will have on their credit scores. The comments section of our reader poll and other posts about this change are full of accusations and concerns.

Over the past two weeks, we've heard that:

• The FICO score change is discriminatory  against women.
• The FICO score change is "just another insult to the American people."
• The FICO score change is going to harm the gay community.
• The FICO score change is another sign of "modern day economic slavery" and that "America needs to wake up this economic HITLER (FAIR ISSAC)."
• The FICO score change is so bad that we should "just bring back slavery. At least I could see who my owner is that is suppressing me and my family."
• The FICO score change will cause the mortgage industry to "crumble. Just fall apart."
• The FICO score change is a "perfect storm" that will destroy the economy and devastate families.

Hold the phone! I'm not happy about the FICO score change either, but I think these readers are taking it a little too far. Yes, the FICO change is going to hurt the credit scores of many in order to stop the fraud of a few. But the change is basically logical. Why should someone get full score credit for an account that they didn't open and are not legally responsible for paying back?

And, yes, it is often married women who are the most dependent on authorized user accounts. But there is no rule that married couples need to manage their accounts this way. It's not really even a good idea. We always recommend that both people in a marriage or a domestic partnership have their own, individual credit accounts.

What do you think about the FICO change? Are you on the side of the "torch and pitchfork" folks? Are you inconvenienced, but not that mad? Or do you think the change is for the best? Share your opinion the comments section below and have a great weekend!

Regulator- Schmegulator

I never cease to be amazed at the naivete of lawmakers who think that just because they pass a law, that behavior is modified and whatever social purpose they had in mind will be advanced.  This is strange because I think that in politics there is a huge gulf between perception and reality anyway. You think that people who saw this all around them would understand that it happens in the rest of the world too.

The fact is that passing a law is just the first step in a long process.  Someone has to put that law into some kind of bureaucratese, what we would call regulations.  Next, someone has to figure out who is in charge of enforcing the rules and what the penalties are going to be for failure to follow them.

Finally, someone has to be enabled to go out and enforce the regulations, like have an enforcement staff up to the task.  You can already see the problem. There are lots of opportunities for failure between the halls of Congress and Main Street.

A topic of current interest is the ability of consumers to fix mistakes on their credit reports.  The intention of the law that consumers can dispute erroneous items and have them removed quickly and easily.  All of us who work with borrowers who have credit problems realize that this has been a joke for years, not just because Congress wants to hold hearings.

The current hearings on all matter of mortgage and credit related malfeasance have been brought on by this very problem. One Congressman chided the Federal Reserve Board for not having implemented rules that would have "enabled" previously passed legislation.

We'll see how that one turns out, but I'm not holding my breath.  Right now, it looks as if the creditors seem to be taking the position that they have a lot to lose by not including information that may or may not be true. Balance that against the damage to consumers from making it hard to eliminate that same information. Thus it's not really a stand-off. The creditors are holding the cards.

Whatever agency ends up in charge, someone needs to step in and TELL creditors that they don't have a choice on this, that they have to make it easier to remove questionable data and make it painful when they don't.

Scam Alert: New Version of Advanced-Fee Loan Fraud

I hate these advanced-fee loan scammers. For the past year, there has been a dramatic increase in this particular type of loan fraud. Unfortunately, I haven't seen any law enforcement action to stop it and Chris Hansen from Dateline's "To catch an ID thief" hasn't returned my messages.

Advanced-fee loan scams are pretty simple. Basically, a fraudster posing as a lender contacts a person and offers them a loan. We think they are using spyware in some occasions to target people who have recently applied for loans and some have official looking loan applications set up online as well. The catch is that they require the "borrower" to wire hundreds or thousands of dollars to Canada under the guise of a downpayment or insurance expense. When the customer sends their money, they never hear from the fake lender again.

A lot of victims have contacted our team looking for help in reporting or undoing the crime. And they've sent us copies of the seemingly-official letters, loan applications and contracts. In the past, the thieves say they are from a made-up company like FairView Financial, Longway Financial, Royal Oak Financial or  Kaitland Insurance Group.

But recently the scammers have been saying that they are from established, authentic banks. Here's one case we received by email this week:

I received a call from a Donald White. He said he is from Lending Tree and that I would have to pay the first month and last month payment in order to receive a loan. Is this true? They are asking for $250 sent by Western Union.

This is definitely not true. Lenders will never ask you to send this sort of money before getting a loan and they certainly will never ask you to wire those funds via Western Union. You can read more about advanced-fee loan scams online.

If you are contacted by a lender asking you to send money in exchange for a loan, DON'T DO IT! Instead, immediately report your case to the Federal Trade Commission, Consumer Affairs and Phone Busters in Canada (usually where the funds are sent). You may also want to share your story with your political representatives, state attorney general, local news media, friends and family.