Funny Money Friday: Lost Mortgage Bailout Proposals

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.

Earlier this morning, President Bush announced a plan to help aid Americans struggling with expensive adjustable rate mortgages. Up to 80,000 borrowers would qualify for a special refinance program despite making late payments on their current mortgages. It's unclear exactly how this plan will work; our team is working hard to investigate the details.

General consensus right now predicts that this aid plan will be a mere drop in the bucket. An estimated 2 million mortgage are said to be at risk for foreclosure. At best, this plan would only assist 4% of the borrowers in trouble.

While we wait for more details to emerge, let's speculate wildly about some of the other aid plans that might have been proposed during the early draft stages. It is still Funny Money Friday after all:

• Free $200 subscriptions to ForSaleByOwner.com all around.
• Assign Miss South Carolina as Foreclosure Czar.
• Air drops of "stop foreclosure" books over Florida, Sacramento and Los Vegas.
• Sell US real estate market to China. Half off!
  
• Generating affordable renewable energy by harnessing Jim Cramer's skyrocketing blood pressure.
• 0% interest rates for everyone! What could possibly go wrong?

Feel free to add your own lost bailout ideas in the comments section below.  Have a great Labor Day weekend!

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Are You Prepared for Another Hurricane Katrina?

It's been two years since Hurricane Katrina devastated the gulf coast. New Orleans and its neighbors are still struggling to rebuild. A third of New Orleans resident's haven't yet returned home. Many of those who have returned are still in FEMA trailers.Thousands more were forced in to bankruptcy.

If a major hurricane, earthquake or other disaster hit your area today would you be prepared?

Along with emergency water, flashlights, food and medical supplies, it's important to have a financial kit on hand. This kit should include:

• One or more credit card with a high limit. Having access to credit can help you get hotel rooms or other expensive items during a crisis.
• Emergency savings account. Enough cash to cover your mortgage payment and other living expenses for a few months.
• Creditor contacts. A simple list of contact numbers for your banks, investment companies, credit card issuers and lenders. In a disaster, it's important to communicate with your creditors. They often have relief programs to help.
• Copies of insurance documents. Keep copies of home, auto and other insurance policies with your kit along with some photo records.
• $200 or more in cash. Getting to an ATM in an crisis can be impossible. Having a little cash on hand will help cover unexpected expenses.

A few photocopies and a quick trip to the ATM is really all you need to get started with your emergency financial kit. Go today at lunch!

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Financial e-Rumors: Check Before You Click Send

They show up in my mailbox from well-meaning friends: those emails warning me about the latest danger to my health money or the environment (and some political shenanigans as well).

I don't mean to embarrass the senders (really!), but nine times out of ten (maybe it's ten out of ten) I end up telling them they have been misled by another email rumor that's not true.

I'll prove it by sending them a link to the truth about the email at TruthorFiction.com or Snopes.com.

Here are some financial emails that are still circulating. All are false except one. Do you know which one is true?

1. Hotel key cards contain your personal information and put you at risk for identity theft.
2. Entering your PIN backwards at an ATM will summon police
3. Bank of America has given credit cards to illegal aliens by not requiring a Social Security number.
4. Requesting a cookie recipe results in a $250 non-refundable credit card charge.
5. A credit card bill for $0 creates enormous headaches for the cardholder and his bank.
6. Your cell phone number is about to be released to telemarketers

I am going to make you go to the TruthorFiction.com website to check the answers, but I've made it easy for you by including the links. Go there so you can bookmark the site. Next time, before you forward one of these mass emails, check it out first.

By the way, Creditblogger Emily Davidson quashed one of these e-rumors about pictures of credit cards being taken with a cell phone. You can read about her experiment here.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

Who Really Gets Rewarded by Rewards Cards?

No matter how you feel about the credit card industry, you have to give them credit for being extremely smart. They simply don't do things that don't make them big money.

This is especially true when it comes to rewards cards. Cardholders usually feel like they're getting such a great deal when they earn airline mileage rewards, bonus points or cash back for their credit card spending. But these rewards serve a distinct revenue purpose for credit card issuers.

The July issue of The Nilson Report included an article about Visa's sophisticated use of rewards cards. Visa Signature is using analytical models first developed for fraud detection to track spending and assign targeted rewards to over 74 million cardholders. Someone who spends $200 a month at Golfsmith might be rewarded with premium tee times the next month. Someone who goes to Whole Foods everyday might be rewarded with a Sur La Table gift card.

The payoff for these sophisticated rewards? A huge increase in credit card spending:

Average Monthly Spending By Credit Card Type
$465 - Traditional No Rewards Card
$890 - Traditional Rewards Card
$2,214 - Visa Signature (Targeted) Rewards Card

The rationale behind credit card rewards programs are pretty clear! As the article says "The higher the rewards level, the greater the monthly spending." That's great for the credit card issuer; they earn merchant fees even if you pay the balance off in full each month.

Next time you reach for your rewards card, remember who is really being rewarded by your spending.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit scores, loans and personal finance as the CreditBloggers.com moderator.

Free Travel Accident Insurance- Courtesy of your Credit Card

Your credit card probably offers several free benefits that you may not even be aware of.  One of these benefits is travel accident insurance. Technically known as accidental death and dismemberment insurance, this can prove to be very valuable coverage, and the price is sure right, FREE! Unfortunately, it’s of the sort that no one ever wants to need, so this perk doesn’t get the attention it deserves.

While the details vary (of course!), chances are you already have a credit card that provides somewhere between $100,000 and $1 million in life insurance when you use that card to charge an airplane flight, cruise, train ride, or bus trip (collectively referred to as common carriers). So the next time you’re booking a trip, choose your card carefully!

Talk to a customer service rep if you are confused about the amount of coverage. If you’ll be traveling with the family, find out if each person will get the same travel insurance if you charge the tickets at the same time, to the same card. If not, you may be better off booking each ticket separately. 

While you are on the phone with your card company, be sure to ask about any other free travel related benefits (or any other free benefit for that matter) that you card might offer. Bon voyage!

Are there free benefits that your card(s) offer that you like or dislike? Please let us know!

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

Bad Credit is Worse than Terrorism?

Bad credit is the most serious immediate threat to the economy according to a recent report by the National Association of Business Economics. The country's economists feel that bad credit - especially loan defaults and excessive debt - was a larger near-term concern than terrorism, gas prices, inflation and government spending.

This shift happened very quickly. In March, the study showed that 35% of economists felt that terrorism was the biggest risk. Now only 20% said it was their biggest worry:

"Financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy," said Carl Tannenbaum, president of NABE and the chief economist at LaSalle Bank/ABN Amro.

Economists did report that they expect the credit crisis to be fairly short lived, under 5 years. Medical care costs and an aging population were cited as the greatest long-term risks. Click here to read the complete report from the Associated Press.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit scores, loans and personal finance as the CreditBloggers.com moderator.

Anomalies

An anomaly is defined as:

"a deviation from the common rule, type, arrangement, or form."

The anomaly in question is the risk premium that the market assigned to the yield on junk mortgages.  Frankly, this wasn't just a problem with the junk mortgage market. It applied all across the spectrum of securities. The world has been awash with money seeking higher yields and the market just assigned the wrong numbers to risk.

Back when junk corporate bonds were all the rage – remember Michael Milkin? – low rated bonds might have had a yield of 13% when the best corporations paid 7% for their money.  The difference was the premium that the market assigned to the higher potential of defaults on the low rated securities.

Mr. Milkin sold those bonds because he said that the real risk was less than the market said it would be.  Although there were some defaults and losses, if an investor bought enough different issues to spread the risk, he would have made out handsomely compared with his more conservative counterparts.

Theoretically, this should have happened with junk mortgages too.  If the best borrowers were paying 6% for their loans, the risky borrowers should have been paying, say, 10% or maybe even higher. That extra 4% was all risk premium. 

But what happened was that the junk lenders were putting people into loans that might eventually yield 8%. You can see that the market was saying that the risk premium didn't have to be 4%. A 2% premium was OK.  That departure from reality was the anomaly I’m discussing.

What was even worse for investors is that the loans carried a lower rate – I prefer the term sucker rate over teaser rate – one substantially less than the final rate, maybe even less than the 6% rate being paid by the best borrowers.  They had to do this because they would have had a tough time selling that 8% yields to borrowers without disguising them in some way.  Note that the investor got a lower initial yield too. The higher return didn't kick in until the loans reset at the end of 2 or 3 years.  That reset issue is one cause of the current problems.

I will tell you bluntly that the lenders or mortgage brokers told the borrowers not to worry, they would just refinance into a new loan just before the loans reset. They wanted to make another commission so they really did plan on doing it, that is until the melt-down.

So if you are following this, it turns out the junk lenders created loan programs that promised the ultimate investor with higher yield, but the structure was such that the investor wasn't ever going to get the promised higher return. They'd get refinanced and paid off before that happened.  The investor would get to keep the loan during the higher yield period only if conditions were such that the borrowers couldn't refinance them, what we're seeing now. This is a Catch 22 involving billions and billions of dollars.

Of course, we know today that the effective yield should have been substantially higher than the yield that was actually being created by the junk lenders.  That's the opposite of what happened in the junk bond market.

And another strange part is that a lot of the investors' early yield was "eaten up" by paying the loan officers high commissions that were largely paid by the investor in the form of Yield Spread Premiums.

You have to admire the cunning salesmanship of the lenders and Wall Street to pull off a scam like this.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Funny Money Friday: Bad Investments

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.

None of us like to think about our investments losing money. We tend to view our mutual funds, 401(k) and home as being sure-fire money makers. But in our current tumultuous stock market, losses are becoming the realities.

Here's a little tongue-in-cheek investment lesson forwarded to me by a co-worker:

If you had purchased $1000.00 of Nortel stock one year ago, it would now be worth $49.00.

With Enron, you would have had $16.50 left of the original $1000.00.

With WorldCom, you would have had less than $5.00 left.

If you had purchased $1000 of Delta Air Lines stock you would have
$49.00 left.

But, if you had purchased $1,000.00 worth of beer one year ago, drank all the beer, then turned in the cans for the aluminum recycling REFUND, you would have had $214.00.

Based on the above, the best current investment advice is to drink heavily and recycle.

It's called the 401-Keg Plan.

Now that sounds like a strategy I could really research this weekend. Happy Friday!

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit scores, loans and personal finance as the CreditBloggers.com moderator.

Don't Waste Your Money on Piggybacking Services

When FICO announced that they planned to stop considering authorized user accounts in their credit scoring models, it seemed like we'd seen the last of the piggybacking industry. Many of these credit repair companies closed shop pretty fast, sites were pulled down across the web.

The FICO change was, in fact, designed specifically to put piggybackers out of business. Piggybacking is the practice of selling consumers with bad credit access to healthy, established credit card accounts. Because of a loophole in the credit system, someone with bad credit could buy into an account and see their credit increase fairly dramatically.

Unfortunately, millions of innocent consumers who had legitimately opened authorized user accounts will also be damaged by this FICO change when it starts in September. And FICO is not the only one paying attention to piggybackers. TransUnion's mortgage scoring division developed a way to "sniff" out piggybacked accounts and VantageScores have always ignored authorized user accounts.

However, it looks like there are a couple piggybackers who aren't ready to back down. In a press release today called "Credit Piggybacking Is Unsuccessfully Attacked," one piggybacking company touted that they were not being shut down by these changes to the credit industry:

Using a Robin Hood-like mentality, [company name redacted] is borrowing from the rich and lending to the poor and credit agencies are on a mission to destroy the tactic.

Credit repair has never seemed so noble! According to the release, the piggybacking company is continuing to sell their $600+ services with the rationale that the credit industry changes will take a while to implement. No matter that FICO, the largest credit scoring company in the US, is rolling out the change next month. And don't mind the fact that any improvements to your score gained through an authorized user account will be wiped out when the changes are implemented.

Do me a favor, don't sign up for a piggybacking service. Save your $600 and open a secured credit card in your own name. Establish your credit the right way and you won't have to worry about it in the future. Share your feedback in the comments section below!

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit scores, loans and personal finance as the CreditBloggers.com moderator.

KMart Gift Card Fee Refunds -- Too Late??

Kmart is getting a slap on the wrist from the Federal Trade Commission for hiding annoying gift card fees. In a settlement with the FTC, Kmart has agreed to reimburse "dormancy fees" for eligible consumers. You can find details on Kmart's website, but basically to get a refund you will have to give 1) your Kmart gift card identification number, 2) mailing address, and 3) phone number. If your card did have one of these fees assessed, you'll get a new gift card for the amount of the fees.

At issue were monthly "inactivity fees." It's not that these fees are illegal (though some states do ban dormancy fees or have disclosure requirements). Instead, the FTC found issue with the fact that the cards were marketed as "never expiring," yet a $2.10 fee would be assessed each month the card was not used. In case you don't want to do the math, over two years that adds up to $50.40 in fees.

The FTC says that many consumers didn't learn of the fees until they went to use their cards.

Unfortunately, I imagine most of these gift card holders no longer have their cards so they can request a refund. Would you have kept yours after you spent the remaining balance or finding out it was practically worthless? (The company stopped charging the dormancy fee March 1, 2006). Still, if you have an older KMart gift card still hanging around it's worth applying for the refund.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.