Party Now, Pay Later

If America's negative savings rate, rising foreclsoures, and ballooning household credit card debt weren't enough reasons to worry about how we're going to pay for everything and everyone in the future, now comes the story on TheStreet.com about company issued 401(k) debit cards that allow people to borrow money against their retirement plan.

Wait, let me get this straight ... the idea of a 401(k) is to incentivize people to set money aside for retirement, but now we're going to let them borrow against their 401(k) to pay for vacations, iPhones and plasma TVs? Sounds like a great plan to me!

As expected, a few party poopers aren't that keen on the idea.

"By making it a debit card, you make it sound like the loan that you take on the 401(k) for everyday purchases," says Jean Setzfand, AARP's Director of Financial Security. "In our opinion, a 401(k) loan should only be taken as a loan of last resort, for a dire medical situation, or if there's no other way to get a home loan, not to go shopping."

Lighten up Jean! So what if we end up spending all of the money we had set aside for retirement? I'm sure social security will take care of all of us when we hit retirement age. For now, I say, "Party on!"

People Smarter than Us Disect the Sub-prime Crisis

I came across this article on the Freakonomics blog about Carmen Reinhart and Kenneth Rogoff, two economists from the National Bureau of Economic Research, who are working on a paper entitled, Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison.

The authors have some interesting things to say about the current credit crunch and how it mirrors other economic downturns worldwide over the past 60 years. Surprisingly, our current problems aren't that much different than any other crisis since WW2 (basically, had you been studying Sweden's 1991 housing crash you could've seen our mortgage meltdown coming a mile away). As they explain, with a little help from Russia's preeminent novelist:

Tolstoy famously begins his classic novel Anna Karenina with "Every happy family is alike, but every unhappy family is unhappy in their own way." While each financial crisis no doubt is distinct, they also share striking similarities, in the run-up of asset prices, in debt accumulation, in growth patterns, and in current account deficits. The majority of historical crises are preceded by financial liberalization, as documented in Kaminsky and Reinhart (1999). While in the case of the United States, there has been no striking de jure liberalization, there certainly has been a de facto liberalization. New unregulated, or lightly regulated, financial entities have come to play a much larger role in the financial system, undoubtedly enhancing stability against some kinds of shocks, but possibly increasing vulnerabilities against others.

I'd suggest downloading the full paper here. It's only about 15 pages and even includes several color coded charts and graphs,.

For those of you who don't feel like going through the effort and just want to know when they predict this thing will all be over, the paper offers the following:

At this juncture, the book is still open on the how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in (real per capita) output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. These more catastrophic cases, of course, mark the boundary that policymakers particularly want to avoid.

Well said.

Debt is the New Mortgage

Last year, 86,000 jobs were lost nationwide due to the credit crunch, mortgage meltdown, sub-prime slime (or whatever you want to call it).

Where did everyone go?

A number of former brokers have gone into debt settlement business. With homeowners unable to tap into their home equity, more and more troubled consumers are turning to debt settlement firms to reduce their debt by negotiating with creditors on their behalf.

The OC Register recently profiled Ray Kikavousi, an ex-broker who was laid off from former high-flyer Quick Loan Funding. Unable to find a job in the lending industry, he launched his own debt settlement firm. As the article described:

"Debt is something that everybody has, including myself, so it seemed like a new and upcoming business," he said.

He and a partner, Charles Park, have invested about $50,000 to launch their company, People Debt, which has an office in Irvine. Kikavousi said he cashed in a 401-k, borrowed from friends and family and took out a bank loan to start the business.

In a sense, he said, he's trying to make lemonade from lemons. During the housing boom, quite a few borrowers overextended themselves. Now that the bubble has burst, why not try to earn a living by helping borrowers pare their debts?

The fees aren't nearly as lucrative as what he enjoyed in his mortgage days, but Kikavousi says he wants to build a business that will last.

Has anyone else out there gone into debt settlement? How is it working for you? We'd love to hear your feedback.

Also, please visit the debt settlement leads section of BigMortgageLeads for information on getting fresh, real-time debt settlement leads to help drive your business.

Now get out there and close more loan ... or, more debt settlements! :)

Another Refi Boom?

After a debate that stretched out longer than anticipated, the Senate today approved the much ballyhooed $151 billion economic stimulus bill. Final congressional approval should come shortly, with President Bush expected to sign the bill into law in the coming weeks.

In addition to providing the well publicized tax rebates for the majority of Americans, the bill also changes the guidelines on conventional mortgages. As Bloomberg News explains:

"Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, will be allowed to buy loans worth as much as $729,750 in expensive markets, an increase over the current $417,000 loan limit, a move that could help struggling homeowners to refinance large mortgages at a lower interest rate. "

How will this affect mortgage lenders? With conventional rates about a point less than jumbos, homeowners who were unable to get conventional loans before the change will obviously rush to refinance. But are lenders equipped to handle the demand? With the dissolution of major lenders, layoffs at big banks, and a great deal of brokers exiting the industry, there may not be enough mortgage professionals to go around.

For example, during the 24 hour rate-inspired refi boom we saw after the last cut, banks and brokers reported being overwhelmed. The Los Angeles Times reported:

"Homeowners deluged mortgage brokers with calls [on January 23], hoping to take advantage of sharply lower interest rates to refinance into cheaper loans. Countrywide Financial Corp., the nation's biggest mortgage lender, said call volume jumped by at least 50% over last week. Independent brokers such as John West of Orange County also said their phones didn't stop
ringing."

The boost in the conventional loan amount may be a great opportunity for smaller shops and brokers, especially in states like California, to staff up in order to help out prime borrowers refinancing into conventional loans. Is it possible that this could be just what brokers need to get back on track? Stay tuned.