The Sub-Prime Mortgage Solution?

Now, if I can only find 6 roommates… President Bush spoke this morning about helping homeowners through the sub-prime mortgage situation by making it easier for some borrowers to refinance their failing sub-prime mortgage through the Federal Housing Administration (FHA) program, cutting down on predatory lending, and creating more transparency in the lending process.

As we’re currently in the process of having a new home built, this was welcome news. The recent sub-prime “crisis” actually did make me wonder about how many people would be buying homes, and if our homebuilder would be able to weather a downturn.

I do have some concerns about how this is going to affect the economy. I fully support helping out homeowners who were mislead into getting bad mortgages. If a lender mislead them into getting into something they could never have afforded without using some exotic loan mechanism and then not fully disclosing that, for instance, their loan payments would nearly double when their ARMs readjusted, then I believe those folks should get some help. Buying a home is no easy process. The mountains of paperwork can be confusing and overwhelming for people who aren’t prepared or don’t understand the process. They can even be confusing for those who do understand the process.

On the other hand I’m a little concerned about helping out those that maybe lied on their loan applications, or overstretched themselves expecting that the real-estate market would just continue in a never-ending increase in value. What kind of message does the government help send out here? Although this isn’t a bailout, it might still be sending the wrong message to those who got themselves in over their heads and may do so again. There is a cost to everything. Someone (the American taxpayers) will wind up footing the bill here.

The good news is that this isn’t a complete bailout. This seems to help a small number of people, and it’s targetted at those who need the most help. I think this is probably the right approach to resolving this issue.

Cutting down on predatory lending obviously sounds good. Who wants predatory lending practices? But what does this ultimately mean? Will any legislation that tries to cut down on predatory lending have an effect on lending in general?

For me, the big news is providing more transparency in the lending process. I haven’t seen any details on what this means yet, but it certainly sounds promising. I can only hope that something that will benefit us gets passed before we have to go through the process for our upcoming home. I’m very interested to hear more about what this will mean.

Read some more about the announcements at CNN Money. More information on the FHA program can be found at Bloomberg and at MoneyWatch .

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The Roundup – Willy Wonka Edition

Wanna go for a ride? It’s been a crazy week in the markets. With all the wild speculation and doomsday talk I wonder how many people are stocking up on diamonds and krugerrands. I feel like we have been pulled from a perfectly lovely candy-filled adventure and corralled onto that scary boat ride down the psychedelic tunnel. And Wonka’s insane singing is freaking everyone out along the way. If movies have taught me anything (and they have) we’ll all be back to eating everlasting gobstoppers soon enough.

If The Market Is Scaring You Now @ Money, Matter, and More Musings - Good article helping to keep things in perspective. Yes, the marketplace is volatile right now but it will all be ok. Time heals all wounds, right?

Seven Nifty Tactics Credit Card Companies Use To Get In Your Pocket And How To See Right Through Them @ The Simple Dollar - Trent looks at some of the different ways credit card companies are trying to appeal to folks as a new form of “personal expression”. The Enlightment Visa? C’mon! Interesting read.

How to Know When your Food is Actually Expired @ Finance is Personal - I’m not too proud to admit I’ve eaten mac n’ cheese that had a “use by” date 2 years expired. Tasted fine to me! But then again, how could a bright orange cheese-flavored powder and pasta ever taste bad?

Market’s Going to Drop by 1/3rd? Got Your Tinfoil Hat On? Good!

OK folks, do you have your tinfoil hat on? Are you ready for the impending doom of a stock market crash? Are the terrorists going to destroy the world markets and profit from our worldwide economic collapse?

If you don’t know what I’m talking about, that’s probably a good thing! You saved yourself a few painful weeks enduring some conspiracy theories about a massive trade in the options market. I think a lot of the discussion started at the The Ticker forums on August 1st. I didn’t hear about The Ticker until after I saw this post from at the Financial News and started hitting Google up for more information. The gist of the story is that a mystery trader has bet that the US stock markets, European stock markets, and Japanese stock markets are going to crash by over a third in value by September 21, 2007. I gotta tell you, seeing those headlines did worry me for a bit. Does somebody know something? Do I need to rethink some of my investments?

I started reading the forums to see what I could find out. People were speculating as to what the trades meant. On this and similar forums, I started hearing theories like :

The terrorists made a bunch of financial moves right before 9/11. They shorted both American Airlines and United Airlines. Maybe Osama invested these millions in the options market! This might be a sign of an impending attack! If the markets crash, this will turn the terrorists into billionaires!

Very scary idea. But then how would they collect their profits? I mean, it looks like some of the suspect investing profits (from shorting AA and UL) weren’t collected last time. I can’t imagine that the SEC wouldn’t be all over this one.

I continued reading through the forums to learn what I could from the folks there. The opinions were varied. There was some speculation that it was akin to a high-interest loan for a hedge fund (just performed in a bizarre way using options). Then maybe it was someone who really thought the market was going to crash. That got people speculating about the terrorists. Then I started hearing a whole new slew of conspiracy theories.

Here are just a few the theories that were thrown around :

Osama Bin Laden is rigging the stock market in preparation for a terrorist attack (Hrmmm)
Someone knows that a crash is going to happen (in the next 3 weeks!)
China is flexing it’s muscle and showing the US they mean business! (by destroying their own economy too?)
The US is about to announce NESARA – a little known law signed in secret that will reshape the world economy and the makeup of the US government (why are the aliens involved?)

Whew! Sounds like some major changes in the next 3 weeks! You can see why we’ve equipped Winston with a new tinfoil hat!

Seriously, while those things might be possible (although incredibly unlikely), I just wasn’t really buying it. Maybe someone was speculating on a crash, but it seemed near impossible to think that someone would risk so much money on something that seemed so very unlikely. There had to be a better reasoning behind this investment.

Then, after all that, CNBC chimed in. From the CNBC article :

Salamone of Schaeffer’s points out that the index options have been “put dominated over the last several months.” And the bets may have as much to do with hedging portfolios — basically an insurance policy you hope you don’t need — as much as outright speculation.

Maybe it isn’t so scary. Finally, today some great thoughts about what really may be behind all these trades at The Money Morning. They basically break it down to 4 theories :

A dividend capture strategy
A “covered call” play
China dumping the dollar
The “Dark Theory” – someone really believes the market is going down

No telling what the real case is (at least not yet). We have no idea who made the trades (at least not yet). And these options don’t mature til later in September (the 21st). The above strategies have a mix where the investor could be betting on the markets going up, or down, depending on what their strategy was. In any case, it’s sure had people talking and speculating.

Most of the possibilities are a little beyond my current financial skillset. I’m not an options player. But this article from Money Morning did give me some relief. At least the aliens aren’t likely to enact any major global economic changes soon (I hope)!

5 Myths That Can Hurt Your FICO Score

Raise your FICO score to help save your pennies Credit – it’s not just for credit cards. Credit plays a major role in determining your ability to borrow money, but it is used in many other places that you might not think of. For instance, some employers will check your credit history as a pre-requisite to your being hired. When you rent a home, most landlords will check your credit history to ensure you aren’t too much of a risk to rent to. And when you want to shop around for a better price on your insurance, you better make sure your score is up to snuff.

Do we really understand how our use (or abuse) of our credit can affect our FICO scores? Your FICO score is a vital indication of your “credit health” and that little number can make a huge difference (especially in today’s credit climate) in what you pay for borrowed money. It is in our best interest to keep our FICO scores as healthy as possible.

To help separate fact from fiction, let’s look at 5 FICO score myths that if followed could do more damage than good.

1. Close old accounts you aren’t using to boost your score.

Although it is true that having “too many” open accounts can hurt your score, by the time you have opened the accounts it’s too late. The act of opening too many accounts in a short time frame is the problem, and closing them will not improve your score. Especially not with the older cards – in fact it could do more damage.

How it can hurt you: Closing your oldest accounts will make your credit history seem shorter and the longer the history the better. FICO looks at the age of the oldest account, the newest account, and the average age of all your accounts when considering the length of your credit history. This history makes up 15% of your score. Also, if you close out these accounts you will be decreasing the amount of untapped credit you have, which in turn makes the debt you do have appear to be more sizable (this is reflected in the debt-to-credit ratio).

Keep the old accounts – make sure they don’t have any annual fees or costs associated with them and put the cards somewhere you won’t use them. If you still want to close accounts for other reasons, take out the youngest with the lowest credit limits. Just be aware it won’t increase your score.

2. Checking your credit report too often can hurt your score.

Often people are confused about what kind of credit check actually affects your score. Ordering your own credit report/score has no negative effect. It’s when you apply for new credit (e.g. a home/car loan or new credit card) when your score could take a hit.

How it can hurt you: If you aren’t checking your credit report you aren’t checking for inaccuracies. To keep your score at it’s highest you must check your report periodically to make sure the accounts and their information are correct. This is even more important now that identity theft is on the rise.

3. Large amounts of unused credit or high credit limits will lower your score.

Having high credit limits available on your cards is actually good, provided you don’t actually use that credit. Your debt-to-credit ratio, which is 30% of your FICO score, is the amount of revolving debt (credit card balances) in relation to the amount of available credit (credit limits). Credit Bureaus use this measurement as a way to judge your ability to manage the credit you have. You want this ratio under 30% if you can manage it.

Example: You have 3 open credit cards with credit limits of $4000, $2000, and $3000, equaling a total credit limit of $9000. You have $1500 on one card and $1000 on a second card, equaling a total credit card balance of $2500. You have used $2500 worth of your $9000 available credit, resulting in a debt-to-credit ratio of 28%. Only 28% of your available credit is being used at this time. The higher the percentage the more likely you could be considered overextended which hurts your score.

How it can hurt you: If you are intentionally keeping your credit limits low (I have a friend who would call and have her credit limit reduced if the credit card companies tried to increase it) you are hurting your debt-to-credit ratio by making your balances appear to be a larger chunk of your available credit. As your credit limit increases (or if your balances decrease) this ratio will lower which results in a more favorable score.

Using the example above, if one of your cards raised your credit limit by $1000 (with your balances remaining the same) your debt-to-credit ratio would drop from 28% to 25%. On the other hand, if you were to cancel the card with the $3000 credit limit without paying down on the other balances of $2500 to counteract the loss of credit limit, your new ratio would be 42%. Ouch!

4. You can get rid of unfavorable history by cancelling the card or paying off the balance.

One of my friends with a less-than-perfect credit history cancelled all her cards in the hopes they would be completely removed from the credit report. Not so. Your payment history makes up 35% of your FICO score and closing the accounts with detrimental histories will not make the negative information disappear. While paying the balance in full is a great move and can improve other areas affecting your score, it will not remove the black smudges on the payment history.

How it can hurt you: Late payments associated with that account won’t go away if you cancel the account. Closing accounts can hurt your debt-to-credit ratio (unless you pay down your other debt to compensate) and it can also affect your length of credit history if you are eliminating older accounts.

If the adverse information is inaccurate be sure to contest it. But if it is correctly reported the best bet is to pay the cards on-time, even if it is just the minimums. Use the card to start building a good solid history of paying on-time and eventually your score will improve.

5. Never using credit cards (or not having any credit cards) will raise your score.

Not having cards may help control your spending if available credit is too much of a temptation to splurge but it won’t help your score. Keep in mind that someone who has managed his credit responsibly will likely have a higher score than someone who has little to no history.

I have a relative that avoids credit cards. He buys everything outright and never carries a mortgage or car loan. Although this is ideal for avoiding interest it is not ideal in terms of building up a good credit history. His score is good but he wishes he was within “bragging rights” range. It is most likely the lack of history and active accounts affecting his score.

How it can hurt you: Having too little credit history can lower your score, and if you have no accounts older than 6 months you might not even get a score at all. They feel it is too little history on which to generate a score. If you have a long but less-than-stellar history and have decided to ditch the cards completely you are losing out on a chance to “redeem” yourself. FICO scores weigh the good and the bad and if you generate more good history your score will improve.

Avoiding paying interest is a great policy to have but that doesn’t mean you can’t build up a credit history. Only spend a small amount on a credit card (maybe charge gas on it) and be sure to pay the balance off every month in full and on-time. That way, you build a favorable credit history and still maintain a no-interest lifestyle.

The Roundup – New Kid On The Block Edition

NKOTB This morning, we were giddy with excitement over checking the website to see if anyone had visited it yet. It appears we got a hit! Excellent! Having just launched the site it sure feels good to see a foreign system show up in our analytics. Gives me warm fuzzies.

Too Many Books @ Frugal for Life - This article lists a number of ways that you can de-clutter by selling or giving away your used books. I looked into a few of these options to sell my books in the past but we decided donating to the library would the best option for us. The tax deduction and good karma will be worth more to us than the returns we would get from selling our dime-a-dozen paperbacks.

Why Do People Accept Wedding Gifts @ Money, Matter, and More Musings - Interesting article but as a newlywed I can’t say I agree with all of it. Gifts certainly shouldn’t be required – sort of like a wedding “entrance fee” – but asking guests to not bring gifts isn’t really kosher either. Many people give gifts out of sincere kindness rather than obligation and telling them that they can’t express their affection through a gift of their choosing, can steal their joy. In that way, NOT allowing gifts can be selfish. Interesting concept to think about – I enjoyed it.

From the Frugal Kitchen: How to make Bread-and-Butter Pickle Slices @ Get Rich Slowly - I love making homemade bread and butter pickles but I’ve never canned them before. They usually don’t last long enough to can! I think this would make a great gift.