Bankrupting the Common People

Dow Jones Largest Fall Since April of 2009: Current Rally Based on V-Shaped Recovery Hopes and Sustained Spending; Credit Card Mail Offers Fall from 2.1 billion in Q3 of 2006 to 391 million in Q3 of 2009

October 31, 2009

mybudget360 - The Dow Jones Industrial Average falling 249 points on Friday was a significant turning point in this rally because it came on the back of a 200 point jump just the subsequent day. On Thursday the GDP numbers were released showing a strong 3.5 percent jump. Yet digging into the data, 1.6 percent of this growth was based on front loading auto sales (the 30 year average for the auto sector each quarter is between .1 and .2 percent) and massive government spending. Yet that is what stimulus is for. On Friday however, consumer spending and income fell leading to the reality that without the government, the average American is tapped out and is unable to juice up those credit cards anymore...

How the Average U.S. Consumer Spends Their Paycheck

Click on image to enlarge it (from Visual Economics, July 8, 2009).

Editor's Note: Why is the government focusing on health care reform when housing (34%), transportation (18%), food (12%), and household expenses [utilities, fuels, public services, operation, equipment and supplies] (14%) are higher. Healthcare is 5.7% of U.S. consumer expenditures; Americans spend just about the same on eating out (5.4%) and entertainment (5.4%).

One in 6 Americans Lives in Poverty, According to Revised Formula

October 20, 2009

Associated Press - The level of poverty in America is even worse than first believed.

A revised formula for calculating medical costs and geographic variations show that approximately 47.4 million Americans last year lived in poverty, 7 million more than the government's official figure.

The disparity occurs because of differing formulas the Census Bureau and the National Academy of Sciences use for calculating the poverty rate.

The NAS formula shows the poverty rate to be at 15.8 percent, or nearly 1 in 6 Americans, according to calculations released this week. That's higher than the 13.2 percent, or 39.8 million, figure made available recently under the original government formula.

That measure, created in 1955, does not factor in rising medical care, transportation, child care or geographical variations in living costs. Nor does it consider non-cash government aid when calculating income. As a result, official figures released last month by Census may have overlooked millions of poor people, many of them 65 and older.

According to the revised NAS formula:

--About 18.7 percent of Americans 65 and older, or nearly 7.1 million, are in poverty compared to 9.7 percent, or 3.7 million, under the traditional measure. That's due to out-of-pocket expenses from rising Medicare premiums, deductibles and a coverage gap in the prescription drug benefit.

--About 14.3 percent of people 18 to 64, or 27 million, are in poverty, compared to 11.7 percent under the traditional measure. Many of the additional poor are low-income, working people with transportation and child-care costs.

--Child poverty is lower, at about 17.9 percent, or roughly 13.3 million, compared to 19 percent under the traditional measure. That's because single mothers and their children disproportionately receive non-cash aid such as food stamps.

--Poverty rates were higher for non-Hispanic whites (11 percent), Asians (17 percent) and Hispanics (29 percent) when compared to the traditional measure. For blacks, poverty remained flat at 24.7 percent, due to the cushioning effect of non-cash aid.

--The Northeast and West saw bigger jumps in poverty, due largely to cities with higher costs of living such as New York, Boston, Los Angeles and San Francisco...

Latest Bank Fee is for Paying Off Credit Card on Time Every Month

October 23, 2009

USA TODAY - You floss regularly, yield to oncoming traffic and use your credit cards judiciously, dutifully paying off your balance every month.

You may believe that your exemplary behavior shields you from unexpected credit card fees. Sadly, that is no longer the case.

Starting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected.

Citigroup, meanwhile, has started charging annual fees to card holders who don't put more than a specific amount on their cards, typically $2,400 a year. Other banks are charging inactivity fees if customers don't use their credit cards during a specific period of time. You heard that right: You could be spanked for staying out of debt.

These fees are the credit card industry's response to credit card legislation that will, among other things, restrict credit card issuers' ability to raise interest rates on existing balances. Credit card issuers are looking for ways to raise income before the new rules take effect in February. During the first quarter, 27% of credit card offers included annual fees, up from 18% a year earlier, according to Synovate Mail Monitor, a credit card direct-mail tracking service.

Curtis Arnold, founder of CardRatings.com, says he expected credit card issuers to raise annual fees after the legislation was enacted. What he didn't expect, he says, "was that good customers were going to be hit."

Fortunately, if you've paid off your balance on time every month, you probably have a good credit score. And when you have good credit, you have more choices.

What to do if your card issuer starts charging an annual fee — or increases the fee you're already paying:

• Call and complain. Check your credit score first to make sure you're on solid ground, says Adam Levin, founder of Credit.com, a consumer website. If you have a good score and you've been a good customer, the lender may be willing to waive the fee to keep your business.

• Weigh the benefits of rewards against the annual fee. The days when you could get a rewards card with no annual fee are numbered, Arnold says. If your rewards card charges a fee, you'll need to figure out whether the value of the rewards exceeds the fee.

That's not always easy to do, particularly with cards that give you airline miles, says Chris Fichera, associate editor for Consumer Reports. Rewards miles often come with restrictions and expiration dates, making it difficult to figure out how much they're worth, he says.

"A lot of airline cards are not the best deal unless you can combine them with a frequent-flier plan," Fichera adds.

If you're not a frequent flier, Fichera says, you're probably better off using a card that gives you cash back. As long as you can estimate how much you spend, it's easy to figure out whether you'll get enough cash back to justify the annual fee.

• Leave. If your card issuer won't waive the fee, you'll have a choice: Pay the annoying fee or close your account. Unfortunately, this decision isn't as clear-cut as it sounds, because closing an account could hurt your credit score.

One of the factors used to calculate your credit score is what's known as the "credit utilization ratio," which is based on the amount of credit you have outstanding as a percentage of your total available credit. When you close a credit card account, the amount of your total available credit shrinks, which could lead to a higher utilization rate. This ratio accounts for 30% of your credit score.

In addition, closing an account you've owned a long time could affect your credit history, another factor used to calculate your score, Fichera says.

Still, if you aren't carrying balances on your other accounts and the card is relatively new, closing your account is worth considering. Even now, there are good deals out there, particularly for card holders with good credit, Arnold says. For example, the Fidelity Rewards American Express card pays 2% of cash back to a Fidelity account, with no limits on cash rewards and no annual fee.

If you don't care about rewards and just want a credit card that doesn't charge an annual fee, consider applying for a card through a credit union. Many credit union cards charge no annual fee and offer below-average interest rates. Associations, such as the USAA, which provides products and services for military personnel and their families, also offer good deals on credit cards, according to Consumer Reports.

One Industry That's Booming: Debt Collection

October 15, 2009

McClatchy Newspapers - ...Across the country, dozens of established collection agencies are expanding their operations and hiring collectors, managers and support staff to keep up with the rising tide of bad debt due to massive job losses.

As real estate values fall, homeowners can no longer tap their home equity to pay down debt. So antsy creditors are farming out more problem accounts to collectors after declaring them as charge-offs or losses.

With billions of dollars outstanding on millions of past due accounts, creditors want their money now and collection agencies with a track record of success are cashing in.

"As banks scramble to bring in money, they're going to go with the companies they feel most safe with," said Patrick Lunsford, the senior editor at InsideARM.com, which chronicles the accounts receivable industry. "They're not going to spend a lot of time trying out new collection agencies, so companies with the strongest business relationships are getting the work."

Last week, Financial Management Systems opened a 350-person call center in Rockford, Ill. Thirty-four people are already employed, and 100 will be on board by year's end.

Last month, Windham Professionals announced plans to add 140 employees to its 60-person operation in East Aurora, N.Y.

In Texarkana, Ark., West Asset Management recently added 100 new customer service employees to contact homeowners on the verge of foreclosure. Premiere Credit of North America just opened a second operations center in Indianapolis and began a $4 million expansion of its headquarters there.

Premiere, which specializes in student loan collections and government debt from traffic tickets to back taxes, bumped its workforce from 250 in January to 361 in August. It expects to employ more than 500 people in a few years.

The extra work has been a mixed blessing for the industry. There's more opportunity, but recovery rates are down because it's harder to collect during a recession when people don't have as much money.

"So it becomes a very tight management drill where agencies have to get enough collectors to work the accounts but, at the same time, to remain profitable, they have to bring more money in," Lunsford said...

For consumers, one benefit of the troubled economy is that more creditors are willing to accept payment plan arrangements and debt settlements for a portion of outstanding account balances.

"They figure they're better off getting something than nothing," Rapp explained. "So we try to be more accommodating on setting up payment plans that we tended to stay away from when the economy was a little better."

Reverse Mortgages Ripe for Abuse, Consumer Group Says

October 6, 2009

McClatchy Newspapers - Consumer advocates say a growing number of older homeowners and a new crop of eager lenders could steer the reverse mortgage industry down the same financial course that toppled the subprime mortgage market and left taxpayers footing the bill.

In order to avoid a repeat occurrence, a new report by the National Consumer Law Center urges Congress to enact new consumer protections to curb shady marketing tactics, deceptive advertising and other potential abuses in the popular reverse mortgage program.

Some of the problems include television advertisements that market the loans as a "government benefit" and financial incentives for loan processors known as "yield spread premiums."

"These are financial kickbacks that make loans more profitable for lenders and loan brokers, but more expensive for borrowers," Tara Twomey, the NCLC attorney who authored the report, said Tuesday.

In addition to banning these practices and requiring better data collection by lenders, the report also calls for a new standard that requires reverse mortgage professionals not to harm the financial interest of elderly borrowers.

"If these systemic problems in the reverse mortgage market are not addressed, this market could be another financial fiasco," Twomey said.

Homeowners who are 62 and older can use reverse mortgages to borrow against their home equity. The mortgages have become popular because the money doesn't have to be repaid until the home is sold or the borrower dies or permanently moves out. The extra cash can help seniors pay for medical expenses, home improvements or simply to live more comfortably.

Ninety percent of reverse mortgage loans are issued through the federally insured Home Equity Conversion Mortgage program, which issued only 157 loans in 1990 and more than 112,000 in fiscal 2008.

Future growth is imminent, said Sen. Claire McCaskill, D-Mo., because 10,000 people reach age 62 each day. And more than 12 million people 65 and older own their homes with no mortgage debt, representing nearly $4 trillion in home equity.

With nearly 78 million baby boomers born before 1964 fueling future growth in the coming decades, the reverse mortgage industry has been attracting many new lenders. These include some of the nation's largest banks, whose profits have been drying in the recession.

But of the 2,700 reverse mortgage lenders nationwide, 1,500 made their first loan in 2008, McCaskill said. That sudden, rapid growth, experts say, also has attracted shady loan professionals who once worked in the subprime mortgage industry.

Earlier this year at a field hearing held by McCaskill, a special agent with the Department of Housing and Urban Development's Office of Inspector General testified that fraud likewise had found its way into the reverse mortgage program. He said inflated home appraisals, which increase lender profits, have been found. And in some cases, friends, family and neighbors have cashed loan payment checks after borrowers have died.

Fraud and declining home values could end up costing taxpayers because reverse mortgages are insured by the federal government. When a borrower terminates the loan because of death or some other reason, the Federal Housing Authority insurance fund would be on the hook if the loan balance exceeds the value of the properties.

HUD insures more than $105 billion in Home Equity Conversion Mortgage loans. In addition, the Government National Mortgage Association, or Ginnie Mae, issued $700 million of Home Equity Conversion Mortgage mortgage-backed securities this year, but it's unclear what the securities are now worth because of falling home values...

Foreclosures Rise 5 Percent from Summer to Fall

October 15, 2009

The Associated Press - The number of households caught up in the foreclosure crisis rose more than 5 percent from summer to fall as a federal effort to assist struggling borrowers was overwhelmed by a flood of defaults among people who lost their jobs.

The foreclosure crisis affected nearly 938,000 properties in the July-September quarter, compared with about 890,000 in the prior three months, according to a report released Thursday by RealtyTrac Inc. That puts foreclosure-related filings on a pace to hit about 3.5 million this year, up from more than 2.3 million last year.

Unemployment is the main reason homeowners are falling into trouble. While the economy is likely out of recession, the unemployment rate - now at a 26-year high of 9.8 percent - isn't expected to peak until the middle of next year...

According to the RealtyTrac report, there were nearly 344,000 foreclosure-related filings last month, down 4 percent from a month earlier but still the third-highest month since the report started in early 2005.

It was the seventh-straight month in which more than 300,000 households receiving a foreclosure filing, which includes default notices and several other legal notices that homeowners receive before they finally lose their homes.

Banks repossessed nearly 88,000 homes in September, up from about 76,000 a month earlier.

On a state-by-state basis, Nevada had the nation's highest foreclosure rate in the July-September quarter. Arizona was No. 2, followed by California, Florida and Idaho. Rounding out the top 10 were Utah, Georgia, Michigan, Colorado and Illinois.

It's Official: No Social Security Increase

October 15, 2009

ABC News - The news had been dreaded by seniors for months -- and today the government made it official: for the first time since 1975, there will be no cost-of-living adjustment (or COLA) for Americans receiving Social Security checks next year.

There will be no cost of living increase for more than 50 million Social Security recipients next year, the first year without a raise since automatic adjustments were adopted in 1975.

Under the law, social security payments are supposed to increase anually if U.S. consumer prices increase. But over the last 12 months, prices have declined. Specifically, the CPI-W -- the price index upon which social security adjustments are based -- has dropped 1.7 percent since September, 2008.

Many, including President Obama and the AARP, are calling for Congress to approve a $250 stimulus payment to seniors and other groups, including veterans and those receiving disability benefits, to compensate for the lack of a COLA.

"This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis," Obama said.

A Second Great Depression Is Still Possible

October 11, 2009

Financial Times - ...With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.

Unfortunately, the car metaphor only partially captures current conditions as it assumes the braking process is smooth. Yet, there has already been a financial crisis and the real economy is now infected by a multiplier process causing lower spending, massive job loss, and business failures. That plus deleveraging creates the possibility of a downward spiral, which would constitute a depression.

Such a spiral is captured by the metaphor of the Titanic, which was thought to be unsinkable owing to its sequentially structured bulkheads. However, those bulkheads had no ceilings, and when the Titanic hit an iceberg that gashed its side, the front bulkheads filled with water and pulled down the bow. Water then rippled into the aft bulkheads, causing the ship to sink.

The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy’s stabilising mechanisms, which the economist Hyman Minsky termed “thwarting institutions”.

Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate the foreclosure problem.

States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector in contraction.

The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit...

Steep Losses Pose Crisis for Pensions

October 11, 2009

Washington Post - The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.

Within 15 years, public systems on average will have less than half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

After losing about $1 trillion in the markets, state and local governments are facing a devil's choice: Either slash retirement benefits or pursue high-return investments that come with high risk.

The urgent need for outsize returns by these vast public pension funds, which must hit high investment targets year after year to keep pace with rising retirement costs, is in turn fueling a renewed appetite for risk on Wall Street.

Before the crisis, many public pension funds had experimented with risky trading techniques or committed more of their money to hedge funds and other nontraditional firms, which in turn invested some of it in complex mortgage securities. When these melted down, pension funds got burned.

Now, facing an even bigger funding gap, some systems are investing in the same securities, betting that a rebound in their value will generate huge returns...

Some pension experts say the funding gap has become so great that no investment strategy can close it and that taxpayers will have to cover the massive bill.

The problem isn't limited to public pension funds; many corporate pension funds have lost so much ground that they are also pursuing riskier investments. And they, too, could end up a taxpayer burden if they cannot meet their obligations and are taken over by the federal Pension Benefit Guarantee Corp.

Public systems still have enough to meet their current obligations. If governments take no action, retirees could keep drawing full benefits for the foreseeable future even under the most pessimistic projections.

But already, some funds are seeking to trim benefits to conserve money. Some governments have also proposed increasing the amount of public money paid each year into the funds. In practice, however, some political leaders have begun doing the opposite -- cutting annual contributions to pension funds -- as a way of balancing state and local budgets buffeted in the recession by falling tax revenue and rising costs...

Oil Hits 2009 High, Holds Above $75

October 14, 2009

CNNMoney - Oil prices surged above $75 a barrel Wednesday for the first time this year as the U.S. dollar remained weak and investors bet that global energy demand is poised to recover.

Crude for November delivery rose $1.03, or 1.39%, and settled at $75.18 a barrel, after climbing to a high of $75.40 a barrel earlier in the session. The last time oil prices ended trading above $75 was exactly one year ago when they settled at $78.63.

Wednesday was the first time oil rose above $75 a barrel in 2009 and comes after prices traded between $65 and $75 a barrel since May.

"The markets continue to get positive indications about the economy," said John Kilduff, an energy analyst at MF Global in New York. "We've broken out of the $65-$75 range and we're clearly headed for $80 a barrel."

Wednesday's advance came as the dollar slumped to a 14-month low on speculation that U.S. interest rates will remain low for a longer-than-expected time...