Subprime, Foreclosures and Second Chances

Home foreclosures are up dramatically across the country as part of the subprime fallout, but has spiked especially high in certain areas (see my post on subprime data and heat maps). If you are one of these people who is getting close to foreclosure and wondering what to do, Clark Howard (Clark Howard - Wikipedia) is suggesting that you call your lender and try to work out a deal. He reporting that to avoid foreclosures some lenders have recently began agreeing to extend loans to 40 years. While not a huge amount of relief (usually about 5%) it may be enough to help you ride things out for a little bit. Clark is saying that foreclosures rates have risen astronomically and are up 1,100% in Ventura Co. California, 900% in Orange Co., and 700% in most other Southern California counties and speculative areas in the southwest. Knowing that your lender likely has a lot of other people in the same situation might give you a little big of leverage when negotiating.

Links
Clark Howard - Apr 17, 2007 Foreclosures Up

Subprime Shakeout and Where it is Happening

The fallout from subprime lending defaults and other risky lending ventures made big news a few weeks ago, but now we are starting to get a clearer picture of the extent of the damage. Some resourceful bloggers have put the data into graphical form. The data floating around out there shows where the most subprime loans were made and also the locations where most are now in foreclosure.

For the most part the data isn't earth-shattering, because it seems that the most subprime loans were made around the major metro areas. I would guess this is because there are typically very wealth and poor people in these areas (or maybe just people in general). My theory is then that there were plenty of people buying more house than they could afford or investment property and also those who probably shouldn't have been offered a loan in the first place. However, that doesn't seem to always be the case if the maps are any indication. I'm not really sure what to make of these, but here they are...

Links
Dinocrat has some nice maps of subprime lending and subprime foreclosures

The Big Picture has a state by state subprime heat map that shows which states have the most subprime loans out there.

Subprime: The Business Falling Faster Than Britney Spear's Career

Subprime lending has received a considerable amount of attention from the major media lately. While I think that some of the negative attention is deserved, like everything the media needs a scandalous story and evil character to go after in stories. These lenders aren't without fault, but people are looking past the real issue.

Land contracts with balloon payments have been around for years in the lending biz. While I think excessively large increasing payments are ethically questionable. The biggest problems are 1) the lack of basic financial skills we possess as Americans, 2) people borrowing beyond their means and buying more house than they need, 3) eager lenders with relaxed lending standards.

Cheap, easy to attain financing is a great thing and one of the keys to people living the "American Dream." The problem recently has been that companies have extended this financing to people who were buying "investment property" or homes that their cash flow would not support. While the economy was growing fast and property values growing faster this generally wasn't an issue. As housing inventory increased the problems began. The subprime lenders had a problem in two respects first many people receiving loans were less than qualified and as the housing market turned and payments increased they were on the hook for payments they couldn't afford.

So why don't I think the problems going on now aren't the fault of lenders?

• Whether at subprime rates or market rates, unqualified people will receive loans -- they may just pay extra for the risk associated.
  
  
• Basic finance skills aren't taught in the U.S. Schools have a vested interest in teaching for tests which determines their funding. The vast majority of U.S. households are buried in "Bad Debt" with no signs of changing soon. Teaching fiscal responsibility needs to start at an early age. Americans do bestow the glory on those who take risks, but there are many more risk takers to fail than succeed.
  
  
• People need to educate themselves. There are a slew of resources online, some better than others, they can help you learn about any number of topics. Personal finance is no different. Banks are required to disclose in plain English the payments and interest rate of a loan. If you are taking out a loan and can't determine if the monthly payments outpace your monthly revenues you need to seek assistance or not take out the loan.

There are always cases of predatory lending companies, but I'm talking merely about companies that lend to borderline individuals. Not those that make loans to people who are clearly incapable of ever repaying. I am also not trying to imply that bad things don't happen to good people. Real life happens and people can lose a job, fall into bad health, or fall on hard times. I think people need to be accountable for their own actions. Too often in the society we live in people are quick to point the finger rather than look in the mirror.

What do you think? Am I way off base?

Micro Loans: Making a Big Difference with a Little Money

It's hard enough to get a loan in the United States if your credit is less than perfect. People in developing countries face a steep uphill battle because money is tight for everyone. Micro loans are an idea that has gained some traction of late. I love the idea of helping entrepreneurs out especially since they create so many jobs in this country. Whether it is the guys at Google, Intel, or eBay, many famous American companies were founded by immigrants.

While micro loans aren't a good investment as far as monetary return, they may pay for themselves in feel-good value. The idea is simple, you loan a small amount of money (as little as $25) to someone and other people do too. A micro loan is less than $1,000 typically and made up of many very small donors. There are sites that allow average Joe's from the U.S. who are up to their eyeballs in credit card debt accept micro loans, but I prefer the international ones. Why? Well, giving someone $25 toward the $400 they need to start a coffee, banana, or clothing business has bigger bang-for-your-buck than the same would for a person over in the states. Additionally, credit is (relatively) cheap in the states and companies are flush with cash willing to throw it at anyone - especially those people who know how to use it the least.

Anyways, I was looking over a site last night called Kiva.org that matches up people in developing countries with investors looking to PayPal at least $25 to their venture. There are bio's of everyone who is looking for a loan and they have local people on the ground that direct funds and make sure you get updates on the status of the business. They site claims that right now there is a 100% payback rate, but these loans are NOT guaranteed obviously and will not pay you interest. So, if you are looking to make money look elsewhere. The site charges recipients 2% interest to cover transaction costs like the website, local lenders, PayPal fees, and keeps the recipients honest.

I'm thinking about putting in $25 since I don't have much excess in the budget. If it ends up as a loss I can weather losing $25. Hmm, the guy looking to start a video game hangout for kids in Nicaragua or the woman who is looking to buy organic fertilizers in the Samoa to grow fruit. If anyone has experience using Kiva or other sites let me know, I'd like to hear what your experience was like.