Debt Advizor

There is a great article on Harvard Business Review highlighting the rise in peer-to-peer lending. It is well worth a read in full:

With consumer credit still tight, peer-to-peer lending is on the rise. Why? For one thing, human society naturally evolves to create pools of capital with which to fund ideas and absorb risk. Roman legionnaires insured one another by swearing to care for the families of comrades lost in battle. The creation of the shared stock corporation allowed for bigger and bigger risks to be taken. Whenever people come together to create a pool of capital, the potential for wealth creation blossoms. For another, peer-to-peer lending is cheaper than consumer credit. Lending Club’s rate for the best credit risks is 7.88%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less.

Why now? First, the internet and social networks enable peer-to-peer interaction on an unprecedented scale. Second, electronic mechanisms for assessing potential customers are emerging. Lending Club starts with traditional credit scoring and adds a proprietary assessment of customers’ reputations within their social networks. You may think of Facebook as fun and games, but important underwriting information is hidden in there for those who know how to look. So what? A profound secondary effect of the down market will be an increase in the availability of peer-to-peer finance and its convergence with traditional lending. My bet is that mainstream investors and banks will cherry-pick the best investors in Lending Club and other systems – reducing risk by tapping their superior credit-assessment capabilities – and fund them to grant more and bigger loans. Moreover, within five years every major bank will probably have its own peer-to-peer lending network.

To read more, which I thoroughly recommend, click here.

A variety of evidence has long pointed toward minorities accounting for a disproportionate fraction of the defaulted subprime mortgage losses that set off the economic crash. This would hardly be surprising since the government pushed hard to increase lending to minorities of marginal creditworthiness in the name of increasing minority homeownership.

Of course, if you want to search for Bargain Network Homes it is currently free for a 7-day trial plus you get a $25 Wal-Mart gift card just for trying.

There is more at Steve Sailer’s blog

Scott Krager, a social lending enthusiast from Seattle, WA has created Uncrunch a pretty good suggestion for Uncrunching the credit crunch. He writes as follows:

The credit crunch currently crippling America’s economy is not due to a lack of available funds. It is caused by dysfunctioning credit markets and by the banks having adopted an overly conservative credit policy in the wake of the subprime meltdown. After very permissive lending practices for many years, the pendulum has now swung the other way.

But the money has not disappeared. The money is still there, with roughly $6 trillion currently sitting in deposits, CDs and savings accounts earning interest at 3% and not being lent out by the banks. This is enough money to get small businesses through the credit crisis, offer student loans to everyone who needs it and refinance half of all mortgages in America.

Our idea is simple: unlock these resources, enable the people who have the money to lend it directly to creditworthy people who need the money through a new (yet tested over the last couple of years) mechanism called social lending: people lending money to each other at fair interest rates. With this aim in mind, we have created Uncrunch America (www.uncrunch.org), to give us a chance to help each other out.

Several companies have already joined us in putting together the banking infrastructure necessary to make it happen (credit reporting, authentication, funds transfer, bank account verification, regulatory framework including lending licenses and SEC clearance, etc.) and have already committed to lend $1MM through Uncrunch America.

Our initial goal is to get 1 million people to participate (a small fraction of those watching the inauguration speech!) and our hope is that the US Government will help by matching funds lent by individuals through Uncrunch America. We believe this is a more efficient way to use the bailout funds because this directly encourages lending, and will help restart the credit markets — from the bottom up.

The scheme is supported by Lending Club where you can borrow up to $25,000. with rates as low as 7.88%.

New research shows borrowers with a weaker credit rating may now have to choose between six personal loans with rates of between 14 and 24 per cent and five loans charging between 50 and 70 per cent interest. Hugo Shaw, of the independent financial advisers Bestinvest, advised borrowers to protect their credit ratings. “If you need to borrow some money and you have anything other than a near perfect credit history it’s going to be expensive,” he said.

“The disparity between the direction of base rates and interest rates on unsecured loans makes clear companies are preying on those people whose finances are not in tip top condition. “

But before you apply for a mortgage, credit card or personal loan there are steps you can take to improve your credit status and encourage lenders to look more favourably at your application. Even those who consider that they have a good credit history should request a copy of their credit file to ensure that all information held on you is both accurate and up to date. Credit files are available for free from the credit agency Equifax, and should be checked regularly. There is another reason why borrowers should check their credit file regularly: to ensure that their details are not being used by a third party for identity theft. If you do spot discrepancies, alert the lenders concerned at the earliest opportunity.

The following tips should help.

• 1. Assert your right to vote If you aren’t registered to vote, or haven’t updated your details after moving house, lenders are likely to give you a wide berth. They use this register to protect themselves against fraud and check that you are who you say you are.
• 2. Sever old relationships When you apply for credit, it isn’t just your details the potential lender will scour. It will also check the credit history of your spouse or anyone else with whom you have a joint bank account or loan. In some cases lenders make mistakes and also check the history of those who live at the same address, or may have in the past. This is why it is important to get a copy of your file to ensure that no one else’s poor credit history is dragging your score downwards. If you are divorced or separated, make sure your ex’s details are expunged as soon as possible.
• 3. Cancel out of date credit cards Many people switch cards frequently but fail to cancel old agreements even if they no longer use the card. But these lines of credit will still appear on your file, which can make lenders wary about the potential size of your total debt – some may fear that you will “max out” these cards and then struggle to meet repayments. Make sure the arrangements are terminated and that this is logged on the file. Likewise, if you do not need the full credit limit given on a card, ask your lender to reduce it. It may make you look a better risk when you come to remortgage.
• 4. Get yourself a reputation Lenders want to see that you have a record of managing credit sensibly. So if you are a first-time buyer consider taking out a credit card six months before making your mortgage application. Of course, you’ll need to make sure that you pay off the balance in full each month, and on time, to avoid interest payments.
• 5. Scour the small print Ensure that you take a close look at all the information on your file to ensure it accurately reflects your current circumstances. Lenders may not always inform agencies of any changes straight away, so if you notice information is outdated ask your lender to inform Equifax immediately - or contact them yourself. Keep a watchful eye for rogue accounts or charges caused by identity theft or fraud and for duplicate entries of your unpaid balances.
• 6. Never miss a mortgage payment This is a cardinal sin as far as lenders are concerned, and viewed more seriously than missed credit card or loan repayments. If you are struggling to make a mortgage payment, talk to your mortgage lender as early as possible; they may be able to switch you to an interest-only loan or lengthen the mortgage term to lower the monthly payment (although this will mean you pay more interest in total).
• 7. Ensure details are the whole truth and nothing but the truth Make sure that information you provide on applications is accurate and truthful. Inconsistencies can have a negative effect on your credit score and may be considered fraudulent.
• 8. Enquire without a trace When you’re just researching loans, credit cards or mortgages, make sure that you don’t unwittingly allow lenders to make an application and search your credit report. Some websites will allow you to compare loan prices, for example, without conducting a full credit check. Lenders should not access your credit history until you expressly request them to, and when they do it will leave a trace on your report. Lenders can get nervous if they see too many of these “footprints” on your file and may refuse credit as a result. This is because they can interpret multiple credit checks as evidence that you are desperate for as much credit as possible, or that fraudulent activity is being planned.
• 9. Settle old debts If you have defaulted on credit or had a court judgement against you, it will be noted on your Equifax credit file. Even once “settled”, some lenders restrict their lending to those who have had a Judgement in the past 12 months. Therefore it is important that, as soon as the status becomes settled, you ensure that your lenders inform the credit reference agencies and that your credit report is updated accordingly.
• 10. Include additional information where necessary, add further information about previous credit problems. If such problems were after redundancy or divorce, for example, and your financial situation has since improved, you can add a note explaining this. Likewise, if you have been a victim of identity fraud in the past, make sure that any credit problems caused by this are removed from your Equifax file. If they are not your fault, they should not be there. Remember that your Equifax credit file changes constantly, so it’s important to check regularly that it is still accurate and that no one else is running up debt in your name.

Diane Shackle found it gut-wrenching to walk away from a mortgage she took out in times that were better for both her and the U.S. economy. But the reality was undeniable: While she was keeping up with the monthly payments, she said she could no longer afford to buy food for herself or even kitty litter for her two cats. So the 44-year-old cocktail waitress walked away from her two-bedroom condo in Southern California last July, turning her back on a debt of nearly $200,000.

“It ripped me up to do it, but I was tired of worrying and I had no food in the house,” said Shackle. “I decided, you know what, I’m not living like this. I’ve got to quit before I kill myself.”

Walking away from a mortgage has always been a homeowner’s last resort —- it flies in the face of the American dream. And experts say it should remain a worst-case scenario. But with the deepening economic crisis fast adding to the 12 million mortgages already “underwater” —- the term for when a home’s debt exceeds its market value —- it’s an option more are likely to consider as home prices continue to fall.

Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations. “You have to make the best decision for yourself, business-wise, which could be walking away from the house,” said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.

Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices. The practice also is known as “jingle mail,” referring to the borrower mailing the keys to the lender and surrendering the house. Bank of America Corp. brought the practice to light a year ago, reporting that a growing number of people who defaulted on their mortgages were current on their credit cards. This suggested that at least some saw bailing out on their houses as a way to gain control of their finances. Though statistics aren’t readily available on the number of mortgage walkers, a year later, Bank of America spokesman Terry Francisco acknowledges that the problem still exists and said it has been exacerbated by the housing market’s further decline.

“The billion-dollar question is, is it going to increase?” said Guy Cecala, publisher of the trade publication Inside Mortgage Finance, in Bethesda, Md. “We really don’t know the answer.”

Speculators who bought houses for investment purposes rather than to live in are the likeliest to do it, he suggested. Shackle doesn’t fit that category. The single, first-time home buyer bought a two-bedroom condo in Calimesa, Calif., in 2006 for $191,000. She wasn’t required to put any money down despite her limited income as a waitress, thanks to a lofty credit score of 788.

The financing consisted of two interest-only loans with initial rates of about 7 percent and 10 percent. Her monthly payment, including an escrow account for property taxes and insurance, was about $1,400 a month. That was manageable until she had serious problems with asthma and missed a lot of work.

Shackle was never late with a payment, she said. But after paying the bills she had no money left over to buy groceries, and lost nearly 50 pounds. Despite her pleas, she said she couldn’t get the lenders to refinance once the collapse of the housing market had slashed the home’s value to about $150,000. Suddenly it was no longer about an investment or the tax advantages of homeownership, it was about trying to survive the crush of bills.

“When you’re a homeowner you think, ‘OK, I’m going to go ahead and try to pay this off,’ ” she said. “But when I tried to get refinanced and everybody pretty much shut their door on me, I felt like I had no alternative.”

Rather than stop paying and wait to be foreclosed on, she sought help from You Walk Away, one of the companies that has emerged to address the growing number of underwater homeowners. The San Diego-based business counsels the homeowners to, as its Web site says, “take control of their financial future” by making a strategic decision to default if necessary.

Jon Maddux, principal and co-founder of You Walk Away, which charges $995 for consultations about a person’s rights regarding foreclosure, says his company doesn’t advocate jingle mail per se, but rather staying in the home as long as legally allowable until the bank takes it back. Underwater homeowners should exercise caution when signing up for any service that offers assistance, because consumer advocates say much of the advice can be found online or through non-profit agencies. Shackle moved out of the condo in July and rented an apartment for $750 a month. Foreclosure still hasn’t taken place. But without the burden of a mortgage gone bad, “I sleep a lot better,” she says.

About 1 in 6 of the nation’s 75 million homeowners are underwater, according to Moody’s Economy.com, and the total has doubled in a year. Their mortgage debt exceeds home equity by an average of $40,000. Half of these negative-equity homeowners owe more than 120 percent of their home’s value. Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.

“These anti-deficiency laws make a huge impact on foreclosure rates because they are basically ‘get out of jail free’ cards,” said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who’s writing a book on consumer bankruptcy and consumer credit.

This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways. The full list includes Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.

Donald Lampe, a Charlotte-based mortgage lending attorney with Womble Carlyle Sandridge & Rice, said the statutes generally prohibit or limit a lender’s ability to go after the borrower’s assets to satisfy the unpaid mortgage debt. “There are some folks suggesting that state anti-deficiency laws should be expanded around the country as a response to the “mortgage meltdown,” Lampe said. However, he noted, “It is difficult to see how these laws could be made to apply to loans already on the books.”

Arizona is joining other states asking Congress to liberalize bankruptcy rules so judges can modify home loans to help reduce foreclosures. Arizona Attorney General Terry Goddard has joined the attorneys general from 21 other states in the effort. Current federal law allows bankruptcy courts to adjust other debts and loans, but not home mortgages. Goddard and other state AGs contend the courts could make the change immediately, which would help reduce foreclosures and generate new loan terms that could help borrowers and lenders.

California Attorney General Jerry Brown also is among those making the written push to congressional leaders. A similar effort was launched in 2008 but failed to gain approval, but the odds could improve with Democrats gaining seats in Congress and the incoming Obama administration.

The Federal Reserve may have slashed the benchmark interest rate to zero percent, but the frozen credit market isn’t showing many signs of thawing yet. So more consumers are turning to each other. Online person to person loans could total almost $6 billion dollars by 2010. For some, it’s an unexpected lifeline.

“I needed a one lump sum payment upwards of $16,000,” said Rob Ramonas. When Ramonas returned to civilian life from a four-year tour of duty as an Army nurse, a perfect financial storm was waiting. First, there was a divorce, and then a house in limbo. Then Connecticut’s Department of Corrections told Ramonas he owed four years of payments toward his pension. And all that while he was also trying to take care of his two-year-old child. “I was flabbergasted,” Ramonas said. “You know, how do you grab that kind of money all at once?”

Already maxed out at his credit union, Ramonas needed money fast. So he looked online and found Lending Club.

“Lending Club is a social lending network, which is an alternative to the banks,” says Lending Club CEO Renaud LaPlanche. “It’s a way for people who have the money to loan to people who need the money.”

As major financial institutions stumble or fail completely, online lending sites like Lending Club are on the rise. Since 2005, the amount of their outstanding person-to-person loans has virtually doubled every year, David reports, swelling from $118 million in 2005 to $1.5 billion in 2008.

It works like this: Folks like Ramonas complete a personal loan request online. “It was one of the easiest things I ever did.” Ramonas says. Once Lending Club approves the loan, lenders, like Howard Rubinstein, can choose to help fund it. In Lending Club, the average loan is for ten thousand dollars at a rate of thirteen percent for three years. Wary of the turbulent financial markets, Rubinstein has invested thousands of dollars in on-line lending clubs.

“I was just really intrigued at the opportunity to make more money than I could make from CDs in the bank and at the notion of being able to lend without the bank as an intermediary,” Rubinstein said. “I’ve been happy. I think I’ve made ten percent on my money since February, when I went in.”

And hundreds of thousands of Americans are following suit, including Rob Ramonas. “Once this loan is paid off I will go in there as an investor and make some loans to other people,” Ramonas says.

There many discussions of moral hazard in the mortgage debacle, and rightly, they focus primarily on the large bonuses given out to the bankers. But aren’t credit default swaps more to blame? Aren’t insured buildings more commonly victim to arson attacks?

Help me out here if I’m wrong, but don’t credit default swaps, a financial instrument invented in the 1990s, suffer from the usual insurance contract problem of “moral hazard?” If you can make a deal so that you get compensated if your mortgage-backed security defaults, aren’t you more likely to bring about a default? If you are, say, Goldman Sachs and AIG offers to, in effect, insure for a modest price a no-doubt-fraudulent pile of mortgages you are thinking about buying from some dubious firm, why not go for it? AIG is rock solid! And if, perchance, AIG turns out not to be so solid, well, Goldman has friends in high places.

Credit default swaps have a second interesting moral hazard aspect. You don’t have to be the owner of the security to get paid if it goes bust. This is kind of like being able to take out a life insurance policy on a complete stranger or your own worst enemy. The murderous marital moral hazard implicit in life insurance is a common theme in crime stories (e.g., Double Indemnity). That’s an inevitable problem, but insurance companies have tightened up over the centuries on who can take out a life insurance policy on whom. Still, there was an Arsenic and Old Lace case in LA recently of two elderly women, who had murdered homeless men after taking out multiple life insurance policies on them. (They bribed the men into signing up for one, then forged their signatures on other policies).

It would certainly be interesting to learn more about the impact of both types of moral hazard. I could see how the second kind (where third parties make bets against the financial health of firms in the securitized mortgage business) could be either bad or good for the economy, in that it could send signals that financial instruments are dubious.

If flipping a house in today’s real estate market seems riskier than trekking with a ragtag band of hobbits to Mordor, take heart: Home flippers can still find plenty of opportunities, though they’re not entirely without risk. It may seem counterintuitive to invest in real estate when the housing market is in its darkest hour. But in fact, it may prove to be the most optimal time for such a venture. The question is whether this is the darkest hour or just another break on the ride down.

According to RealtyTrac, a seller of mortgage default data, the foreclosure rate reached its highest level in 50 years in 2007, and has since risen to record numbers in the third quarter of 2008. Real estate investors are finding bargains everywhere, particularly in formerly hot housing markets such as Florida, Nevada and California.

“The key … is doing your research and knowing what you’re getting into. Know the area you’re buying, the market, how the price compares to the neighborhood.”

The horizon is flush with opportunity for those with the money and know-how to snap up a bargain and flip it, but to make it pay you first must understand how the rules of the game have changed.

“The prices that were recently so outrageous are down again, so those with capital or access to credit will find it’s a very good time to pick up bargains in the marketplace. Those bargains are mostly in neighborhoods where you would like to live. Areas undergoing urban renewal present good investment opportunities.“

It seems elementary, but in the recent past many flippers found themselves in trouble because they had not correctly calculated the amount of money it takes to finish a flip and market it. Investors should figure out how much money they’ll need right upfront, and not just the purchase price. It translates to being realistic about renovation costs and the hidden expense that gets so many in trouble: carrying costs.

“You may have carrying costs on the books longer than you think. The days of the 60-day flip are gone.”

Carrying costs, or house payments you must make until you sell the property, can subtract thousands from the bottom line. And even though you are technically chipping away at the debt incurred when you purchased the property, the interest you’re paying at the top of the flip probably won’t be earned back in the sale. Those payments come right out of your potential profit.

Save up to 50% on Real Estate Visit Bargain.com today: 700,000+ homes updated daily including foreclosures, HUDs, VAs, etc. Homes from $10,000, listings nationwide 24 X 7 live customer support Free credit report and mortgage center Save up to 50% off Real Estate Try a FREE Search on Bargain Network Homes to find a home in your area and price range. Best of all register for a free trial and you’ll receive a free credit report.Search Bargain Homes Now

Since the Government’s $700 billion financial bailout in October, things have only gotten worse for New Mexico’s home builders. The national bailout was suppose to infuse the capital markets with enough money to trickle down in the form of small business loans through regional banks. In the past 45 days, builders say banks have made their lending policies more onerous. They feel squeezed between consumers who aren’t buying homes and banks that are making it harder to refinance their speculative projects. Lending on new spec projects has died while banks are seeking increasing equity stakes and higher interest rates on current developments whose loans have matured and are seeking renewals. Without renewals, foreclosures could mount.

It’s ominous for the overall regional economy because of hundreds of job losses as builders are abandoning projects throughout the city. Rio Rancho and the northwest quadrant are especially hard hit, where hundreds of approved lots are growing weeds and not homes. No builders are stepping up to acquire abandoned but already platted projects because land prices have yet to drop significantly. And they can’t get the financing.

“Right now our members are very stressed. They were caught with spec homes and have no money coming in from sales. Their loans are expiring and the banks are raising their interest rates on them,” said Steve Nakamura, president of the Home Builders Association of Central New Mexico. The president of Rachel Matthews Homes describes his declining membership as “scraping bottom.” “Everybody is talking about a mortgage- lending bailout, but that is not what is killing our industry. Seventy percent of residential building is small business and 30 percent are the big tract home builders. That 70 percent can’t get loans. The banks have got to lighten up. If we can’t build anything, it also effects our subs [subcontractors] and suppliers.”

Otley Smith is trying to hold on to his spec home projects in La Cuentista on the Westside and in North Albuquerque Acres. He said he has never missed a loan payment and thought he would be treated favorably when his loans needed renewing. Instead, his loan rate climbed 2.5 percent, which translated into $800 extra per month in payments. On a condo project in Corrales, his bank asked for a 9.25 percent interest rate compared to his initial 8.25 percent rate. Smith hired a lawyer to pressure the bank to keep the loan at 8.25 percent and it worked. On another loan, he pulled his business from a local institution and found a more suitable loan at a Bank of the West branch. He decries the banks for not wanting to take on any risk.

“We’re in a vicious cycle,” Smith said. “It’s real common now on renewal notes for banks to require more equity in deals. If your deal is $100,000 and the bank was carrying $80,000, they now want the developer to buy it down to $60,000. They want cash.”

Bankers say renewals are requiring some cash and they can’t do loans tied to the prime rate, which has dropped to just 4 percent. They admit their reluctance to take on new speculative projects.

“There is such an excess of supply that it would be hard to justify how a new spec project would be viable. Those kinds of loans have pretty much ground to a halt or close to it. We’re doing a few loans for pre-sold homes for our steady customers,” said Pat Dee, president of First Community Bank. “When loans mature, we sit down with our existing developers and try to come up with a plan that makes sense for both sides.”

Larry Levy, senior vice president of Bank of Albuquerque, said banks today are under the constraints of the federal government and must carefully monitor their real estate portfolios, making sure that loans “don’t sit still.” David Murphy, publisher of SalesTraq New Mexico, which focuses on new home sales, predicts at least two to three national builders will leave New Mexico in 2009. He foresees smaller builders pooling resources.

“When just 26 new building permits were issued in September in Albuquerque, that is not a recession, but a depression,” Murphy said. “When you look at homes priced $750,000 and above, at best there is a four-year supply on the market now and at worse, it’s a nine-year supply. If you’re looking for the silver lining, homes in the $100,000 to $200,000 [price range] have sold well — there is just a six months supply.”