Why don’t merchants try to engender our loyalty through offering good products, good prices and good service?  Will people buy shoddier goods at higher list prices and receive poor service if they think they are getting a better deal by being a member of the inner circle?  I don’t know.  Everyone likes to get a good deal on what they are buying, of course.  But why not offer everyone your best and fairest prices instead of causing them to fill their wallets with an ever growing number of merchant cards?

Merchants are doing it for several reasons.  One – they do believe that this is a way to tie customers to their store and to have them avoid the competition.  However, if the Rite-Aid and Walgreen’s both offer loyalty cards, why not get both?  They’re only a block apart, so shop where you want.  Then they try to tighten the noose by making you accumulate points through purchases in order to qualify for the higher discounts.

Two – they get lots of valuable data.  When a customer signs up for a card a file is established.  Depending on the store, you may provide them with just your name and phone number, or you might give them your address, age and other information as well.  These days, even if you only provide a name and phone number, it is easy and inexpensive for them to obtain the other info if they wish.  Now every purchase made is tracked and entered into the database.  Patterns are analyzed – for individuals and groups.  Most of this does help the merchants to make decisions about what to stock, what sells at what price, and other general marketing issues.  It also provides the merchant with a rich base of information on each customer that regularly uses the card.  For those who have concerns about corporate big brother, this is something to worry about.  For others, who like to receive notices and offers seemingly tailored to their needs and tastes, it is a good thing.

Three – they do it because everyone else seems to be doing it and customers have come to expect it.  If merchant A is offering an item that sells for $10, but is “only” $9 with the loyalty card, and merchant B sells the same item for $9 but offers no card, there are many, many people out there who will routinely patronize A because of the perceived discount.  So, merchant B raises the listed price, offers a card and sells the item for $9.  So now the item is being sold for $9 in both stores, but both merchants now have the additional expense of purchasing the card system and software and then maintaining it over time.

Through all of this, no one is saving any more money than could have been achieved otherwise.  In fact, since the cost of the card system and its attendant support have been introduced into the mix, the likelihood is that the prices paid by the consumer will eventually rise to cover that cost.

If one wishes to look further at the deleterious effects of loyalty card behaviors, it’s not difficult to do.  People driven by the perceived benefit of discounts through card usage will drive past the closer store to get to the card offering store, thereby using more fuel for the shopping trip.  It gets worse when, as is common in grocery stores, the card only provides “discounts” on certain items.  In those cases you will find customers driving to one store for items 1, 3, 5, and 7 and then going to a second or even third store for items 2, 4, 6, and 8.  The result being wasted fuel and time.

The end result is a case of changed perceptions, changed expectations, and changed behaviors – all with no change in product quality and no real change, at least in a positive way, in the product cost to the consumer.

The solution?  Get rid of the cards.  Compete on price, quality and service.  Yes, I know – not going to happen.  Probably not.  Certainly not until enough people realize what’s happening and stop signing up for the damn cards.  If customers refuse the cards, the merchants can figure out that people don’t want them.  If enough people refuse them, the cost of the system is being justified by a smaller and smaller percentage of the customer base, another sign to the merchant that the expense may not be worth it.

Maybe we can do away with the cards and go to a system of making our purchasing decisions based on buying the right product at the right price at the right time, from someone who is knowledgeable about the product.  Wishful thinking, I know.  Oh well.

There are a few people who have been identified as having spotted the mortgage free for all for what it was and who took some action.  Either they curtailed their own investments in the real estate arena or they issued some sort of caution to the rest of us, but we apparently weren’t listening hard enough.  Why not?

One view is that we did not heed the warnings because we were all caught up in the frenzy of easy mortgage money and rapidly appreciating real estate values.  It’s not like the people doing the warning were unrelated to the problem at hand, but we just didn’t listen.  Remember when Alan Greenspan characterized the tech bubble of ten years ago as “irrational exuberance”?  Who listened?  And this from a guy that is put into a position specifically to watch for problems in the economy and deal with them or at least let us know what to expect.  So, the tech bubble popped and lots of folks were surprised and lost money.

Of course, where was Mr. Greenspan seven years later – subprime mortgages, no verification mortgages, credit default swaps and derivatives of all sorts of exotic flavors.  He didn’t see that one coming he says.

It’s become pretty clear that it’s unlikely that any one person or group of persons is going to get it right every time or maybe not even most of the time.  Or if they are, they are not telling us.  Or if they are telling us we are not listening or believing them.  It’s a credibility thing.  We are looking for an established track record that keeps reminding us that the guy doing the yelling was right the last time…and the time before that….and the time before that.  Maybe he’s right again and maybe we should do something about it.

Not that long ago we had someone who could always pick up the warning signs of danger.  This was way before the Internet’s ability to disseminate news instantly and before bloggers were able to expound to worldwide audiences on whatever moved them.  In spite of that, this beacon of reason was able to inform millions of citizens of the benefits of looking before leaping.  That seer was Lassie.

Sure, you’re going to say that Lassie was a dog.  Yeah, so?  She still knew what was up.  When that mangy stranger came into the farmyard, allegedly looking for work, Lassie always gave a warning growl.  When Timmy got too close to the edge of the quarry, Lassie tried to pull him back.  The problem then, as now, is that those being warned did not listen.  Mom told Lassie to quit growling – the stranger just needed a good meal and some honest labor.  Timmy said quit barking, I’m just trying to reach my kite that went over the edge.  I mean, who had a better track record than Lassie and whose warnings got ignored until it was too late, week after week for years on end?  Millions were out there in the audience trying to tell them to listen to Lassie.

Lassie would have seen the subprime crisis coming (I’m sure of it) and would have barked her head off.  Lassie would have spotted the duplicity inherent in the overheated derivative market and would have parked herself outside the investment banking houses and nipped at the heels of every trader going by.  That would have told us something.

We’ve had others who have tried, valiantly at times, to sound the alarm only to be ignored until it was too late.  The Robot on Lost in Space, for example.  How many times did we hear “Danger Will Robinson” only to see it go unheeded.  It’s like the Robot is there for us, but (insert name of your investment banker here) is Dr. Smith and convinces too many of those who should know better (just as Will Robinson should have known better) to just keep on buying what they’re pushing.  Now we’re living with the results.

So, the next time you get a warning from Lassie, or the Robot, or maybe when the Beav tries to tell you what a sneak Eddie Haskell is (well, OK, maybe the Beav wasn’t the most reliable one of the bunch), consider your source’s track record.  Maybe it’s time to listen.

Tedeschi writes that mortgage seekers in a heavily condominiumized (that might be a word) market such as New York have an additional burden when  buying in new developments.  It seems that Fannie Mae and Freddie Mac rules preclude approving a mortgage for a condo unit unless at least 70% of the units have been sold (although Fannie will sometimes lower that to as low as 50%).  That makes it tough unless the buyers can come up with all cash or have access to unconventional mortgage sources.  Enter seller financing by the developer.  Typically they will require a substantial down payment of 35% or more and the note will have a balloon due after 5 years or so.  The expectation is that things will have changed sufficiently enough for the buyer to refinance at that time.

Just one more example about how this niche mechanism makes real estate deals happen.

Along with those reports were a fair number of warnings that the recovery, if that’s what it was, might not be sustainable.  Without significant improvements in employment and wages, it was projected that home sales would falter again.  With many people exhausting their unemployment benefits there could be another round of foreclosures looming on the horizon.

HousingWire reports on the National Association of Realtors (NAR) finding that sales of existing homes have declined for three months in a row through February.  Granted, some of the drop-off in February may be attributable to the snowstorms in the Eastern part of the country – but that’s only part of the country for part of one month.

In a separate article HousingWire reports that the Federal Housing Finance Agency statistics show a decline in home prices in January and February.  The article quotes Paul Dales of Capital Economics as saying that we are now in a double dip as regards real estate sales.  Increasing signs of stress in the system, according to Dales, indicate that the market will continue to worsen.  No prediction was made as to how much more of a decline is to be expected or how long until the true bottom is reached.

Recent unemployment figures have shown a significant slowing in the numbers of jobs being lost each month.  The Obama administration would like us to believe that we are close to turning the corner and start adding jobs, although not in significant numbers for a while yet.  If the job engine does not get into gear soon, we’ll have to look to other factors to prevent the real estate double dip from becoming more serious.

The news, however you acquire it, is chock full of confusing information.  It’s not that it’s contradictory so much as inconsistent. New home sales are up and then they are down.  Housing starts pick up but then falter.  Existing home sales are happening, but perhaps it’s due to foreclosures and REOs.  FHA wants to keep the market fluid, but finds the need to tighten lending requirements.  If a clear direction has been set, if the economy has truly righted itself, it’s pretty hard to discern and few are willing to certify it just yet.

The interpretations of what this all means, and the predictions about where it’s heading are all over the map.   Those that are constantly sought out by the media for quotable prognostications would have us believe that what they say is based on complex models that take into account hundreds or thousands of variables.  We hear the pundits talking doom and gloom.  However, it seems that as soon as one notable variable, say last month’s housing starts, changes for the better, everyone quoted seems to trending in the same upward direction.  Sophisticated multivariate models are unlikely to change on a dime because of one component.  It seems to the outside observer that they are not doing much more than straight lining the latest statistics for lack of better information.  If that is indeed what is happening, no one is well served.

Maybe they really do have good models and it’s the fault of the media’s nature to report only surface level quotable information.  It’s unlikely that the local paper or even the Wall Street Journal is going to provide an in-depth analysis of someone’s economic model on a regular basis, but one would think you’d see such a discussion once in a while.  I haven’t.

Something else that would be interesting would be to go back a couple of years and see what these folks were saying, individually and collectively and compare that to what has actually transpired.  We do occasionally get a prediction from someone who is identified as the person who “called it right” two or three years ago as a contrarian, but then why do they keep quoting all those other folks who got it wrong?  Why are we to believe that they are now any better at this than they were just a short time ago?

When someone does make a loan to a member of the family, the question of what to charge for interest must be addressed.  It’s important to understand that to qualify as a loan under IRS rules, the money must be repaid and interest must be charged.  If the principal is not repaid, the IRS may consider it to be a gift (if the amount is above the annual and/or lifetime exclusion amounts) and apply the gift tax.  If no interest is charged the IRS may impose penalties as well.

Generally speaking, the lender is making the loan to help someone, not to make a large profit.  The interest charged can be a nominal rate, but it cannot be too low.  The IRS requires that a certain minimum rate be charged or, once again, the question is raised as to whether this is a loan or a disguised gift.  The rate that the IRS requires is called the Applicable Federal Rate (AFR) and is adjusted each month.  The rate is lowest for loans of less than 3 years, higher for 3 to 9 years, and highest for longer than 9 years, but in all cases is lower than what banks would charge for personal loans.  One can charge more than the AFR without IRS concerns, but rates that are lower can attract scrutiny and result in penalties.

When making a loan to a family member, it’s advisable to formalize it in a written document such as a promissory note.  This is recommended for several reasons.  It lays out the details of the transaction, i.e. repayment terms, security (if any), due dates, etc., thereby avoiding misunderstandings at a later time.  It provides documentation of the nature of the transaction for the IRS if they should come knocking.  And, it provides legal documentation of the lender’s rights if the borrower defaults.  A list of issues to consider when making such a loan and drawing up the documentation are contained in an earlier post to this blog.

By the way, everything discussed here would apply equally to a loan to a friend.  The issues relate to structure and form, not to the legal relationship of the parties.

The above examples deal with how seller financing works for individuals. For many of the same reasons, corporations and large developers are realizing the benefits of seller financing as well. In Las Vegas, for example, developers involved with the $8.5 billion CityCenter project are using seller financing to their advantage. City Center is intended to have 2,400 high-rise condominiums priced from $500,000 to $9 million. 1,100 are still unsold as the project nears completion. The developers have lowered prices by 30% with some promising results. Deposits are starting to be made on units nearing completion.

Now, in this post in The Casino City Times, Howard Stutz says, “the challenge will be closing sales. Realtors said banks are not so quick to provide funding for high-rise purchases….”

Stutz spoke to Tony Dennis, executive vice president of CityCenter’s Residential Division for MGM Mirage, who said that “CityCenter is looking at potential seller financing possibilities, similar to a program the Palms began using to close sales on units inside its high-rise condominium tower. “ He broadened that by saying
“we’re looking at everything that can be supportive to our buyers.”

This is clearly a case of what happens in Vegas need not stay in Vegas (it’s not like they originated the idea of seller financing). Developers of all sizes are sitting on unsold units all over the country. Seller financing is one way to make sales happen. Granted, with seller financing the developer does not get the entire sales price all at once as would happen with conventional financing. What he does get is the down payments and a substantial income stream that can be used to pay off current obligations such as construction loans. If the developer wants to cash out before the balloons are due on the financed properties, the notes can be sold, preferably after a bit of seasoning, to investors who seek these types of financial instruments.

By offering seller financing the developer accomplishes the goal of selling the developed properties, likely at a profitable price. Getting whipsawed by construction loans and other obligations is avoided. The bank doesn’t get dragged down by non-performing construction loans. Renters become homeowners. What’s not to like?

A report by attorney Ellen Brown says that there may be legal relief coming for millions of people facing foreclosure.  She writes about a recent decision of the Kansas Supreme Court that ruled that foreclosures initiated by Mortgage Electronic Registration Systems (MERS) are not valid.   MERS is a nominee company that registers mortgages electronically and then keeps track of changes of ownership.  Brown’s article explains that if the original mortgage was registered through MERS and then sold, the court held that there is no party with legal standing to foreclose.  Reportedly there are 60 million mortgages registered through MERS.

What this means at this point is hard to determine.  A ruling by the Supreme Court of Kansas applies only in the state of Kansas.  Courts in other states can take note of the decision, but may choose not to apply it if they feel that the laws of their own state differ in material ways (or if they disagree with the legal reasoning used by the Kansas court).  Brown states that the legal reasoning is sound, but I have found no other corroboration of that as yet.

If this decision contains legal principles that are indeed applicable in other states, then we can likely expect a flurry of lawsuits being filed.  If some of those cases result in decisions agreeing with the Kansas case, confusion would soon reign in the mortgage world.  Those who had been buying mortgages, often in bundled and collateralized forms, likely would stop doing so if they could not effect a foreclosure in the event of non-payment.  Lenders who routinely sell their mortgages would find that the market had evaporated.  Lawmakers likely would be tying themselves in knots trying to decide between a frozen credit system (again) and putting even more people out of their homes (again).  Not a pretty picture.

The major caveat at this point is that so far it is one case that affects only one state thus far.  It remains to be seen where, if anywhere, it goes from here.  Stay tuned.

There are number of ways in which you can pay off debt. You can do it on your own or take the help of a professional. In case you are unable to hire the services of a debt help company due to financial limitations, there are many non-profit making debt help organizations operating in the industry. These non-profit making companies earn their revenues from donations received. Some of the debt help programs offered by these companies include debt counseling, debt settlement, debt management etc. Bankruptcy is also a way of getting out of debt although this should be your last option.

Whether you are opting for debt consolidation, debt settlement or a debt management program, the main aim of these debt help options are to assist you in paying off debt. You are able to enjoy lower rate of interest. And this in turn lowers your monthly payments to a considerable extent. You also get a new repayment plan that makes your monthly payments more organized and systematic.

If you are confident enough to wrap up your debt on your own, you can take the following measures –

Pay more than the minimum

The minimum payment you are required to make each month is usually 2% to 3% of the outstanding balance. So, if you can keep aside some cash and pay it for reducing your debts it will lower the principal amount too. So, you can get out of debt much faster.

Pay off debt having higher interest rate

It is better to pay off debts that attract higher rate of interest. If you are not being able to do so, pay off debts that have lower outstanding balance.

Curtail use of plastic money

If you have been using plastic money a lot, try to curtail using credit cards. If you make purchases with cash, you tend to spend less. This can act as a check in your spending habits.

The mantra of staying out of debt is to manage your finances better. If you are undecided about the debt help option that will suit your needs best, try to consult a credit counselor who can guide you to manage your debts better.

While most people feel that they understand how interest works, it turns out that many do not.  Even those who have a basic understanding of interest would have a difficult time telling you what their remaining principal balance will be after a year of making payments on a debt.  Does anyone ever check to see if the interest on their home mortgage is being calculated and credited correctly?  Not very often.  Or, if they do, they clearly don’t understand it.  We commonly receive calls from clients asking why, if they make a payment in the same amount each month, last month the interest paid was X and this month it is Y. (For a detailed explanation of how monthly interest is calculated, see the previous post “Keeping Interest Simple”.)

While calculating simple interest accrual is, well, fairly simple to do, other interest calculations can be a lot more work.  Figuring out the amortization of a fixed rate loan is not complex, but it can be time consuming and tedious if one does not have a calculator or a spreadsheet with that function already programmed into it.  If you are dealing with variable rate loans, compounding interest, extra principal payments, interest only with periodic balloons or any of a number of other variations on the theme things can get rather complicated.

The people who work for the various financial institutions have tools at their disposal to do these calculations for them (although given the current state of the U.S. financial system, one has to wonder if they know how to use them correctly).  Most of us don’t need to use them everyday or even every week, but we’d like to be able to verify that we are paying the correct interest on our outstanding obligations without having to acquire a black belt in spreadsheets.  Or, we should be able to recalculate the amortization schedule on our home mortgage based on alternative payment scenarios.  Or, we should be able to figure out what effect will be if the credit card company bumps up its interest rate, both in terms of how much more will the monthly payment be and how much longer it will take to pay it off if we continue to dribble along making the minimum allowable payment each month.

There are a number of websites that have calculators available to use for a specific purpose.  A mortgage website might have a calculator for home mortgages, or an auto dealers site might have one for car loans.   Frequently you can only use them on their site and cannot store your information.  The site run by Vertex42 is different in a couple of ways.  They are not a financial organization, so they don’t limit you to a tool that only works for the products they offer, thereby steering you away from other financial products that might fit your situation better.  They offer a very wide variety of financial calculators that cover just about any type of borrowing you might encounter.  Many of these calculators are spreadsheet templates that you can download to your own computer to use anytime, and they are free for personal use.

For example, the site has six different mortgage calculators, an auto loan calculator, a calculator for a loan that involves a balloon payment, and a home equity loan calculator.  All downloadable, all free for personal use.

They’ve got a calculator for estimating your 401(k) balance and one for planning the family budget.  Downloadable and free.  I counted at least two dozen calculators just related to financial matters.  They make it quite easy for you to plug in the numbers and get results quickly.  Whether you are checking the accuracy of the loan company’s monthly statement, thinking about buying a new car or home, or planning the family budget, you’ve got the ready made tools to do so accurately.