Saturday, February 28, 2009

Free DVD on "Avoiding Foreclosure"

This DVD is free of charge and a public service offered by the National Foundation for Credit Counseling. To order your free copy, complete the order form at this link.

"Avoiding Foreclosure" is a consumer education DVD that introduces you to four clients who found themselves in mortgage trouble for different reasons and sought assistance from an NFCC-certified housing counselor. The DVD does several things. First, it introduces consumers to some of the terms and scenarios they are likely to encounter as they work to save their own home. Second, it familiarizes consumers with the process of avoiding foreclosure. Third, it shows examples of a variety of life situations and challenges facing individuals and families who are facing foreclosure and what they did (with the help of an NFCC-certified housing counselor) to address it.

The Amazing Math of Leveraged ETFs

An Exchange Traded Fund (ETF) is a fixed portfolio of assets meant to mirror a specific market index. The portfolio is only changed to reflect changes in the composition of the index. An ETF trades on secondary markets like a typical share of common stock. Since ETFs are market traded, investors can enter and exit positions very rapidly, intraday if they so desire. In contrast, most mutual funds settle only at the day’s closing net asset value.

A leveraged ETF multiplies the risk in the underlying index. A 2X leveraged ETF would move twice as much as the related index in a single day. An inverse 2x ETF would move twice as much in the opposite direction, so that if the market index fell by 1 percent in a single day the inverse index would rise by 2 percent that same day. A full description of leveraged ETFs and the associated risks is contained in an article by Paul Justice, "Warning: Leveraged and Inverse ETFs Kill Portfolios," at Morningstar.

Leveraged ETFs will mirror the linked index over short periods. However, over longer holding periods they dramatically depart from the value of the underlying index. This is explained in the article by Paul Justice and in the accompanying video from Morningstar. The primary reason is that leveraged movements will produce greater absolute dollar changes at higher index values than at lower index values, so that the dollar movement from a leveraged 10 percent upward movement in an index is less than the dollar movement from a leveraged subsequent 10 percent downward movement. Consequently, the pattern of movements will affect the ultimate value of the leveraged ETF.

Friday, February 27, 2009

Can We Blame the Credit Crisis on the Quants?

The quants are the financial analysts that base their view of the market on highly sophisticated statistical models. The problem with this approach is that it is only as good as the underlying assumptions. Felix Salmon in an interesting article in Wired Magazine, "Recipe for Disaster: The Formula That Killed Wall Street," argues that the models used to predict the risk of holding securitized assets were grossly inadequate in modeling the interrelationship between various loans that made up the credit pool. In addition, the financial managers that applied the models lacked the requisite mathematical sophistication and did not understand that their calculations were built on a house of cards.
They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.

This article discusses risk analysis related to credit default swaps. If you want to understand the basics of credit default swaps, you can view this video.
AmericanPublicMedia October 08, 2008

When the analysts and experts talk about the current financial crisis, they often refer to credit default swaps. So, what exactly is a credit default swap? Marketplace Senior Editor Paddy Hirsch goes to the whiteboard for this explanation.

Positive Trend in Mortgage Fraud Reports

A recent report by the Financial Crimes Enforcement Network entitled, "Filing Trends in Mortgage Loan Fraud," documents the rising trend in Suspicious Activity Reports (SAR) filed by banks concerning mortgages. It is not clear whether this signals more criminal activity or greater institutional awareness. As the report states:

Many SARs reflect activity dates that preceded the filing of the SARs by a number of years. Hence, an increase in the filings during this period is not necessarily indicative of an increase in mortgage loan fraud activities during the same period.

CBS June 19, 2008
More than 400 real estate industry players have been indicted since March - including dozens over the last two days - in a Justice Department crackdown on incidents of mortgage fraud nationwide.

Thursday, February 26, 2009

Leaving Your Estate to the Dogs

Maybe I am just thoughtless or cold hearted, but I never thought of leaving my estate to Fido. Apparently, others have been more considerate. Consumer Reports provides some information on creating a trust for your pet and continuing care programs.
An alternative to the traditional pet trust is a statutory pet trust, now available in the District of Columbia and 37 states and pending in several more. These simple, legally enforceable trusts can be established for minimal cost, as little as $50 or $100, as part of your will.

The article warns against caring for your pet in a testamentary trust since it must first go through probate before the funds are available. The preferred alternative is a living trust.

Read more

See also PetGuardian

DHLevinsonJ uly 09, 2008
Leona Helmsley leaves Eight Billion Dollars to the dogs

Federal Deposit Insurance Reserves Fund Ratio Falls

Federal Deposit Insurance Reserves fell to .4 percent in December 2008. In December 2007 the ratio was 1.22 percent. This was the lowest ratio since June 1993 when it was .28 percent. Over the same period the number of FDIC determined "problem institutions" increased from 76 to 252. See FDIC paints bleak banking picture at MarketWatch and FDIC.

The Historic Price of Crude Oil

The Department of Energy website has an interactive graphic that lets you trace the price of crude oil from 1970 onward. The graph presents both the nominal and the real price in 2009 inflation adjusted dollars. In 1981 the real price of crude reached a $91.96 a barrel. After falling for about two decades the next peak occurred in July 2008 $124.40. It might make you feel a little better during this financial crisis to know that the current price is about $44 a barrel, significantly below the most recent crest.

Tuesday, February 24, 2009

Money Smart News Winter 2009 Edition

In This Issue

Message from the FDIC
FDIC Web Site Features Resources on How and Why to Save Money
Federal Programs Promoting Economic Recovery Via Financial Education
Promoting Financial Education at IRS Tax-Preparation Sites: Success Stories
FDIC Publication Helps Consumers Understand Changes in Deposit Insurance Coverage
New Spanish-Language Web Site Helps Depositors Understand Their Money Is Federally Insured

Tax Provisions in the American Recovery and Reinvestment Act of 2009

Congress has approved and the President has signed new economic stimulus legislation, the American Recovery and Reinvestment Act of 2009. The IRS is implementing tax-related provisions of this new program as quickly as possible.

Here are some key highlights:

Payroll Checks Increase This Spring. The Making Work Pay Tax Credit will mean $400 to $800 for many Americans. The IRS has issued new withholding tables for employers.

$250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board.

Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid.

Information on other provisions of the stimulus law will be available on the IRS Web site,, as they become available.

Read more

Housing Affordability Surges At Year-End 2008

February 19, 2009 - Nationwide housing affordability surged at year-end 2008 to its highest level in at least five years, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), released today.

The HOI indicated that 62.4 percent of all new and existing homes that were sold in the final quarter of 2008 were affordable to families earning the national median income of $61,500, up considerably from the 56.1 percent of homes that were affordable to such families in the previous quarter and the 46.6 percent of homes that were affordable to them at the end of 2007.

Read more

Saturday, February 21, 2009

Housing Opportunity Index

The Housing Opportunity Index is published quarterly by the National Association of Home Builders. "The Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income based on standard mortgage underwriting criteria." Consequently, it depends on local home prices, incomes and credit market conditions. It assumes a family can spend 28 percent of their income on housing. A similar index, the Housing Affordability Index is published by the National Association of Realtors.

Thursday, February 19, 2009

New Stimulus Subsidy for COBRA Premiums

Workers who lose their jobs can continue health care coverage under COBRA. However, they must pick up the full cost of the insurance plus a 2 percent administrative fee. The high cost of the premiums has deterred most workers from exercising the continuation option. Under the recently passed stimulus plan, the government will now subsidize 65 percent of the premiums for up to 12 months after termination.

To be eligible the loss of employer health coverage must result from involuntary termination and "must occur during the period beginning September 1, 2008, and ending with December 31, 2009, and the qualified beneficiary must be eligible for COBRA continuation coverage during that period and elect such coverage."

This video from the Wall Street Journal discuss the subsidy. Unemployed? Help Paying Cobra Benefits is on the Way

Tuesday, February 17, 2009

The Cost of Raising Eight Premature Children ($2.9 million?)

Insweb reports that the average cost of a hospital stay for a premature baby in California is about $160,000. For eight premature babies the octuplet's mom should have a hospital bill of around $1.3 million. The Department of Agriculture has a Child Cost Calculator you can use to estimate the annual cost of raising a child. They also publish an annual update to Expenditures on Children by Families. The latest report indicates that the cost of raising a child to age 18 in a two-child middle income family is about $200,000. Ignoring economies of scale in an eight-child family, the total cost of raising eight children is approximately $1.6 million. Consequently, not counting a few extras (6 other children) the octuplet mom should budget for about $2.9 million.

Saturday, February 14, 2009

No Bailout for Student Loan Defaulters

Apparently, government compassion for home mortgage borrowers does not extend to those with student loans. It has been reported that the Justice Department is planning to expand ifs filing of lawsuits against those who have failed to repay their student loans.
See story at

Thursday, February 12, 2009

My Rich Uncle is Broke

In 2006 My Rich Uncle, which provided educational loans for college students, was promising student loans at below market rates.(See MSNBC). The company filed Chapter 7 and ceased operations on February 9. New government limits on student loan rates and the credit crisis has restricted student lending. (See FastCompany) The markets for all securitized loans, such as packages of student loans, has been particularly hard hit.

FTC Uncovers Mortgage Foreclosure Scam

There is nothing more reprehensible than criminals that seek to take advantage of those that are already experiencing hard times, such as the unemployed and the sick. Lately, companies claiming to help you forestall foreclosure for a fee have been springing up across the country. After the fee is paid, the promised refinancing never materializes.

For foreclosure assistance see HUD Hope for Homeowners and Hope Now.

Are you the potential victim of a foreclosure scam? In this new web commercial from Freddie Mac, learn to spot a foreclosure scam and find out how to avoid becoming victim to home foreclosure fraud...

Tuesday, February 10, 2009

IRS Tax Tips for Disabled Tax Payers

IRS TAX TIP 2009-26
There are several tax credits and benefits available to qualifying taxpayers with disabilities as well as to the parents of disabled children. Listed below are several tax credits and other benefits available if you or someone else listed on your federal tax return is disabled.

Sunday, February 8, 2009

A Review of Consumer Protection Laws in 50 States

The non-profit National Consumer Law Center has issued a report on "Consumer Protection in the States: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes." The report examines the quality of consumer protections in each state along with suggestions for improvement. From the press release:

Serious gaps and weaknesses have compromised consumer protection laws in most of the 50 states, and recent court rulings have opened the door to predators and abuses in billions of everyday transactions.

The report analyzes and summarizes the unfair and deceptive acts and practices (UDAP) laws that protect consumers in each state and the District of Columbia, and spotlights limitations in the substance and scope of the laws and in their enforcement. “State unfair and deceptive acts and practices laws provide the main defense against abuses in most consumer transactions,” said Carolyn Carter, an NCLC senior attorney and the author of the report. “Yet in some states these laws provide almost no protection to consumers.”

Saturday, February 7, 2009

Health Insurance After Job Loss

Families USA lists the following options for those who need to replace health insurance coverage after job loss. You can read more about each of these options at Getting Covered: Finding Health Insurance When You Lose Your Job.

1. Find out if you can get coverage through your spouse’s or domestic partner’semployer.
2. Find out if you can continue your coverage through COBRA.
3. Find out if your state has any laws or programs that could help you.
4. Find out if you are protected under another federal law called HIPAA (the Health Insurance Portability and Accountability Act).
5. Find out if you are eligible for Trade Adjustment Assistance and the HealthCoverage Tax Credit that comes with it.
6. Find out if you or any of your family members are eligible for Medicaid, the Children’s Health Insurance Program (CHIP), any other state or local program, or VA coverage.
7. If you can’t afford COBRA and you can’t get help through a public program or any of the options listed above, shop for insurance in the individual market— but do so with CAUTION.

Thursday, February 5, 2009

Health Care Spending in Medicare Households

A new report, Health Care on a Budget: An Analysis of Spending by Medicare Households, finds that in 2006, out-of-pocket health care spending accounted for 14.1 percent of all expenditures for Medicare households – less than housing (34.1 percent) but about the same as transportation (15.0 percent) and food (13.6 percent). And, one in four Medicare households devotes more than one quarter of total household expenditures to health care. This group includes a disproportionate share of Medicare households that are low- and middle-income, have older members (age 75+), and are living in rural areas.

Insurance Fraud Hall of Shame

Angry about paying insurance premiums all those years and receiving nothing in return? Thinking of cheating your insurer? Well, think again. You should be happy you never had to submit a claim. What you received in return for your premiums was a reduction in risk and a good night's sleep. This is neither costless nor valueless.
The Insurance Fraud Hall of Fame sponsored by the Coalition Against Insurance Fraud includes a number of shysters who all thought they were too smart to get caught.

Tuesday, February 3, 2009

The “What Ifs” of an Economic Downturn

The IRS has been working late thinking of all the bad things that can happen to you in the current economic crisis. To review the tax implications related to all these "bads" go to the IRS What If Page.

Sunday, February 1, 2009

Will the Current Financial Crisis Affect Future Investment Behavior?

A new study by Stefan Nagel and Ulrike Malmendier, "Depression Babies: How Our Economic Experiences Affect Investment Behavior," indicates that it probably will shape our future willingness to accept risk.

The implications of this study—especially for how things might play out in the next few years—are notable. Precisely because difficult economic times make investors less willing to take risk, bad experiences can lead to a vicious circle. Investors, skittish because of recent —and in many cases massive—losses, can be loathe to put money back into markets even after they stabilize. “This can amplify recessionary effects, and prolong economic downturns,” said Nagel.