Inman

More and more Loan Originators I speak with are asking about debt settlement. Past and prospective clients are asking for help with consumer debt. They are worried they may soon be unable to make the minimum payments (or may have already fallen behind), they can’t consolidate debt like they had in the past using home equity, and they want to avoid bankruptcy.

What do you tell your clients?

Can you point them in the right direction when they need help managing or eliminating their unsecured consumer debt?

Can you tell them the difference between bankruptcy vs. debt settlement vs. consumer credit counseling?

If you consider yourself a mortgage planner or advisor to your clients, it’s important you understand what options they have available to them in managing and eliminating their debt.

Basics of Debt Settlement

Debt settlement is a legitimate option for consumers struggling with consumer debt who are looking for an alternative to Chapter 13 Bankruptcy.

The basic premise of debt settlement involves redirecting required monthly payments intended for creditors into a separate settlement account. Existing assets/savings can also be used. Once enough money has been saved, the negotiations begin. While specific results will vary, the goal is to settle a consumer’s debts for 50% or less of what they owe.

We’ll take a very simple look at the numbers (not taking into penalties, additional interest, fees, etc).

Let’s assume you owe $35,000 in credit card debt. Your minimum monthly payment is $700.

You can’t afford it.

You’ve stopped paying your creditors and start to put $500 a month aside for purposes of settling.

You have $6,000 you can pull from a ROTH IRA without penalties.

In 16 months, you’ve saved $8,000 (not including the $6k from the ROTH IRA).

You successfully settle for 40% of the original $35,000 saving yourself $21,000.

Sounds simple, right?

Unfortunately, many consumers who hire a third party debt settlement company are either not good candidates for debt settlement — or hire the wrong company.

Like in many industries that cater to financially desperate people - there are a lot of bad apples. In September, the FTC held a workshop to discuss the grossly unregulated industry. News reports of debt settlement firms being shut down or fined are not uncommon.

Bankruptcy winds up being inevitable for some. They owe more at the end due to interest costs and penalties than they did at the beginning of the process.

Some consumers tackle debt settlement on their own - but underestimate the process, risks, or the length of time it may take. Some are wildly successful.

In the next post, I’ll begin to cover some of the pitfalls associated with debt settlement. I’ll follow that up with some of the benefits. I’ll wrap it up with what I would look for in a debt settlement company.

In the meantime, feel free to contact me with any specific questions or if you need a referral to a reputable debt settlement firm. I hesitate to say this, but I know some will ask - yes - some will even compensate you for your efforts.

In this 6-part series, I am going to attempt to explain something that affects all of us but something that few of us understand — inflation. If you stick with me through this series, you will find out why I think that the way inflation is calculated contributed to — or perhaps caused — the recent real estate boom and subsequent bust. But first we need to learn a bit about inflation as measured by CPI.

Inflation is more money chasing the same amount of goods. If it takes 95 cents to buy the same candy bar you bought last month for 90 cents, that extra 5 cents is inflation. To get a handle on the overall rate of inflation, someone has to track the prices of all goods and services. That job falls to the Bureau of Labor Statistics. Each month they publish the Consumer Price Index (CPI). The CPI is a measure of the average change over time of prices paid by consumers for a specific basket of goods and services. It’s basically a measure of inflation as experienced by consumers.

There are different versions of CPI, but the most commonly reported CPI is the CPI-U, also known as the all-items CPI. Since 1977, the BLS has also published what is commonly called the Core CPI-U, which is the CPI-U minus food and energy. The Core CPI (CPI-U minus food and energy) is the Federal Reserve’s favorite measure of inflation. The goal of the CPI is to determine what happens to consumers when prices go up. If the goods in the CPI basket go up 5%, consumers must increase their spending by 5% in order to remain at the same standard of living.

To put together the CPI, the BLS conducts consumer surveys. They want to know where you eat, shop and fill up your tank. Once they know where consumers purchase goods, the BLS regularly collects prices at these “outlets” to put together the various CPI indexes. They also use telephone surveys to find out what consumers are paying, and they use statistical samplings to gauge the prices of rental homes and apartments. The CPI for all items in the basket is known as the CPI-U, the overall Consumer Price Index. In the end, 211 item categories and 38 geographic areas produce over 8,000 different basic indexes from which CPI is constructed. Gasoline in Chicago, apples in Dallas, doctors’ services in Seattle and all the other indexes are lumped together to form one CPI, one measure of inflation. The goods included in the CPI basket include food and beverages, housing, transportation (including gasoline), education and communication, medical services, recreation, apparel and an “other” category that includes items such as tobacco and haircuts.

Measuring inflation is a tough job. Think about your own “basket of goods.” You probably buy gasoline. If we looked at your own personal basket of goods, we might also find that you buy a lot of compact discs and Oreos along with 90% lean ground beef, spaghetti sauce, apple juice and Tom’s of Maine toothpaste. If we tracked your basket of goods, we would probably find that your purchases change over time. You might give up Oreos, for example, in an effort to shed weight. You might start downloading music via iTunes instead of purchasing traditional compact discs. If the price of beef goes up, you might switch from 90% lean to 80% lean meat. You might keep eating the same spaghetti sauce, but you might buy orange juice instead of apple juice if orange juice goes on sale at your local market. You might also decide that Tom’s of Maine toothpaste is too expensive and go back to using the toothpaste you used to buy at the Dollar Store.

The point is that consumer behavior changes over time. Items go on sale that spur different purchasing habits, consumers switch to less expensive alternatives when prices go up, products get discontinued, and technological advances produce new options. Because of the ever-changing marketplace, the American basket of goods never stays the same. That makes tracking prices a difficult job. The people who track the American basket of goods, The Bureau of Labor Statistics, have tough choices to make.

Let’s take soda as an example. If you buy a 12-ounce bottle of soda every day, what do you do when the manufacturer stops making that size, offering only a 16-ounce alternative instead? You cannot buy 75% of a bottle of soda. It’s all or nothing. If the manufacturer keeps the price the same, how does the change affect CPI? You are now getting 4 extra ounces of soda for free. From one point of view, the price of the item has fallen. After all, you are getting more soda for the same price. The other point of view says, “But I didn’t want 16 ounces of soda! I shouldn’t even be drinking soda, so 12 ounces a day was already enough. Give me back my 12-ounce bottle of soda!” From that point of view, the price hasn’t fallen because the consumer didn’t want the extra 4 ounces. The BLS has a decision to make. They have to decide whether or not a consumer getting an extra 4 ounces of soda for the same price constitutes a price drop. These types of decisions are made by the BLS, and they directly affect CPI, the measure of inflation in the American economy. Good decisions by the BLS produce an accurate CPI, whereas poor decisions mean that CPI is not reflective of actual inflation. Incidentally, the soda-pop example used here would be handled automatically by the CPI. They would chalk this one up as a price decrease.

The Consumer Price Index was first published in 1921. The way the numbers were calculated remained the same from 1921 to 1983 when a major change was implemented. They changed the treatment of homeownership in the CPI from an asset-based approach to rental equivalence (We’ll go into rental equivalence and the other changes more in detail later on). A second major change in the calculation took affect in 1999 during the Clinton administration. That’s when they switched from straight arithmetic to the “geometric mean” formula and introduced “hedonic regression,” which is a way to make quality adjustments. To recap, here is the history of the CPI:

• Calculation unchanged from 1921 to 1983
• 1983 change in the way housing was treated. Instead of using the prices paid for houses, they began using what a homeowner would receive in rent if they chose not to live in the home (rental equivalence or the homeowner’s opportunity cost).
• 1999 switch from arithmetic mean to geometric mean
• 1999 introduction of hedonic regression, which makes adjustments for quality changes

Critics say that these changes resulted in an understated CPI, meaning that actual inflation is higher than what the government says it is. Economist John Williams says that inflation as reported by CPI is understated by roughly 7% per year. Supporters of the changes say that the adjustments have made CPI a more accurate measure of inflation. They claim that inflation was previously overstated, and since the changes, it’s now very accurate. We’ll address each of the changes in more detail later on, but before we get to that, I want to address why having an accurate CPI is so important. We’ll talk about that in Part 2 …

by Wade Young

Many of you are probably wondering why this week’s update is so late and please accept my apologies for the fact that it is.  Today was my checkride to allow me to keep flying and as such, I tend to “disconnect” emotions and extraneous thoughts, and I forgot to upload this morning’s update.  The funny thing is that mortgage bonds have been acting “disconnected” as well.

What an interesting week we had last week, with technicals beating out data even, which is not normal.  In my flying career, I come to Dallas every 9 months to practice abnormal procedures, like losing an engine as you rotate on takeoff, windshear, and other fun stuff we hope we never see in real life.  Taking a look at the last week, as I thought possible last week, we had a great opportunity to float as mortgage bonds moved higher within their trading range, but the sharks I warned you about finally did show up and data couldn’t stop them.

As the data started flowing, right as the week started as well, we saw mortgage backed securities begin to rally, and they really took off on Tuesday, even with the absence of data.  Throughout the week, the data pointed to a struggling economy, bringing recessionary fears to the forefront, and even ended the week with a dismal jobs report.  Yet, mortgage bonds did exactly as the charts predicted, even with the dismal data and that was the weird part, since favorable data is what usually gets mortgage bonds to break through resistance or support layers and the bad jobs data should have sent them through the roof.

So, we are in another abnormal time, where we see chart patterns outweighing resistance, and that has trapped mortgage bonds in their sideways trading pattern and is sending mortgage rates higher, as we even saw today.  Mortgage rates last week did manage a net drop for the week, but the week ended very poorly and painted a very ugly picture for at least the near future.  Remember those sharks I warned you about last week?

Since this report ended up being rewritten this evening due to my hectic day (I even caught a flight back home), we see that the week already started out continuing where Friday left off, with mortgage bond pricing dropping, though only slightly.  There is not much in the way of data this week, so technical indications are leading the way, that is unless we get some major news that changes things, which is not likely.  Retail Sales is the “big one” this week.  Here is the scheduled data releases for the week…

• Monday:  No data
• Tuesday:  Take a moment to thank those whom have served our country, especially those whom have lost their lives.  Don’t forget those serving right now as well.
• Wednesday:  No data
• Thursday:  Initial Jobless Claims (8:30), Balance of Trade (8:30)
• Friday:  Retail sales (8:30), Consumer Sentiment (10:00)

This week may be a very volatile one as today ended early and the markets are closed tomorrow in observance of Veteran’s Day.  Volatility is usually increased on shortened trading days and shortened trading weeks.

Taking a look at the charts, we see another lower peak in pricing and that means the trading range remains intact, with decreasing tops.  We can expect mortgage bonds to slide back down and test their support at the bottom of the trading range, and we hope that support holds again.  This week, plan on mortgage rates returning to their recent highs, about where we started last week, after which we may see another period available for floating if the range holds.

PS - Please accept my apologies for the tardiness of this week’s update and don’t forget my daily updates over at Florida Mortgage Daily, which will resume with this evening’s report as well.

I’m joining two of my favorite mortgage bloggers, Dan Green and John Yedinak, along with a host of real estate 2.0 professionals at SPARKt on December 10th in Chicago. From the site.

“The inaugural SPARKt Technology Conference features notable national experts and change-agents leading an afternoon of short-form talks (18 minutes each) that challenge each of us to expand our understanding of how technology is changing real estate as we know it.”

I’ve been saying for a while that Chicago is a great spot for such an event. Some of the most established and successful real estate bloggers come from the mid-west, and the ranks are growing. If you can make it to the event, please introduce yourself to me. I’d love to meet you.