Do I walk away?

Should I walk from my mortgage is a very common question right now.  People are wondering about the moral ethics behind walking away from a loan.  I have my thoughts about it.  I found this article on His blog.  He has a very interesting take on this situation.

This article is written by a guy named Mike Shedlock.

Businesses Advised To Walk Away

Before exploring legal advice being given to banks about walking away, let’s review one more time the Moral Obligations Of Walking Away.

In a nutshell I made a case that “business is business” and yes, I encourage people to walk away now if they are going to be forced to do it later anyway. I also encourage people to walk away if they are hugely underwater on their homes.

Banks knowingly and willingly gave homeowners a free PUT option when they financed homes at zero percent down. It’s just a business decision. Businesses break contracts all the time.

In the “moral Obligations” post I also claimed there would be a national referendum on walking away. A few days later an ABC Poll showed that US citizens decided that walking away from Iraq was the single most important thing we could do economically for the country.

The masses have finally caught on and that is one reason why I declared Obama: The Next President Of The United States.

Walking Away Retail Style

In Does The Shopping Center Economic Model Work? we took a look at trends in retail. Consider what Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research said two days ago:

“Some companies are closing stores to increase profitability, some are doing it just to stay alive. A lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn’t just stop those new stores on a dime. Looking back on that, they’re going to wish they had just walked away and paid whatever it would have cost them to stop the process. ….. For the next decade, retailers are not going to have to open a brand new store because there’s going to be so many empty ones that need to be filled.”

The interesting thing from the morality standpoint is that some stores are walking away, not to stay in business but to increase profitability. Others wished they walked away right during construction to say costs. Are such decisions morality issues or business decisions?

Wilson’s Leather Walks Away From 160 Stores

“Sandi”, one of my readers, sent me a note this morning that Wilsons Leather will close up to 160 mall locations.

Wilsons The Leather Experts Inc. will close the majority of its 260 mall locations and cut more than 1,000 jobs, the clothing retailer said Friday.

Wilsons will keep 100 stores open, revamping them under a “Studio” concept focused on fashion accessories for women. All stores should be remodeled by August.

About 938 store-related jobs and 64 positions at the company’s corporate headquarters, overseas offices and distribution center in Brooklyn Park, Minn., will be cut.

Clearly Wilson’s Leather had contractual agreements on all those leases. Is there a morality issue here when they just walk away like that?

Banks advised to walk away from big deals

Today, the Financial Times is reporting Banks advised to walk away from big deals.

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

Oh! The Morality!

Note the irony. Numerous programs are being put into place in an attempt by banks and mortgage holders to encourage home owners to stay debt slaves forever, while lawyers are advising banks to walk away from contracts and pay the penalty of loss of reputation.

Exactly how does this differ from homeowners choosing to walk away from their obligations with a price of “loss in reputation” otherwise known as a black mark on their credit score?

Here’s the answer: There is no difference, and that is precisely why all these programs to keep homeowners in their homes when it is a bad economic decision for them to stay, will fail.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named said Mish, who was willing to be named. “The banks Consumers have so many issues with their balance sheets that they are considering a new policy.”

If it’s in your best interest to walk, and you are willing to pay the penalty price, then walk.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mr. SEC, Can I Loan Money To My Brother?

I can’t believe it…oh wait YES I can.

Have you heard of these Peer-to-Peer lending websites?  You can go onto the sites and loan money to other individuals.  In return you will charge them interest on the loan.  You are able to choose to whom and how much you loan.  It is a great idea.  It allows the regular Joe to get involved in private lending.  On these sites you can loan just a portion of what the person is asking for so you don’t have to take on the full risk of that one loan.

Some people might say that sounds risky to lend like that and so they just keep funding their 401k and other stock market related accounts.  I guess what that means is the stock market is less risky then private lending ( According to who?).  Have you watched your stock portfolios pay you 15% interest year after year?  How about those 401ks?

The SEC is now stepping in to tell these companies they need to be registered as a security (surprise surprise).  Is it because they want to save the consumer from a massive pitfall?  One reason might be that it can cost these companies anywhere from $250,000 to $1 Million dollars to register.  Sounds like financial motivation to me.

Sometimes I wonder if people with financial motivation will always mess with good things that come around.  And I am referring to legit business models.

Here are a few of the sites that I am aware of.  I have 0 financial motivation to introduce these sites and am not responsible if you lose money.

http://www.prosper.com

http://www.lendingclub.com/home.action

Here is a good article on the subject.

http://www.nuwireinvestor.com/articles/p2p-loans-may-be-classified-as-securities-51813.aspx

Cancel My Credit Card?

This article has some good ideas on how to manage credit cards. This is one question I get a lot of. Credit in general is a very confusing subject due to many opinions. This piece seems to be on a good track according to my O.K. knowledge and experience on the subject.

The Motley Fool

By Dayana Yochim March 24, 2008

If your idea of “streamlined” finances is having eight credit cards in your wallet (that’s about how many the average card-carrying U.S. citizen hauls around), you’ve probably considered canceling some of credit cards you don’t use often.

Before you dash off “Dear John” letters to your lenders, first make sure you’re not doing more harm than good by parting ways.

The truth about canceling credit cards
Do unused lines of credit hurt your credit score — or help it? Will removing old information about already closed accounts make you look more (or less) attractive to bankers?

Great questions. Let’s clear up some common misconceptions:

Closing accounts will not undo anything. Once a credit card is in play, there’s no denying its existence. It’s on your permanent record — your credit report — for at least seven years. Yes, even if you cancel the card the next day. Same goes for any red marks (late payments, charge-offs, overspending) associated with your accounts. Sorry, you simply can’t deny your past. But at least it will fade away and, for most negative entries, fall off your report in seven years. However, you might not want some entries to disappear …

Why deny the good? Removing old closed accounts that have no negative items is a bad idea because you benefit from a long credit history, and those accounts speak to that history. (Good entries can remain on your report forever.) Remember, 15% of your credit score is determined by how long you’ve been borrowing.

Closing accounts might hurt your FICO score. Lenders take a hard look at the ratio between the balances on your revolving accounts and your total available credit. If you do have debt, try to keep it to less than 30% of your available credit. (The ideal number here is, of course, 0%.) Go ahead and keep those lines of credit open, but don’t be tempted by untouched lines. When you close out open accounts, those credit lines are no longer factored into your ratio. Thus, your debt as a percentage of available credit will increase. Ouch.

Why cancel cards at all? It may sound like the lending industry loves customers who have gobs of plastic, but as with most things, it’s best not to binge. According to Fair Isaac, once you acquire more than seven revolving debt accounts, your FICO credit score begins to suffer a little. And while simply closing accounts won’t necessarily have an immediate positive effect, over time it could boost your credit score. So let’s see if it’s time to break up with some of your banks.

Keep the oldies … As we said above, commitment counts, and lenders see long-held accounts as proof that you are the responsible citizen that we know you are. So, if it’s the choice between parting ways with that dashing new sliver of plastic in your wallet or the faded alumni credit card you got when you still had hair, keep the latter.

… and the goodies. If you get points, miles, cash back, good karma from using a credit card, and — this is important — you actually take advantage of the goodies that come with membership, keep the card in play. It’s good to know, however, that credit cards with rewards programs are really common. So if the card carries an annual fee, call and ask if it can be waived. If you don’t get back what you pay annually to use it, consider cancelling.

Dump the flighty ones. Just because your credit boasted a single-digit interest rate when you got it doesn’t mean it will do so indefinitely. Nothing’s uglier than paying for a new transmission at a 23.9% interest rate. Those credit cards that have ever-shifting rules and rates require an eagle eye be kept on all those leaflets that come in the mail. If you’re not the type to keep your eye on the dealer, this card may be a lot more trouble than it’s worth to keep in play.

Keep the ones that stood by you in bad times. If debt was a problem in the past and may become one in the future, keep open those accounts where you have a decent track record — meaning no (or few) bloopers (like late payments or overages) — and a longstanding relationship. If the low-interest offers dry up, your room for negotiating a better deal is best with a lender that has fond long-term memories of your time together.

Hold on to your single days. If you’re married, don’t give up your identity entirely. Simply being an authorized user on your sweetheart’s credit cards won’t help you establish credit or keep your reputation intact. You must keep at least one line of credit from your single days open and active, and in your name only. If you don’t occasionally use the card your file will go dormant and become unscoreable.

In addition to using the nuts and bolts of your credit card program, other factors may play a role in reviewing your lending relationships. Customer service is a biggie for some, and it’s usually not an issue until something goes wrong.

The right way to close a credit card account
Simply cutting up the card and calling it quits doesn’t count. An unused card is still an active account (until expiration), so while you might not be getting a bill in the mail, the bank still counts you as a customer. If your number gets in the wrong hands, you might not notice until it’s too late.

To end your relationship with your lender for real, call the 800 number on your card statement and find your way to a live operator. Specify that you want the account closed — and this is important — “at the cardholder’s request.” It’s a minor point, but it looks better on your credit report if the account was terminated by the user and not the lender.

Know when to hold them, when to fold them
It’s tempting to do a major spring cleaning and dump all the dusty cards from your wallet at one time. However, cutting off too many lines of credit at once can give the wrong impression on your credit score. Again, the level of “acceptable credit” depends on your income. Too high, and you’re a risk. Too low, and your banker may wonder why you don’t qualify for more. Still, with responsible credit usage — paying your bills on time, every time — any short-term blip will be history in no time.

The Motley Fool

By Dayana Yochim March 24, 2008

FICO 08

Have you checked your credit lately? How will your credit be affected by the new system change? Will it be an advantage for those with good credit? Here is a good article I ran across that explains some of the basic changes we should all be aware of.

http://www.nuwireinvestor.com/articles/fico-08-the-new-fico-credit-score-model-51467.aspx