Bankrupt! Nearly 1 in 4 People Are Uncomfortable With Their Debt

A new Gallup poll reveals that, despite the fact Americans are taking on more and more debt as a way to fuel consumption (and in theory are comfortable with the idea of debt), about 23% are "somewhat or very uncomfortable" in terms of their level of debt.




While 23% may not be as "significant" as Gallup claims (keep in mind, 77% of respondents said they are "very" or "somewhat" comfortable with their debt level), to me the more important piece comes after, in that 49% of respondents are uncomfortable with making a major purchase (in turn adding to their debt) in the next 3 months.

Perhaps we're seeing a turning point- people finally getting fed up with the ever growing mountain of debt weighing them down. Take this with things like the growing proliferation of debit cards- particularly young people, "with 60% of people 18-25 reporting they use the cards for purchases for anything from digital content and vending machines to parking and newspapers" according to MSN- and it does seem that the willingness to incur debt may be retreating.

Though, its a long battle back from the situation we young'ns are in. Yikes.

Also interesting to note that 4 of the 10 most recent Gallup poles are focused on debt, highlighting again how top of mind this issue is for people.

Innov8 (or Die): What Banks Can Learn from Geek Squad

The Geek Squad seems an unlikely model for banks to emulate, but founder and "chief inspector" (read, CEO) Robert Stephens has a lot to say about how banks can improve their customer experience. Interviewed in the March/April 2007 issue of BAI's Banking Strategies, Stephens says banks should strive to make the routine activities of banking fun, such as waiting in line at the branch or at the drive-thru. He also calls for innovative business cultures able to nurture small, inexpensive experiments that could later on have a big impact.

Some excerpted mindbombs to consider:

ON THE CULTURE OF INNOVATION
•Think of every company not as a company but as a software program—as a system you're buying into. Customers, either consciously or unconsciously, choose companies based on their interface.

•There are endless ways to innovate. We need cultures inside companies that are constantly turning out these ideas.

•What makes the Geek Squad unique is that we are defined by the employee. Labor is our biggest expense, as it is with most other service businesses, so we define ourselves by our relationship with our employees. The technology will change, but how we deliver service and what people expect from good service, those things won't change.

•The customer experience is a product of your employee experience, especially if you're customer-facing. For banks, the branch is just one part of it. That's why online and phone are probably the most important channels, because even if you come to a branch, you might be calling first to get driving directions, or going online to find out about the hours. So, the online and the phone experiences almost should be taken care of first, since they can be more easily controlled.

ON SAYING "NO"
•For example, we're launching Geek Squad in London early this year. I told the team: "You have no money for public relations—none." I told the marketing team: "You can't do marketing, but I'm going to give you money for creative endeavors. What you're going to do is, you're going to design the call center scripts to make it fun to be on hold."

•The reason they have no money for PR is because I expect them to make that experience of being on hold enjoyable. The experience should be so memorable that the press will line up to call us and ask us to come on their TV or radio show and talk about it. Now, that's public relations. Operations become marketing. They become indistinguishable from each other. That's when you know you have accomplished your mission.

•I ran into our chief financial officer the other day in an elevator and said, "You know, the finance department is the most important catalyst to creativity in the entire company." He looked at me, like, "Really? Why?" I said, "Because you say 'no' more than you say 'yes.' And saying no frustrates people. But the successful people, the persistent people, will always seek to find a way."

ON THE PIRATE MENTALITY
•I learned this from not having the resources, as a small company, to do things. So you tend to do them differently. That's a lesson that I'm learning now, even in a large environment like at Best Buy. The best thing that ever happened to me was not having money when I started my company. That starves the organization, which fosters creativity.

•A large bank may give up on innovation for many reasons, such as we're government regulated, we can't get things through too quickly or there are Wall Street pressures on a quarter-to-quarter basis. But I would argue that those pressures are the source of the creativity; they are not the limiter.

•That's the riddle. We tend to give up too easily and just throw our hands up, saying, "Well, we can't innovate," and then complain. But that's a form of competition because that kind of attitude prevents you from beating your competitors.

ON ASSEMBLY LINING INNOVATION
•It's easy to blame the faceless monolith, but if you're competing for its resources against a peer, well that's different. You can look at which idea contributes to a better customer experience. If you can't measure that, then it's back to the drawing board.

•That criterion creates a Meritocracy; it's one idea versus another. But the ideas should start small. If you ask for a lot of money for a project, you're going to be subject to a lot of restrictions, a lot of barriers. Not spending a lot on a project provides greater creative freedom because there's less risk for the organization.

ON FAST PROTOTYPING
•Tiny experiments can snowball into great revenue producers, and that's what companies need to do. Software is your process in real time. It offers the ability to design, to experiment, at a really low cost. That's where I think banks are specifically missing out on a coming revolution in software development at low cost and high speed.

•Banks should continually set a goal of coming up with one new idea a month, one new little service. They don't have to be large, massive undertakings, but simple, tiny stuff.

•I recently launched a rapid prototyping program at Best Buy called "Two weeks: $500." Basically, if anybody in the organization has an idea and can give us a prototype in two weeks, we'll give them $500 to develop a simple software feature or function to demonstrate it. The feature can be made accessible on the company network so people can check it out. Then, to take it to the next level, we can add a few more zeros, maybe do a $5,000 prototype. When you get to the $50,000 level, maybe you invite your top customers in to beta test it.

•Eventually, you might move to the $5 million implementation, but you start with $500 to force that creativity and de-risk the idea to get it off the ground. You can't even get to the $5,000 level unless you've proven out some kind of working prototype.

via BAI Banking Strategies

Bankrupt!: A Perfect Storm Forming

Been a minute since I reported on "Maxed Out"(+/+), a scathing documentary exposing the effects and inner workings of America's debt crisis and debt industries.

Since then, James D. Scurlock, director of Maxed Out has been a busy bee, as screenings play nationally throughout this month in 12 cities including Chicago, Los Angeles, New York and Washington.

His companion book — formally titled “Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders” — is being published by Scribner.


Yet, more interestingly, Stuart Elliot and NY Times reports on a general trend towards louder and harder-edged criticism of lending practices.

A coalition of organizations, called Americans for Fairness in Lending, which is comprised of the Consumers Union, the N.A.A.C.P., Acorn, the Association of Community Organizations for Reform Now, the Center for Responsible Lending, the Consumer Federation of America, United Automobile Workers, and the National Consumer Law Center are teaming with Maxed Out's director James Scurlock, to launch an advertising campaign that compares the effects of so-called unfair lending practices with the havoc wreaked by natural disasters like earthquakes, fires, hurricanes and floods.

The campaign from the coalition, which includes print advertising and a web site, has been in the works for more than two years, its organizers say. The ads are being introduced 13 days after a trade organization for the payday-lending industry, which provides short-term cash advances, began a campaign centered on what it calls a voluntary “customer pledge” to help shield borrowers from abuses.

Members of the coalition wanted a campaign that would be perceived as “different for folks from nonprofit organizations,” says Kirsten Keefe, the executive director of the coalition, by being more like hard-hitting, attention-getting ads for products and less like warm and fuzzy public service announcements.

The ads depict unhappy families and their meager possessions in makeshift circumstances, as if they were evacuated or rescued from nature’s wrath. In each instance, readers are told that the “crisis,” “tragedy” or “disaster” was caused by “credit card debt,” a “400 percent payday loan” or a “late mortgage payment” rather than, as they would expect, a natural calamity.

Meanwhile, on the other side of the ring, stands the trade organization
Community Financial Services Association of America, made up of Cash America International, the largest pawnshop chain; Check Into Cash; the Dollar Financial Group; Express Check Advance; First Cash Financial Services, and Rent-A-Center which all say they will spend $10 million on its campaign. The coalition campaign, by contrast, has a budget estimated at $500,000, although the member organizations are hoping to raise additional money.

Print ads for the trade association carry headlines like, “A customer pledge from the payday advance industry” and describe steps that members are taking to address critics.

They include a new feature, called an extended repayment plan, which will offer some borrowers more time to repay loans; adding to “all marketing and advertising materials” an advisory that payday loans “are for short-term use only,” and an agreement to refrain from advertising payday loans “for frivolous uses.”

AKI COMMENT: I still predict we are fast approaching a tipping point - a shift in mass sentiment (and demands for action) on par with recent cigarette industry backlash, Wal-Mart backlash, sweat shop production backlash. Consider recent fast food industry backlashes after effective hactivist exposes such as Fast Food Nation and Super Size Me goosed the rising tides of consumer dissatisfaction into organized movements for change.

Some additional light reading:
Bankrupt!: The Unbanked: Payday Lending
Bankrupt!: The Unbanked: Payday Lending to Military
Bankrupt!: The War On Soldier Debt
Bankrupt!: Ominous Housing Market Bubble
Bankrupt!: Young and In Debt
Bankrupt!: Youth Debt Burden
Bankrupt!: Retiring In The Red

People-to-People Lending Redux

We did a feature back in March 2006 about Prosper.com. The first year results are in - suggesting that Prosper.com's revenues for 2006 were in the range of $300,000 - based upon a 1 per cent origination fee charged on almost $30 million of loans originated.

Obviously, they'll need to grow that revenue number by a couple of orders of magnitude for this person-to-person lending business to be considered economically viable.


via PaymentsNews

Bankrupt!: Ominous Housing Market Bubble

2 Million Homeowners Facing Foreclosure

A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households are likely to lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.

The CRL study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006.

CRL's research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

"In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans," said Mike Calhoun, CRL president. "At $164 billion, the losses from foreclosures could pay for the college educations of four million kids. For families who lose their houses because their loans fail, savings and economic security will be way out of reach."

The report discusses a number of factors that drive subprime foreclosures -- in the majority of cases, borrowers receive high-risk loan features, packed into an adjustable rate mortgage with a low start rate, that is approved without considering whether the homeowner can afford to pay the loan after the rate rises.


Adjustable rate mortgages known as 2/28s (or "exploding ARMs") operate with an initial "teaser" rate for two years, followed by a steep payment increase. And, regardless of a borrower's credit history, the almost one-quarter of American families who get subprime loans find them crammed with other high- risk terms such as prepayment penalties, limited income documentation, and no escrow for property taxes and hazard insurance.

In recent years, high appreciation in many areas has masked problems in the subprime market. CRL projects that the cooling housing market, will cause failure rates to rise sharply in many major markets. California, Arizona, Nevada, and greater Washington, DC will be especially hard hit.

Trouble in the overall subprime market spells trouble for African American and Latino families across the country. Although white families receive more subprime loans overall, blacks and Latinos receive a higher proportion of high-cost loans than any other group, a fact consistently verified annually by data lenders submit under the Home Mortgage Disclosure Act (HMDA).

The report, "Losing Ground," estimates that 8 to 10 percent of all black and Latino families who received a home loan in 2005 will be affected by subprime foreclosures.

"Homeownership rates for minorities are up but so, too, is the cost of that homeownership," said Wade Henderson, executive director of Leadership Conference on Civil Rights. "We need rules to curb predatory lenders, but we also need prime lenders to step up for this expanding market of borrowers."

And It's Not Just the Subprime At Risk

The delinquency rate for residential mortgage stood at 4.67 percent of all loans outstanding in the third quarter of 2006 on a seasonally adjusted basis. That's up 28 basis points from the second quarter, and up 23 basis points from one year ago, according to Mortgage Bankers Association's National Delinquency Survey.

"The housing market continued to normalize in the third quarter of 2006. Although labor markets remain strong, the pace of job growth has slowed, as has the home price appreciation rate which has decreased in response to higher interest rates and rising inventories of unsold homes," said Doug Duncan, MBA's Chief Economist and Senior Vice President of Research and Business Development. "Some states experienced home price declines in the third quarter, and a few have experienced declines over the past six months."

The percentage of loans in the foreclosure process was 1.05 percent of all loans outstanding at the end of the third quarter, an increase of six basis points from the second quarter of 2006, while the SA rate of loans entering the foreclosure process was 0.46 percent, three basis points higher than the previous quarter.

Compared with the third quarter of 2005, the percentage of loans in the foreclosure process was up eight basis points while the percentage of loans entering the foreclosure process was up five basis points. This quarter's NDS results cover over 42.6 million loans (32.6 million prime loans, 5.8 million subprime loans and 4.2 million government loans).

The delinquency rate increased during the third quarter for all loan types. The delinquency rate increased 15 basis points for prime loans (from 2.29 percent to 2.44 percent), increased 86 basis points for subprime loans (from 11.70 percent to 12.56 percent), increased 35 basis points for FHA loans (from 12.45 percent to 12.80 percent), and increased 23 basis points for VA loans (from 6.35 percent to 6.58 percent).

During the third quarter of 2006, the foreclosure inventory rate increased across the range of loans. The foreclosure inventory rate increased three basis points for prime loans (from 0.41 percent to 0.44 percent), 30 basis points for subprime loans (from 3.56 percent to 3.86 percent), eight basis points for FHA loans (from 2.20 percent to 2.28 percent), and two basis points for VA loans (from 1.10 percent to 1.12 percent).

Subprime Lender Implosion: Bad Omen For Housing Market

Subprime lenders have been both blessing and bane in the housing industry for many years, enabling lenders to rake in huge profits while saddling consumers with exorbitant loan terms and high interest rates.



Now, as the housing market slows to a crawl, many subprime lenders are collapsing faster than homes made of substandard materials, and the signs point to even more pain in the housing market as a result.

Mortgage Lenders Network USA (MLN) announced it was shutting its doors this week, as a result of market economics the lender said were "not good ... it deals with the performance of loans, and to a lesser extent the value of homes."

The last few months have seen a flurry of subprime lenders shut their doors, declare bankruptcy, or engage in mass layoffs as the housing market freezes up. Ameriquest, formerly the country's largest subprime lender, collapsed quickly after its former CEO, Ronald Arnall, was appointed by President Bush to be ambassador to the Netherlands. Other subprime lenders potentially on the chopping block include Countrywide Financial and H&R Block's mortgage unit Option One.

Subprime mortgage lending grew an average of 25% a year from 1994 to 2003 and now is a more-than-$330-billion-a-year industry that provides about 1 in 9 U.S. mortgages. The growth has helped broaden homeownership — nearly 70% of American homes are occupied by their owners — and given a boost to minority home buying.

Subprime lenders provide mortgages or home equity loans to people, including high-income borrowers, who don't qualify for conventional financing. Such lenders accept credit scores below the 620-660 threshold generally needed for prime financing and require less-stringent income documentation.

But critics say many of the subprime lenders' clients could qualify for conventional loans. Subprime lenders offer mortgage rates that sometimes range into double digits, though they can be as low as 6% to 7% for those with near-prime credit. Costs rise, often steeply, as credit scores fall.

The failures of subprime lenders are bad tidings for the housing market as a whole. Although economists and realtors continue to claim that the housing market slump has hit bottom, many still see delinquencies on the horizon.


Sources: ConsumerAffairs.com and USAToday.com