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Winners and Losers of the Minimum Wage Hike

letters@smartmoney.com (Lisa Scherzer) — Thu, 09 Jul 2009 00:00:00 -0400

Millions of American workers are about to get a federally-mandated raise, but the recession has left many wondering if and how the economy will benefit.

The raise, which will go into effect on July 24, represents the final wage hike in a three-step boost to the federal minimum wage increase passed by Congress two years ago. The minimum wage will rise 70 cents -- or about 11% -- to $7.25 per hour from $6.55. (Last summer, it went up 70 cents from $5.85.)

Whether Congress would have approved the wage hike had legislators known how dismal the economy would look two years later is an open question. But there’s no doubt the timing is awkward.

“There’s low inflation, high unemployment and this is when teens are looking for summer jobs,” says Mike Gibbs, a professor of economics and human resources at the University of Chicago.

The hike will give about 4.5 million workers a raise and boost hourly wages by $1.6 billion a year, according to the Economic Policy Institute, a nonpartisan think tank in Washington, D.C.

The final phase of the federal minimum wage hike will impact 31 states whose minimum wage levels are below $7.25, including Florida, Pennsylvania, Nebraska and New York. Firms in these states will have to match the federal minimum. The increase has no bearing on 20 states (including Washington, D.C.), which already mandate an hourly wage of $7.25 or more.

Wage hikes are always controversial pitting employees against employers and triggering historical arguments over the legacy of trickle-down economics. Yet this hike comes at particularly poignant moment for all sides. Employers are strapped and facing new benefits requirements, while workers are struggling to pay their bills.

For many workers the increase is a boon. It might mean being able to afford a visit to the doctor or college textbooks for the fall semester. But given the 26-year high unemployment rate and the fact that so many companies are hamstrung by the gloomy economic climate, some might see a mandatory wage increase as a setback in terms of hiring and pricing.

Here are a few ways the federal minimum wage increase might affect you.

Job seekers stand to lose

A mandated raise won’t do job seekers any favors especially if they’re looking for temporary or entry-level positions. Studies suggest that increasing the minimum wage has a slightly negative effect on the job market. A 10% increase in the minimum wage is associated with a 0.9% to 1.1% decline in retail employment and a 0.8% to 1.2% reduction in small-business employment, according to a study published in July 2008 in the Journal of Labor Research.

Minimum wage increases typically target low-wage, low-skilled workers as well as teens and young adults. The industries that rely most on minimum-wage workers include fast food restaurants, small-scale independent retail stores, day care establishments and hotels.

The prospects for a teen looking for work are grim, and the wage hike may exacerbate their problems. The unemployment rate for 16- to 19-year-olds climbed to 24% in June, according to the latest Labor Department data, more than double the national rate of 9.5%. The mainstays of summer youth employment -- movie theaters, restaurants and mall stores -- are increasingly turning to older workers or scaling back their hiring amid cutbacks.

With a higher minimum wage, already-cautious companies will decide they can do without some of their low-wage, low-skilled positions. They’ll use less low-wage labor, cut their hours or drawn on more skilled workers if they can.

Low-skilled and younger workers stand to gain – if they’re working

Those who manage to snag a minimum wage job or hold on to their existing one stand to gain. “There’s an economic argument to be made that when you push things up at the bottom during a recession, you’re pushing more money into the pockets of people who are surely going to spend it and not going to save it,” says Chip Hunter, an associate professor of management and human resources at the Wisconsin School of Business.

Also, there might be a silver lining for part-time workers. Firms looking to cut costs may promote their part-timers to full time instead of hiring new minimum-wage workers, which would be more expensive, Neumark says.

Some consumers could see higher prices

Overall, the effects of the wage increase will be small, Gibbs says. Most companies knew a hike was in the offing and planned accordingly. However, for those businesses that rely heavily on low-wage workers, higher costs could trigger higher prices. “If costs go up, you have to pass some of that to your customers,” he says. Where consumers might see higher prices and by how much is difficult to predict.

A 2005 study showed that restaurant prices rose in response to an increase in the minimum wage. (The report’s authors looked at the "food away from home" component of the Consumer Price Index during a three-year period with two federal minimum wage increases.)

But even though fast food restaurants will feel the brunt of these wage hikes in terms of labor costs, they are unlikely to respond by bumping the prices for a cheeseburger and fries. “I don’t think [restaurants] can raise prices much more. They might just absorb it,” says RJ Hottovy, a retail analyst at Morningstar. In the past year or so, restaurants were more apt to jack up prices. For example, Chipotle raised prices on some food items last fall. But times have changed, Hottovy says. “I think we’re in a different situation now. Consumers are cash-strapped as it is,” he says.

Restaurants were hit hard by food inflation in 2007 and 2008 and had no choice but to raise prices then. “That has ameliorated a bit,” says Mike Donohue, a spokesman for the National Restaurant Association, an industry group. “But restaurants are reluctant to raise prices significantly because they don’t want to push away customers.”

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Breaking Down the Obama IRA

letters@smartmoney.com (Lisa Scherzer) — Tue, 07 Jul 2009 00:00:00 -0400

Tucked into President Obama’s financial regulatory reform legislation still being debated in Congress is a proposal to get more workers saving for retirement. The plan calls for employers to set up mandatory automatic-enrollment IRAs, retirement accounts that allow for tax-deductible contributions.

If the measure passes, companies that don't currently offer a tax-deferred retirement-savings plan would funnel employee contributions into IRA accounts through direct payroll deposits. It would also represent the biggest increase in new retirement savers since the creation of the 401(k) in 1980.

Still, for as long as it’s been, the concept is hardly new. Some form of automatic retirement savings has been kicking around the legislature for a couple of years. The model’s roots are in the science of behavioral finance, a field whose findings routinely suggest that people tend to put off doing what they know they should do. For example, rather than choosing a retirement fund from the myriad options available – a daunting task – many people do nothing. They become victims of their own inertia and ultimately come up short when they retire. The Obama initiative is meant to make decisions on workers’ behalf.

Early estimates predict that the plan could direct roughly $100 billion into IRAs over five years and give some of the 75 million workers who don’t have access to an employer plan an opportunity to save, says David John, one of the plan’s designers, the principal of The Retirement Security Project and a senior research fellow at the Heritage Foundation, a conservative think tank. John says he hopes to have a draft of the legislation introduced to Congress within a month.

Many of the details about the automatic IRA have yet to be fleshed out, but here’s a look at how it would work and some of the early benefits and drawbacks.

How it would work

Companies that don’t currently offer a retirement plan, employ 10 or more workers, and have been in business for at least two years would be required to enroll their employees in an IRA. The accounts would automatically deduct money from employees’ paychecks starting with a default deduction of 3%. Employees can choose a higher or lower withdrawal rate or opt out of the plan altogether.

The default IRA portfolio would likely include a basket of conservative holdings. Those assets include I bonds (inflation-indexed savings bonds), money-market mutual funds or stable value funds, John says. “The goal here is to build up a certain amount, say $3,000 to $5,000,” he says, at which point the account would automatically roll over and new contributions would go into a target-date fund, a popular 401(k) investment option. Workers would retain control over their accounts, but the plan would make adjustments over time -- even if the workers did nothing.

Pros

More companies will cover workers. If passed, the legislation would cover roughly 40 million of the 75 million workers who do not have access to an employer-sponsored retirement plan, John says. The National Federation of Independent Business (NFIB), a Washington, D.C.-based lobbying group for small businesses, estimates that 27% of small businesses with fewer than 250 employees do not offer a retirement plan. For businesses with 10 to 19 employees, that number jumps to 50%.

Improved retirement prospects. Any measure to nudge workers into saving for retirement is a positive one, says Brigitte Madrian, a professor of public policy and corporate management at Harvard University’s Kennedy School of Government. Data from automatic enrollment in 401(k) plans suggest this plan would broadly lift employee savings rates. Nearly 5% of workers with 401(k) plans dropped out in 2008, but the participation rate remained flat that year at 74% as many new hires were automatically enrolled in comparable plans, according to a May report by Hewitt Associates, a human resources and outsourcing consultancy that studied more than 2.7 employees who were eligible for 401(k) plans during the last few months of 2008.

Cons

Pushback from small businesses. Small businesses stand to be impacted the most by this reform. Their biggest concern: the administrative burden associated with these plans. Many small businesses don't have in-house human resource departments, and a proposal like this would require some owners to hire an accountant or third-party payroll service to handle the new IRAs. “It’s a new expense,” says Bill Rys, a spokesman for NFIB.

John says the costs imposed on businesses would be minimal and would depend on how they process their payrolls. If a business uses an automatic payroll service provider like ADP, the cost could be as low as $6 to $8 per payroll period, he says. Initially, the IRA mandate would affect only firms with more than 10 employees, he says. Later, once the details are ironed out and businesses and officials watch the plan underway, the threshold could be lowered.

Not aggressive enough. Given the market turbulence that has washed out millions of Americans’ 401(k)s over the past year, the conservative investment approach pegged for the automatic IRAs is understandable. However, caution might not be the best investing tactic, especially for younger workers who have a longer-term horizon. “I’d be more in favor of getting more aggressive investments in there sooner rather than later,” particularly for younger employees, says Ron Rough, the director of portfolio management at Financial Services Advisory, an investment advisory firm in Rockville, Md. “I think if you’re dollar-cost averaging into your portfolio, you want to take advantage of market volatility.”

A more stock-heavy investment option might eventually become available, John says.

5 Public School Cutbacks Students Will Feel

letters@smartmoney.com (Lisa Scherzer) — Mon, 29 Jun 2009 00:00:00 -0400

School may be out for the summer, but across the country school boards are now wrestling with mammoth budget shortfalls that will require painful cuts in the upcoming year.

Their own budgets in shambles, many states are inflicting deep reductions in K-12 funding. At the same time, local property tax revenue has waned because the housing market’s collapse slashed residential property values. The losses were particularly heavy in big-bubble states, including California, Arizona and Florida. Economists estimate the broader housing market won’t fully recover for years, which could put a dent in school districts’ coffers for the foreseeable future. That deficit is forcing many of the nation’s 14,300 school districts to make harsh cuts. School officials are telling parents that programs and resources they have come to expect will be pared down or eliminated.

Of course, small fluctuations in municipal budgets can always leave a field trip cancelled or a playground scrubbed, but this recession has exacted a far greater toll on public education. Many schools are scaling back academic programs or closing altogether because of financial hardship, according to a survey by the American Association of School Administrators on the impact of the economic downturn. For instance, 44% of schools surveyed are increasing class size for the 2009-10 academic year, up from 13% the year before. The percentage of schools eliminating enrichment programs and other nonacademic courses will rise to 27%, up threefold from last year. And more schools are doing away with field trips, deferring textbook purchases and reducing elective classes.

Some budget shortfalls are being filled by federal aid. The federal stimulus package has funneled about $100 billion to states for education funding – the largest single federal outlay for education in U.S. history, says Jack Jennings, president of the Center on Education Policy, a nonprofit advocacy organization that studies school funding. “If it weren’t for the stimulus money, these would be the worst cutbacks in education since the Depression,” he says. “It’s what’s saving the schools from disaster.”

The cutbacks are not necessarily permanent and in fact may save some schools and services in the long run. Making cuts earlier rather than later can mitigate future financial trouble, says Arturo Pérez, a fiscal analyst at the National Conference of State Legislatures in Denver. “By making reductions, you are essentially providing a future savings to the program.” If school districts were to face another year of weak tax revenues and leave their budgets untouched, then “the problem compounds itself,” he says.

Here’s a look at some of the things that public-school students will be missing out on come September.

Bands and Music Programs Silenced

At many schools, library services, counselors and extracurricular activities like sports, band and art clubs may be curtailed or eliminated. Even curriculums are being stripped to the bare minimum because schools typically cut enrichment courses first to avoid laying off teachers, Jennings says.

For example, all three elementary schools in the Phoenix/Talent district in southern Oregon have lost their music teachers, a move that will impact 1,200 students, says Dori Brattain, deputy executive director of the Oregon School Board Association. As of now, no concerts are budgeted for the next school year, but the PTA is trying to raise funds to resurrect the music program, she says. In Arizona, Higley Unified school district is scaling back its sports program back by 60% because of budget cuts, says Janice Palmer, director of government relations at the Arizona School Boards Association. That means the football, baseball and girls soccer teams will be playing with old uniforms and equipment, and ballfields won’t be maintained.

Desks Inch Closer Together

In California, 27,000 teachers have been laid off already, with more expected soon. In total, these layoffs amount to cutting 15% of the state's public school teachers, according to data compiled by the National Conference of State Legislatures. Fewer teachers means bigger classes. For instance, the San Jose Unified School District is considering increasing its class sizes to 30 students from kindergarten through second grade, up from 20 last year, in order to save the district at least $6 million.

Class size increases in Massachusetts are particularly pronounced at the elementary-grade level, says Glenn Koocher, executive director of the Massachusetts Association of School Committees. For instance, some second-grade classes in the Asburnham-Westminster Regional School District will get bumped to 25 students next year, up from about 21 now.

School’s Out, Like It or Not

California’s public school system – whose per-pupil expenditures were already below the national average – is getting hit with some nasty cuts, thanks in large part to the state’s $24 billion budget gap, says Brian Edwards, senior policy analyst at EdSource, a nonprofit education and research group in Mountain View, Calif. In response, Gov. Arnold Schwarzenegger proposed slashing $5.3 billion from K-12 education funding, making summer school a luxury most districts can’t afford.

In May, the Los Angeles Unified School District said it would cancel the bulk of its summer programs, and the consequences will no doubt be hard felt. Parents who otherwise would enroll their kids in a summer program will have to find child care; many students won’t be able to take courses required to graduate, and others will miss an opportunity to prepare for next year.

Cut in Bus Service

Heavy cutbacks in transportation will make life tougher on students and parents next year. The number of schools cutting bus transportation routes rose to 23% for the 2009-2010 school year, up from 14% last year, according to the American Association of School Administrators survey.

The Novato Unified School District in California’s Marin County is cutting bus service for most of its students as part of a $647,000 cost-cutting measure. Meanwhile, other districts are hitting students – and their parents – with transportation fees. Students living within two miles of their school in Lakeville, Minn., will have to pay $150 a year for bus service starting in September. (Students living two or more miles from their school get free transportation, according to state law.)

Athletes Will Pay to Play

Playing sports is getting pricier at many schools next year. Students in the Asburnham-Westminster district in Massachusetts will have to shell out $195 a year for every sport they play – up from $170 now. And in Colorado, the Boulder Valley Board of Education agreed to increase high school and middle school athletic fees to retain the district’s six high school athletic trainers. That means high school athletes will pay $185 for each sport they play, up 37% from last year. Intramural fees at the middle school are also set to rise.

5 Housing Markets That Have Further to Fall

letters@smartmoney.com (Sarah Morgan) — Fri, 26 Jun 2009 00:00:00 -0400

Home buyers looking for a bottom in the real estate market may have been encouraged by housing data released earlier this week. Sales of existing homes rose 2.4% in May, according to the National Association of Realtors. The increase was a little less than most analysts had expected, but it represented the second straight month of improvement. Meanwhile, sales of new homes dipped 0.6% in May, continuing a trend of fairly flat months so far this year, according to data released by the Commerce Department.

Don’t get too excited – it’s still too early to say the housing market bottomed out, analysts and economists say. Distressed properties still account for about a third of all sales, and 29% of sales were to first-time home buyers, who are currently benefiting from an $8,000 tax credit.

The sales trends are telling. “You’re not really seeing a lot of move-up buying,” says Richard F. Moody, chief economist and director of research at Forward Capital, LLC. “There are so many vacant homes and so many foreclosures that [there’s] not the normal trade-up pattern that you would have traditionally seen,” Moody says.

Housing prices fell nationwide during the first quarter, according to Standard & Poor’s Case-Shiller Index. The decline appears to be slowing: in February and March, the annual rate of decline did not set a new record, but home owners should take little solace in those numbers. “Based on the March data… we see no evidence that that a recovery in home prices has begun,” David M. Blitzer, chairman of the Index Committee at Standard & Poor’s, said in a statement.

All of this less-than-terrible news has left analysts cautiously optimistic that much of the country will start to see housing prices rise sometime in the next year or two. Looking at the nation as a whole, today through the spring of 2011 may be the window for those looking to buy a house at the bottom of the market, says Gary Hager, president and founder of Integrated Wealth Management, a New Jersey-based financial planning company.

A few markets where the housing crisis started earliest have already shown signs of bottoming out. Early-suffering cities like Denver and Boston are now seeing slower declines in home prices, which could indicate they’re already poised for a comeback.

And in some areas, buyers have seized on rapidly falling prices. Existing-home sales rose 9% in the Midwest in May, according to the National Association of Realtors.

“There will be regional differences in the turnaround,” says Maureen Maitland, vice president of index services at Standard & Poor’s. “Most economists I talk to are expecting the beginning of the turnaround to be sometime next year,” she says. However, she added, “the last market may not turn around for two or three years.”

For those hoping to buy at the best possible price, we’ve got a list of five cities where home prices may still have farther to fall. But keep in mind, getting a house at a discount is still not necessarily a house you can afford.

“In light of the housing market boom and bust, consumers should feel very comfortable financially” before deciding to buy, says Lawrence Yun, chief economist for the National Association of Realtors. “They should not try to overstretch their budget to get their dream home.”

1) Detroit

Housing prices fell 4.9% in Detroit in March, according to the latest reading of the Case-Shiller Index. That marked the city’s largest monthly decline since January 1991, when S&P’s backlogged data begin. Houses in Detroit are currently selling at 1995 prices – and with prices still falling so fast, it’s hard to say when the city will rejoin the 21st century.

“Detroit is Detroit because of the auto industry,” says Maitland. The whole Midwest is hurting from car companies’ woes, but Detroit is hurting the most.

2) New York City

Anyone who was hoping to see Wall Street suffer from the financial crisis can relax. New York may have avoided the nationwide implosion in home prices early on, but the city saw its largest-ever monthly decline in March, at 2.5%.

“New York may not be out of the woods,” Maitland says. “Because of what’s going on with the financial markets and the layoffs on Wall Street, New York may be one of the last places to turn around.”

3) Phoenix

Home prices in Phoenix have fallen 53% from their peak in June 2006, and the 2009 data suggest they’ve got farther to go. In March, prices in Phoenix fell 4.5%.

The Southwest has been one of the hardest-hit regions in the mortgage crisis. The region still faces a glut of recently-built homes.

“In Phoenix, you had some of the worst excesses,” in terms of overbuilding, Moody says. “The surplus of houses is so great that it could take two or three years” for prices to turn around. However, a steady influx of new residents into the region suggests the long-term prospects for the market are sound, he says.

4) Portland, Ore.

In the Northwest, median home prices are down but they remain above the national average. Portland’s prices fell 2.1% in March. Home prices in Seattle were down 2.0% for the month.

“Portland’s still going down,” says Dave McCarthy, president and chief executive of Integrated Asset Services, a real estate valuation and asset disposition and management company that collects data on the housing market.

The city “has remained pretty strong but they’re starting to feel some of the effects,” he adds.

The local labor market may be playing a role, Moody says. Portland’s unemployment rate was 11.6% in April, according to the Department of Labor. That’s well above the national average for the month (8.9%).

The Pacific Northwest bubble was among the last to burst, which could mean the market will be among the last to recover.

5) Minneapolis

Housing prices in Minneapolis fell 6.1% in March, the largest monthly decline of any metro area since data tracking began in 1987.

More than half of all March home sales in Minneapolis were due to foreclosure or short-sale activity, according to the Federal Reserve Board’s Beige Book, which gathers information on regional economic conditions. Foreclosed homes tend to drive prices down because “the bank’s best interest is to get the asset off their books” as quickly as possible, Maitland says.

'Jon and Kate' Divorce? The Money Traps Ahead

letters@smartmoney.com (AnnaMaria Andriotis) — Tue, 23 Jun 2009 00:00:00 -0400

On television, “Jon & Kate Plus 8” has been a ratings bonanza. But as any divorce lawyer will tell you, “Jon Minus Kate” could be a complex financial maze — with college tuition alone posing a million-dollar dilemma.

As the media spectacle of Jon and Kate Gosselin’s separation — disclosed in Monday night’s episode of their reality show – unfolds, much of the focus will be on what went awry in their marriage, the emotional impact on the couple’s eight kids and how their divorce procedings unfold.

But as with any divorce, financial questions can present complications. In the case of an unusually large family, such as the Gosselins, those complications can be particularly tricky. College costs alone for the eight Gosselin kids could amount to upwards of $1 million, for instance. Though divorcing parents could agree simply to split the future costs of education, for a couple with many children, agreeing now how both spouses contribute to an ongoing savings plan could avoid future strife.

For now, the Gosselins are separating, and no one knows what plot twists might be in store – reconciliation or eventual divorce. In terms of their arrangements, so far the Gosselins have divulged only that their children will remain in their house and that Jon and Kate will take turns with them.

Among the big money questions for a big family splitting up:

(1) How Are Child Support Payments Determined?

Generally, child support includes monthly payments for food, shelter, clothing and education. Most states use a model based on “income shares,” in which children receive the same financial support before and after their parents are divorced. The noncustodial parent’s contribution is based in part on the number of children in the family and the gross household income. However, in Pennsylvania, which is where the Gosselins are based, in cases in which both parties' net income exceeds $20,000 a month or the family has more than six children, the courts determine child support payments based on their expenses, says Julia Swain, an attorney at Philadelphia-based Fox Rothschild, which practices family law.

(2) Who Pays Out-of-Pocket Health-Care Expenses?

In most cases, children will remain covered under the health plan of the same parent who covered them prior to the divorce. However, parents may need to split unreimbursed medical expenses or out-of-pocket costs, depending on their income, says Daniel Clement, a family law and matrimonial attorney with offices in New York and New Jersey.

In Pennsylvania, where the Gosselins live, the custodial parent must pay the first $250 of out-of-pocket health expenses per year per child, says Swain. After that, the parents will split the costs in proportion to their income. Those expenses can pile up quickly in big families. For example, the measles vaccine ProQuad costs $128.90 per dose in the private sector, according to the Centers for Disease Control. For a family of eight children, that’s $1,031.20 for the first dose. If the family’s health-care plan has a high deductible or doesn’t cover the vaccine, parents could have to pay these costs out-of-pocket.

If parents can’t reach an agreement on these costs, the custodial parent should consider signing up for the health-insurance plan that their employer provides – assuming that they have this option.

Typically, parents don’t set up an account for these expenses, says Clement. Instead the agreement is laid out in the divorce paperwork. And often, the parent who receives the bill will send their ex an invoice for reimbursement.

(3) Do the Kids Need Two of Everything?

Toys, cribs and other items that the couple purchased for their children while married are technically up for grabs in equitable distribution, says Clement. (These items can include the crooked houses that the Gosselins ordered for their children last winter and arrived during Monday’s show.) The argument on each parent’s side is that they’ll need these items when they spend time with their children, says Clement. Big-ticket items, like the Gosselins’ family car – a 2004 Dodge Sprinter 2500 passenger van – are also on the block, but in most cases the custodial parent ends up with most of these items since he or she will be the one spending the most time with the children, says Clement.

Of course, arrangements can be made for each of the parents to use these items when they’re with the children, says Clement. This could be a likely outcome in Jon and Kate’s case, as the children will remain in their home and each parent will be staying there during their designated time with the kids. The Gosselins would be a unique case, but in most states, including Pennsylvania, figuring out which parent gets what falls under equitable distribution laws.

(4) Pay for College Now or Later?

As part of a divorce, ex-spouses should agree to continue contributing to their child’s college education fund even if the child is a decade away from graduating high school, says Clement.

The average cost of college tuition, including room and board, is $14,333 per year for in-state students at public four-year colleges and $25,200 for out-of-state students as of 2007-08, according to the College Board’s latest data. The average cost at a private university is $34,132 for 2008-09. That means that the Gosselins could pay as much as $1.1 million for all eight of their children to attend college (not including the annual inflation on tuition).

What’s more, the Gosselins will probably encounter these astronomical expenses over a relatively short period; their eldest twins Cara and Madelyn are 8 years old and their sextuplets are five.

“This behooves them to deal with the ticking time bomb,” Clement says. “That is, sooner or later, your kids will go to college, and the cost will be apportioned in some way between the two parties.”

In the case in which an ex refuses to contribute but has the means to do so, the other parent can drag them into court. With 529 plans, both exes can contribute to a single plan for each child or separately if need be, says Rick Kahler, a fee-only certified financial planner in Rapid City, S.D.

The riskiest thing to do, however, is to agree to split Junior’s costs evenly once they start college, Kahler says. There’s no guarantee that both parents will be financially sound that far down the road, he says.

(5) How Much Allowance to Give?

Deciding how much allowance to give your child each week may seem insignificant, but it should be laid out in the divorce paperwork, says Kahler. Parents need to decide how often and how much they’ll give their kids and whether the kids will have to work to earn their allowance or not.

“You don’t want it to be where one parent has a more strict view of allowance and the other one has a liberal view, and the kid starts playing that against each parent,” says Kahler.

10 Things Moving Companies Won't Say

letters@smartmoney.com (Nkiru Asika Oluwasanmi) — Tue, 23 Jun 2009 00:00:00 -0400

1. “We’ll hijack your stuff.”

The moving industry packs in nearly 55 percent of its business during the summer months, but often leaves a trail of frustrated consumers in its wake. The Department of Transportation receives up to 4,000 household moving complaints annually, mostly about loss and damage, poor service, or overcharging. The Council of Better Business Bureaus, meanwhile, reports that complaints about movers jumped from nearly 3,800 in 1997 to more than 9,200 in 2007.

Just ask Spyro Malaspinas, a victim of a botched move. He says that Nation Van Lines, which he hired to move his belongings from Austin, Tex., to Chicago in January 2003, hiked his bill from an estimate of $1,050 to nearly $4,300. The movers, according to Malaspinas, said his goods measured 500 cubic feet more than anticipated. When Malaspinas threatened to call the police, the drivers made off with his possessions, which he estimates were worth $47,000. Despite an FBI investigation and the March arrest of Nation owner Eli Peretz by the FBI for alleged crimes with another moving company, Malaspinas wasn’t thrilled with the final results: He only got back around $25,000—and never saw his belongings again. The experience was “paralyzing,” he says. “It’s not like somebody stealing your wallet; they have stolen everything you’ve got.” (Peretz’s lawyer did not return our calls; Nation Van Lines has since gone out of business.)

2. “We’re popular, especially with the FBI .”

Eli Peretz wasn’t the only mover rounded up by the FBI in March 2003. The feds indicted a total of 16 moving companies and 74 operators, owners, and employees on various charges following a two-year investigation called Operation Stow Biz. “It is the most significant crackdown that we’ve done,” says a spokesperson for the FBI’s Miami division, whose undercover agents posed as potential customers to trap movers committing fraud, money laundering, and other acts. Among those indicted were 20 officers and employees of Sunrise, Fla.–based Advanced Moving Systems. The charges in the 60-count indictment include fraud, extortion, false documentation, and “inflating the price of the move and, thereafter, withholding delivery of . . . goods until [customers] paid the inflated price.”

Too bad Patrick and Tammy Runion didn’t get advance word of Advanced’s alleged practices. The couple booked the company for their move from Toledo, Ohio, to Lake Forest, Calif. Patrick says that Advanced movers locked their stuff in storage in Chicago when he refused to pay an additional $500 because the load’s weight had been miscalculated by a driver. “We were so stressed and frustrated” by the ordeal, says Patrick, who eventually paid $1,000 to find the storage space. Attempts to contact Advanced officials were unsuccessful, and the company has since gone out of business. According to the FBI, 10 of the indicted employees are listed as fugitives; the other 10 have pleaded not guilty to charges as of press time.

3. “Don’t mess with us; we’re virtually untouchable.”

While the FBI sting did manage to take some bad guys out of play, Robert Julian, bureau chief for the Economic Crimes Division in Ft. Lauderdale, Fla., doesn’t think “consumers should breathe easy.” Scammers are tough to stop. Local police hesitate to get involved in moving disputes because they’re considered civil matters, and while the FBI will investigate complaints involving interstate moves, getting property back is not its priority.

There are also federal laws to contend with that, historically speaking, have tended to protect moving companies more than consumers. It used to be, for example, that while dissatisfied customers could sue their moving company for goods lost in a move, they stood very little chance of recovering even their basic monetary value, let alone winning any punitive damages on top of that amount. But the advent of the Safe, Accountable, Flexible, Efficient Transportation Equity Act in 2005 has given consumers and the federal government more authority in going after scofflaw movers; it “has helped the agency greatly in curbing abuses” in the industry, according to a spokesperson for the Federal Motor Carrier Safety Administration (FMCSA). Today movers are being held liable in a way they never were before for at least replacing the value of lost items—so long as the customer opted for full-value protection for their belongings in the initial moving contract. For more information, visit the FMCSA’s website at www.protectyourmove.gov.

4. “Someone will deliver your stuff—it just might not be us.”

In June 2002, Carole and Doug Stowers contracted with Elite Van Lines to transport the contents of their threebedroom house from Palm City, Fla., to Bailey, Colo. Nothing unusual there, right? Guess again. Elite then subcontracted the job to other companies for the cross-country trip. The Stowers were shocked when Majesty Moving & Storage pulled up to their new home with only half their possessions and didn’t know what had happened to the rest—after all, they hadn’t loaded the goods.

Beware: In the hectic summer months, a mover might get so busy that it asks another company to help out with a job. That’s fine, but the consumer should be notified in advance of the deal. A spokesperson for the American Moving and Storage Association says, “For a completely different company to show up at your house with no prior arrangements, that is totally unacceptable.” No need to tell Carole Stowers that. She shelled out $5,375 to Elite—the original estimate was $1,700— to get all her possessions back. “We almost went bankrupt trying to save our furniture,” she says. (Both Majesty and Elite have since gone out of business.)

5. “How much experience do our movers have? At least a day or two.”

Even if one company does handle your entire move, don’t assume that the movers who show up are actual employees of that company. Moving companies have been known to hire day laborers plucked off the streets on moving day. Peter Drymalski, investigator for the Montgomery County Division of Consumer Affairs in Maryland, says for smaller movers, “That’s probably the rule rather than the exception, because they often don’t have regular crews.” The problem is that inexperienced workers are more likely to damage possessions.

Similarly, many moving companies contract with independent truck drivers—a concern if the mover arrives in an unmarked rental truck. That’s a red flag, indicative of a fly-by-night operator with limited fixed assets—who would be difficult to go after in court. Swing by the company’s offices before you choose a mover. If the company doesn’t appear to have its own trucks, do yourself a favor: Cancel the job.

6. “Our pricing policies are wacko.”

Moving can test even the most timeconscious planner. For instance, it may be tempting to bypass getting an inhouse and written estimate from a mover, opting instead to save a few minutes with a telephone or online estimate. But if you take the shortcut, be prepared to get burned. Tim Walker thought he’d caught a break when he booked a mover online who gave him a lowball quote of $1,800 for a Virginia to Nevada move. But once his goods were on the truck and measured in cubic feet, Walker says, the price was jacked up to $5,012. He could pay only the original amount, so the movers held his belongings until he ponied up the cash six weeks later.

With an in-house estimate, you’re likely to get a more precise idea of the cost. But you also need to consider how the mover is reaching that estimate—is it by total weight or by cubic feet? Go the weight-based route, if possible. That will at least entitle you to witness all weighings. Also, it’s pretty easy to check your bill to see if you’ve been overcharged. Simply divide the total weight by the number of items. If the average amount per item is more than 35 to 45 pounds, there’s cause for suspicion. The trouble with cubic-foot pricing is that actual charges could depend on how the mover packed your items.

7. “Extra fees and charges? You can count on it.”

Understand this: There are many ways for movers to squeeze extra dollars from customers. Besides charges for accessorial services, movers have been known to levy exorbitant fees for such things as packing supplies. Sound petty? Sure, but they can add up. According to the American Moving and Storage Association (AMSAS), you can knock off some of these costs by packing your own nonbreakables, but movers may be reluctant to take responsibility for items they didn’t pack.

There are also charges related to the specific circumstances of a move. You might get dinged for a “long carry,” when the distance the movers have to haul your belongings from their truck to your door exceeds a certain limit; this is often applied in cities, where movers can’t always secure parking directly in front of a residence, for example. Then there’s the “flight charge” for having to lug goods up and down stairs in the absence of elevators.

“You just have to make sure you know all of these costs up front so you’re not surprised at the end,” says a spokesperson for the National Endowment for Financial Education, a nonprofit dedicated to promoting financial security and education. “If you start to incur these separate charges that weren’t estimated before, you’re going to have sticker shock.”

8. “We’ve never met a schedule we didn’t ignore.”

Thinking of moving during the last 10 days of June, July, or August? Think again. Those are the busiest moving days of the year. Still, moving companies will often overbook just to keep you from taking your business elsewhere. Consider what happened to Jenna Callahan. She was scheduled to move from Boston to West Chester, Pa., in July, but the movers never showed up. “I lost a lot of time and sanity,” she says.

But it doesn’t only happen at peak times. In January 2002, Tyrone Kelley was set to move from Stoughton, Mass., to Las Vegas, but the movers didn’t arrive until 6 p.m., seven hours late. Says Kelley, “It’s a common tactic to arrive after business hours so that it’s too late for you to find another moving company.” He wishes he had, because U.S. Movers charged him more than double the estimate due to allegedly wrong weight calculations. They also locked his stuff in storage when he didn’t have cash to pay for the job. It took three months to persuade the local police to serve a search warrant on the storage facility so he could reclaim his stuff. U.S. Movers’ executive vice president, Tom Timen, denied the weight was false, saying Kelley had more than twice the number of items listed on the estimate. “All we asked was to be paid for the services he agreed to,” Timen said in 2003. U.S. Movers has since gone out of business.

9. “Surprise! Our insurance isn’t worth much.”

Remember Carole Stowers? When she and her husband finally got their belongings back from Elite Van Lines, much of her furniture was battered and broken. The insurance adjuster from Crawford & Co. estimated $13,642 worth of damage. But little good that did—she was entitled to just over $2,000 recompense. The reason? A mover’s liability coverage, known as “valuation,” doesn’t work like a typical insurance policy. For interstate moves, standard valuation limits the carrier’s liability to no more than 60 cents per pound, and it’s often less for in-state moves. So if your 50-pound plasma screen TV gets smashed, you’ll collect just $30.

The AMSA estimates that one in five moves involves a claim for damage. That said, you’re better off getting some real protection—say, through a rider on your homeowner’s insurance. At the end of the move, look over your possessions carefully before signing a receipt. If you sign and later discover a huge dent in your Chippendale dresser, the mover will point to the receipt as proof that the dresser was fine when he dropped it off.

10. “We change addresses as often as our customers do.”

James Balderrama called the Federal Motor Carrier Safety Administration (FMCSA) in June 2001 to register a complaint about his belongings being seized by a mover. Good idea. Too bad he didn’t get a return call until 10 months later. The agency, a Department of Transportation division that oversees safety, licensing, and regulation of trucks and buses, has only eight full-time investigators to police roughly 4,000 companies.

With so little manpower, the FMCSA lacks the muscle to rein in rogue movers. The agency fined 117 carriers in 2007 at an average amount of $13,000 per carrier—chump change for an industry that brings in $10 billion annually. And companies that do get censured often remain defiant. “Typically, they will not pay the fine; instead, they close down and reopen under a different name,” says an FMCSA spokesperson. Until regulators toughen up, take the FMCSA’s advice: “Educate yourself before you hire a mover. Once you hire one, most of the time it’s too late for us to do anything to help.”

A New Number for You to Sweat: Your ID Score

letters@smartmoney.com (Aleksandra Todorova) — Fri, 19 Jun 2009 00:00:00 -0400

You probably already know how an inaccurate credit score can cause you problems — but what about your “identity score”?

Though most consumers aren’t familiar with this type of rating, it’s increasingly being used by everyone from car dealers and banks to utilities and wireless service providers. Much as a credit score attempts to put a number on how good someone is at paying their bills, an identity score measures the risk that a consumer isn’t who they say they are.

Companies that sell ID scores say their products serve as a weapon to combat that fraud by helping to predict the likelihood of identity theft, which by some estimates cost consumers and businesses $48 billion last year. Already, such scores are used before most credit-card transactions or loan applications are approved -- and their use is expected to spread. Thanks to new regulations, most businesses will soon be required to use ID scores or some other type of methodology to confirm a customer's identity.

But the growing use of identity scoring is raising some questions, too. Some privacy advocates say the expansion of efforts to compile incredibly detailed consumer dossiers is troubling. Others say the scope of identity theft has been exaggerated -- in terms of losses to both businesses and consumers. And then there's the issue of accuracy: If some of the data used to calculate a score are wrong — due to errors in one’s credit report, for example — the score will be wrong as well.

A bad identity score — justly or not — is likely to create a number of issues for consumers, ranging from the inconvenience of having to answer some annoying questions when applying for credit to having important purchases or bank transfers slowed or put on hold for a matter of days while thorough ID verification takes place.

Companies that calculate and sell these scores say they're beneficial to businesses and consumers alike. As for privacy concerns, they say that consumers' personal information is never sold or shared with third parties. Some also say identity scores measure identity risk much more accurately than credit scores measure credit risk.

“Credit scores and identity scores should not be viewed with the same lens,” says Thomas Oscherwitz, chief privacy officer at San Diego-based ID Analytics, one of the companies that provide identity scores. “They have different purposes and are calculated differently.” Heather Grover, senior director of product management at Experian’s fraud and identity solutions group, says that consumers can make sure their identity score is accurate by disputing any erroneous information in their credit reports.

While nowhere near as big as the market for credit scores, ID scoring is becoming a fast-growing field. Players include FICO, which offers its Falcon product for scoring credit-card transactions; Experian's Precise ID, which is used to determine the fraud risk of new account applications; and ID Analytics'sID score, which is sold to companies directly and through partnerships with credit bureaus Equifax and TransUnion. It’s an industry estimated at $1 billion a year -- just from the credit-card issuers alone, according to Brian Riley, research director at financial services research firm TowerGroup.

Thanks to federal regulations scheduled to take effect Aug. 1, that market is only expected to grow. This so-called Red Flags rule will require any business that conducts transactions or extends payment terms to consumers (such as lawyers, retailers or telecom outfits) to have a system in place to identify and resolve red flags that a transaction or application is fraudulent, says Oscherwitz of ID Analytics who helped draft the rules five years ago as a staffer at the Senate Judiciary Subcommittee on Terrorism, Technology and Homeland Security.

Identity scores are calculated based on how certain personal information, such as your name, Social Security number, address, birth date or phone number, is used in transactions or for credit applications. For instance, your score might be higher -- signifying a higher risk -- if you move around a lot. Other factors that can raise your score, according to companies that calculate them: changing your name (say, after getting married) or living in an apartment building, where many people share the same street address. Even using an out-of-state cellphone number when applying for a car loan can boost your score.

If a score is deemed too high, an account application or transaction gets flagged. As a result, the consumer may be asked seemingly random “challenge” questions. They're meant to be questions that fraudsters are unlikely to be able to answer -- but in some cases, they can tax the memory of the authentic consumer. You might be asked the house number where you lived seven years ago, for instance, or the color of the car you owned in college or the issuer of the mortgage on your first home. Further up the inconvenience scale, you might even be asked to visit a bank branch to show your personal identification or to fax information to prove your identity.

And then, of course, there's the faulty information to contend with. David Szwak, a consumer credit attorney and partner at Bodenheimer Jones Szwak & Winchell in Shreveport, La., calls it the “garbage in – garbage out” problem. Some of the data used to calculate your identity score come from the “above the line” part of your credit report – which often contains errors.

“Almost every single report that I have seen has personal identification information that does not belong to that consumer,” says Szwak. “There are typographical errors, just plain old inaccurate addresses, multiple Social Security numbers on file.”

The result: Between 5% and 20% of applications for credit are flagged and less than 1% end up being fraudulent, says Andy Smith, a former vice president of business analytics at the fraud department of Capital One, the big credit-card issuer.

Smith says he often runs into such problems himself. “My last name is Smith, my father and brother’s names are David,” he explains. While trying to transfer a large amount of funds between trading accounts, he was unable to answer the questions correctly and was kicked out of the system for manual review. The transfer was delayed by three days.

While many consumers are likely to be unaware of the world of identity scores, some companies want to change that. ID Analytics, which says its ID Score is used by some of the biggest banks in the country, as well as major wireless service providers, is now making the score available to consumers at no charge through MyIDScore.com.

ID Analytics says consumers can use the score to assess their personal risk that their identity may have been stolen. But the company gets something out of it too: More information for its own database. In order to get the score, consumers must enter their name, address, phone number, date of birth. (Social Security numbers are by request, but providing it is optional.) The result is a three-digit number between 1 and 999 -- lower is better -- that assesses the level of risk that you’ve been a victim.

Mari Frank, a Laguna Niguel, Calif.-based attorney who specializes in privacy rights and identity theft, says consumers should be aware they're sharing sensitive personal information in order to get their score, which the company can then use to improve its products, according to its privacy policy.

CEO Bruce Hansen says ID Analytics may use the information to improve its web site, but does not plan to use it in product development. The company also says consumers can opt out, though the instructions – which require sending an email – are buried in the privacy policy’s fine print. ID Analytics says it is working on adding an opt-out option next to the fill-in form within the next month.

And much like the use of credit scores and reports has expanded dramatically over the years, from lenders to insurers and even employers, the potential for identity authentication and scoring is unlimited. Smith, the former Capital One exec, is now building a similar model that predicts instances of insurance fraud. “Stopping fraud is not that hard,” he says. “Stopping it without dropping a whole bunch of inconvenience on your customers is the trick.”

Obama's Health-Care Plan: What It Means for You

letters@smartmoney.com (Aleksandra Todorova) — Tue, 16 Jun 2009 00:00:00 -0400

More than $1 trillion will be needed to pay for the Obama administration's ambitious health-care reform plan. To come up with the money, the president has pledged to trim fat from the Medicare and Medicaid programs. But when all is said and done, it may be consumers who end up paying the price.

Over the next 10 years, the government hopes to save $622 billion by reducing overpayments to private insurers and curtailing fraud in the Medicare and Medicaid programs. Over the weekend, President Obama unveiled a proposal on how nearly half of that savings – $313 billion – can be attained. The plan is vague at best, leaving the details to be hammered out by Congress in the following months.

Even without the specifics, it's clear that health-care providers will take a hit, says Julius Hobson, senior policy adviser at the law firm Bryan Cave and a former director of Congressional affairs at the American Medical Association. Hospitals will receive less funding from the government to pay for providing care to the uninsured, for example, while pharmaceutical companies may have to start accepting lower prices for their drugs.

How doctors and hospitals will react remains to be seen, but reducing their payments will inevitably impact patients, says Paul Keckley, executive director of the Deloitte Center for Health Solutions. Hospitals, for example, are going to be under “intense pressure to operate more efficiently and to operate at a higher level of safety,” he says, and may stop offering some services.

Here are some of the cuts the Obama administration suggests and how they may impact consumers:

Proposal 1: Lower the annual rate of pay increases for Medicare

Projected savings: $110 billion over 10 years

The government plans to reduce the rate at which Medicare payments to hospitals and other health providers increase each year. The rationale behind these cutbacks is that hospitals continue to reduce their expenses through productivity measures like negotiating better prices with vendors. Instead of letting health providers keep those savings – i.e., the extra dollars that they receive from Medicare -- the government will simply pay them less and use the money to offset the cost of its health-care reform. “The hospitals have been doing everything they could to improve their costs,” says Keckley. “Now the government is taking those savings.”

What it means for you: Forced to improve their profitability, hospitals may close certain units or clinical programs that operate at a loss, Keckley says. Typically, such programs serve Medicare or Medicaid patients, including pediatric practices, neonatal intensive-care units and burn centers. As a result, some patients, including many Medicare recipients, may have to travel further to receive certain types of care. “Most people in a community think a good hospital ought to do most everything,” Keckley says. “But looking down the road, that’s not possible.”

Proposal 2: Reduce hospital subsidies for treating the uninsured

Projected savings: $106 billion over 10 years

Hospitals that treat a large number of uninsured patients receive federal government subsidies from Medicare/Medicaid Disproportionate Share Hospital (DSH) programs. Under Obama's plan, these facilities will receive fewer government subsidies as the new health-care plan kicks in and the number of uninsured patients decreases. The expectation is that so many Americans will get insured under the new plan that these hospitals eventually won't need any subsidies at all. The government plans to phase out DSH programs over the next 10 years.

“The idea is, you’re taking money with one hand, but you’re bringing it back to the hospital with the other,” says Paul Precht, director of policy at the Medicare Rights Center. The key to making this part of the plan work, however, is to make sure that a patient seeking treatment in these hospitals receives affordable health coverage before any funding is withdrawn, Precht says.

What it means for you: It could go one of two ways. With reduced payments, some hospitals will be forced to start operating more efficiently, says Mary Johnson, social security and Medicare policy analyst at the Senior Citizens League, a nonprofit advocacy group for retirees. However, on the other hand, hospitals may shift those costs to the patients and their supplemental insurers would end up footing the bill, she says.

Proposal 3: Better prices for Medicare Part D drugs

Projected savings: $75 billion over 10 years

Under the proposed plan, the government will negotiate the prices that Medicare pays for drugs. It will also reduce reimbursements for beneficiaries who qualify for both Medicare and Medicaid.

Currently, drug makers are required to sell drugs at a discounted price to the Medicaid program, but not to the Medicare program. When in 2006 Medicaid recipients started getting drug coverage through the Medicare Part D program, that discount was eliminated and the pharmaceutical companies made a profit, says Precht. “The idea is to get those discounts back to the same level they were in 2005,” he says.

What it means for you: If the government negotiates lower drug prices for Medicare, beneficiaries may see an improvement in the prices they pay, says Bryan Cave’s Hobson. But with few specifics known so far on how the savings will be attained, that outcome is far from certain. If the government reduces reimbursements to pharmaceutical companies, that could just mean the public will make up the difference by paying more out of pocket, says the Senior Citizens League’s Johnson.

5 Risky Real Estate Deals

letters@smartmoney.com (AnnaMaria Andriotis) — Fri, 12 Jun 2009 00:00:00 -0400

Despite efforts to crack down on risky lending practices, sketchy housing deals are making a comeback.

In the throes of the subprime meltdown, most mortgage lenders tightened lending standards, requiring borrowers to have credit scores of at least 700 and down payments often of 10% or more. But as the credit crunch takes a toll on consumers' credit scores and cash positions, those questionable lending practices are beginning to pop up again.

“[S]ince early this year…a new wave of people are finding ways to scam [home buyers],” says Dani Babb, founder of The Babb Group, which offers real estate consulting to consumers, and dean of business at Andrew Jackson University.

Read about 5 types of risky real estate deals

Combine such risky deals as 100% financing and piggyback loans with skyrocketing interest rates and fees and it could spell disaster -- both for borrowers' bottom lines and
the economy, says Chip Cummings, president of Northwind Financial, a Grand Rapids, Mich.-based training and consulting firm for mortgage and realtor firms.

Here are five risky financing offers that prospective home buyers should watch out for:

Practice: Hard money lending

Hard money loans may seem attractive to those who've had a run of bad luck, but it will cost them dearly.

Most hard money lenders don’t place an emphasis on a borrower's credit score or employment status and will even offer loans to borrowers who've been rejected for government-backed or private mortgages. On average, these mortgages charge interest of anywhere from 10% to 14% and can require the borrower to pay up to five points, or 5% of the loan, upfront, says Leonard Baron, adjunct professor of real estate investing at San Diego State University. (One point equals 1% of the loan. Currently, the average mortgage rate on a 30-year fixed is 5.81% and typical mortgages charge from 0 to 0.5 points, says Keith Gumbinger, a vice president at HSH Associates, a mortgage data firm.)

And, in return for taking on the extra risk, many hard money lenders require the borrower to make a down payment of around 30%, says Baron. Some may even offer mortgages with zero money down, but require the borrower to put up collateral – like their car, says Babb. The problem here is that these loan contracts are often so confusing that some borrowers don't realize they are signing away their assets, she says.

Bottom line for the borrower: Not only will you pay sky-high interest, but borrowing from a hard money lender has the potential to dig you into a deep financial hole should you fall behind on payments, says Baron.

Risk for the economy: Hard money loans make up less than 1% of the mortgage market, says Baron. “But the number of people turning to them could grow if the credit crunch continues,” he says.

Practice: Advances on the First-Time Homebuyer Tax credit

The First-Time Homebuyer Tax Credit, which offers up to $8,000 to qualifying buyers who purchase a home through Nov. 30, is a generous perk worth taking advantage of. But it can also get some home buyers into deep trouble.

In late May, the Department of Housing and Urban Development (HUD) said it would permit FHA-approved mortgage lenders to offer eligible borrowers an advance based on the tax credit. Borrowers, in most cases, are still required to make the standard 3.5% down payment required for FHA-insured mortgages, but they can add the value of the credit to the down payment or they can use it to pay for closing costs, says Cummings.

Repayment rules vary, but depending on the lender, borrowers will have to pay the loan each month, pay a lump sum when they receive their tax credit or make payments
over several years. And, in most cases, they'll be paying interest, too. (HUD recommends that lenders refrain from charging fees that surpass 2.5% of the tax credit.)

Bottom line for the borrower: If a borrower needs to rely on an advance of their tax credit to afford the purchase, then they'll probably have a hard time affording both their loan payments on the advance and the mortgage payments, says Cummings.

Risk for the economy: “We’re building a house of cards like we did before,” says Cummings. “We’re getting people into homes that they can’t necessarily afford with no equity, which is artificially propping up the market.” A new ripple effect of foreclosures could occur in the next two years as a result of this practice, he says.

Practice: Zero-down financing

Believe it or not, it’s still possible to buy a home with zero money down, says Babb.

Recently, more than 10 states, including California, New Jersey and Pennsylvania, created state loan programs that give borrowers the 3.5% down payment they’ll need for an FHA-insured mortgage as a second loan. And in the private lending sector, piggyback loans – when a buyer purchases a home using two mortgages – are slowly returning. In this case, lenders refer borrowers who can’t come up with a down payment to other lenders who can give them a second mortgage for that amount. These second mortgages often carry sky-high interest rates, some near 25%, says Babb. In other cases, buyers try to persuade a seller (especially if they’re eager to unload their home) to loan them the down payment and promise to repay it over time, says Cummings.

Bottom line for the borrower: For piggyback and zero-down loans like these, keeping up with two mortgage payments each month can be tough and could force the borrower to eventually walk away from the home, especially if the home's value drops and they have no equity in the property, says Gibran Nicholas, chairman of the Ann Arbor, Mich.-based CMPS Institute, which trains and certifies mortgage lenders and brokers. Sellers who agree to front the down payment, meanwhile, could find themselves high and dry if the buyer is unable to pay it back.

Risk for the economy: With banks getting even stricter about whom they lend to, sellers eager to unload their homes and buyers who want to take advantage of low real estate prices are likely to see more unscrupulous lending practices such as these occur, says Cummings. And that could potentially stall or even derail the housing market's recovery.

Practice: Unlicensed lenders failing to properly disclose their identity

Many mortgages brokers who lost their license during the real estate bubble for creating fraudulent documents or failing to disclose fees have returned to the market -- and they're underwriting FHA-insured mortgages, says Babb. To become an FHA lender, they just register under different names – such as their spouse’s.

Bottom line for the borrower: Many of these lenders are charging high fees and interest rates, says Babb. Some even charge fees for information on mortgages, like whether or not a borrower would qualify for an FHA-insured mortgage, information which is typically free, says Babb.

Risk for the economy: The government doesn’t have the time or manpower to track down these fraudulent lenders, so preventing borrowers from being lured into expensive mortgages will be difficult, says Babb.

Practice: Trying to buy a home that recently changed hands

In an effort to avoid foreclosure, some homeowners are giving ownership to a relative or friend by signing a quit claim deed -- a practice that's permitted in most states, says Cummings. The relative or friend then agrees to make the monthly mortgage payments until they can sell the home. Anyone looking to buy that home, however, may be in for a surprise. Depending on the type of mortgage they were pre-approved for, prospective buyers may find out late in the process that they are unable to purchase the home and lose the mortgage.

The problem is that, in some cases, government-backed loans, such as FHA-insured mortgages or a VA home loans (for veterans), won't allow borrowers to purchase a home that has been owned by its current owner for 90 days or less. The buyer, however, may not know that their loan will be retracted until they’re far into the purchase process, says Cummings. Realtors typically research this information once they receive the listing and will often inform the buyer, but buyers generally won’t be aware of this if the home is being sold by the owner, he says.

Bottom line for the borrower: The buyer risks losing the home they’re interested in -- and the mortgage. They can try to get a private mortgage in the secondary market, but they’ll need a bigger down payment than if they use an FHA-insured loan.

Risk for the economy: This could further slow the amount of time it takes for houses to sell and could spark desperate borrowers to sign up for risky loans, says Cummings.

Mortgage Insurers to the Rescue?

letters@smartmoney.com (Aleksandra Todorova) — Thu, 11 Jun 2009 00:00:00 -0400

Homeowners in trouble may find help from an unlikely source: their private mortgage insurance company.

Typically, homeowners turn to nonprofit housing counseling services or even paid “mortgage fixers” (not a good idea) to help them renegotiate better, more affordable terms on their mortgage. But the credit crunch and the large numbers of folks in need of financial help have caused those avenues to clog up.

Homeowners who've tried unsuccessfully to get help, may have one more opportunity to get back on their feet by turning to their private mortgage insurer. Private mortgage insurance (not to be confused with homeowners insurance) is required of anyone who buys a home with less than a 20% down payment. These policies protect the lender in the event of a default, covering anywhere between 12% and 35% of their losses on the property, says Keith Gumbinger, vice president at mortgage information firm HSH Associates.

With more homeowners facing the threat of losing their homes to foreclosure -- and more defaulting clients to cover -- mortgage insurance companies are stepping in to help them stay put. “As a mortgage insurance company we stand in the borrower’s shoes,” says Michael Zimmerman, senior vice president of investor relations at MGIC Investment (MTG), a mortgage insurer.“If the borrower loses the home to foreclosure, we have to pay.”

Walnut Creek, Calif.-based PMI Group (PMI), for example, now offers no-interest loans to help certain borrowers catch up on defaulted mortgage payments. Genworth Financial (GNW) offers a job-loss protection feature in its policies that pays up to $2,000 per month towards the mortgage payment of a homeowner for six months after losing their job. And if a homeowner qualifies for a loan modification under the government’s Making Home Affordable program, but can't get their loan servicer to help, Genworth may step in to process the paperwork and streamline it to the servicer for approval.

Granted, getting help from your private mortgage insurer – the name of the company should be listed in your mortgage documents – requires that you meet a rigorous set of requirements. For example, to qualify for PMI Group’s “Saving Homeownership and Repayment Program,” which covers a homeowner’s delinquent home payments with an interest-free loan, borrowers must prove that their delinquency was a result of a temporary financial setback and that they have a good prospect of repaying the loan. They also must be able to continue making their payments, says Joel Luebkeman, a company spokesman.

Genworth’s job-loss protection program is only available to those who have closed on their loan within the past three years. So anyone who bought a home before June 2006 isn’t eligible. Currently, about 10% of the company’s loans are taking advantage of that program, according to Chris Antonello, a spokesman. However, as unemployment and the costs of running such programs climb higher, further restrictions and requirements may be imposed on these programs, says Rick Gillespie, a spokesman for mortgage insurer Radian (RDN), which has offered a similar program in the past.

Homeowners who have Genworth’s private mortgage insurance may find it easier to get help for a loan modification or refinancing under the government’s Making Home Affordable program. Genworth is proactively reaching out to homeowners who may qualify for the program, offering to help them complete the necessary paperwork and send it to the servicer for approval.

And when it comes to Home Affordable refinancing for loans that have private mortgage insurance, the cooperation of the industry is key.

In the past, a new mortgage insurance policy needed to be obtained for the loan at refinancing, says Frank Ruzicka, a mortgage banker with Cornerstone Mortgage in St. Louis. But these days, getting that insurance is much more difficult, if not impossible, especially on loans that are more than 90% of the home’s value. In fact, many homeowners who are underwater on their homes don't qualify for private mortgage insurance -- despite the fact that they may qualify for a refinancing under the government's program.

In such cases, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, has encouraged mortgage insurance companies to allow the transfer of a policy to the new loan. “Mortgage insurance companies are attempting to cooperate on this as best they can,” says mortgage banker Ruzicka.