Keep Reading and we will show you the way to prevent home foreclosure…

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NINJA Loans were made famous by the recent housing meltdown and subsequent U.S. and world economic crisis. NINJA is an acronym for No Income, No Job or Assets.

Until the mid-1990’s, the only NINJA loans in the marketplace were those offered by small finance companies to consumers who needed emergency cash to deal with a temporary financial emergency. In the old days, the amount of money permitted under a NINJA loan never exceeded $3000.

How The Politicians Screwed Things Up

Then came politicians and non-profit groups whose sole interest was to make home purchases affordable to everyone. The seeds were sewn for this current financial crisis in those days in the mid-1990’s.  (Am I blaming Bill Clinton? No, I am not. In fact, if you read your history, Bill Clinton recommended that NINJA loans for home buyers was a bad idea. Later, George Bush Jr, echoed Clinton’s reservations, but neither were able to stem the tide of NINJA loans for home purchases.)

In order to enhance the ability of people to borrow money for home loans, the rules of the game were changed to accommodate the needs of the lower-income masses. It was no longer necessary for hopeful home owners to bring 10%-20% cash down to the table, nor was it necessary for hopeful home buyers to ensure that their desired monthly payment did not exceed 40% of their gross monthly income.

To strengthen the hand of potential home owners, the rules were changed to allow people to apply for and obtain a home loan, so long as the home buyer was able to meet the specific fees required in the transaction. Instead of a huge down payment and proof of income that showed the proposed house payment would not exceed 40% of the home buyer’s gross earnings, the hopeful home buyer only needed to bring enough money to cover the transactional fees associated with home buying. This is the structure of the NINJA loan - all that is required is to cover the costs of acquiring the loan, yet it is not a requirement to prove the existence of an income, a job, or money towards the principle of the home being purchased.

I am not going to knock NINJA Loans too hard, because I benefited from the NINJA loans myself. As a small business owner, with less than two years in operation, I would have never afforded the house I bought for closing costs nor the vehicles that I have since bought on signature only - twice.

Even though I benefited from NINJA loans, I have not contributed to the problem. I am up-to-date on both the car I still own and my house.

The problem occurred when too many home buyers and car buyers defaulted on their loans. Unfortunately, since home buyers did not have any equity in their homes, they had nothing to lose when defaulting their loans. Banks also contributed to the problem by letting people get home loans for up to 125% of the homes’ value and to buy homes that were overpriced to begin with.

How Homeowners Got Burned

To give an example, suppose a home was worth $100k and the bank allowed the home buyer to over-borrow by 25%. So the bank has given the borrower $125k on a home that was appraised at only $100k. Even if the bank loaned at 100%, instead of 125%, the other problem kicks in next.

Whenever a block has one foreclosed home, the fact that the home was foreclosed reduces the property values of everyone else who owns a home on that city block.

In Stockton, California, east of San Francisco Bay, one of every 27 homes are in foreclosure, the highest foreclosure rate in the country. This means that the average home in Stockton CA has a foreclosed home on either side or across the street. If one foreclosed home on a city block reduces the value of every other home on that block, imagine how much real estate prices will be depressed when 1-in-4 homes on a block are in foreclosure!

Suppose one foreclosed home pushes the real estates values of all of its neighboring homes down by 15%. Now that home purchased at $100k has a real resale value of $85,000. Even if the home owner had put 10% down on his home purchase, the reduced value of his home puts him or her at a financial loss if he or she wanted to sell the home today. If the bank had permitted a 125% financing of the home, most homeowners may consider walking away from an existing home to be more financially responsible than paying on  the house that is now worth only $85,000.

When NINJA loans were written for a $100 or a $3000 payday loan or small loan, finance companies would take a financial hit if that loan was defaulted, but it would not be enough to break the company financially. But since banks were setting up NINJA loans for homes, the banks are reeling under the financial losses created by those loans that were defaulted.

How The Banks Got Screwed

Let us look at this scenario in terms of the bank who loaned the money to purchase the house. For this accounting, we are going to assume that all banks only loaned up to 100% of the homes’ value. We will totally ignore the 125% equation.

So assuming the bank only loaned $90 (10% down payment) or $100k on a $100,000 home, it might seem on the surface that the bank is going to win when they take the home from the homeowner.

This is where most homeowners screw up when they get into financial trouble.

Many people assume that even if the bank only gets the current $85k value out of the home that the bank will only lose about $5k on the foreclosure. But it does not work this way when a bank takes over a home in foreclosure.

If you are a homeowners facing foreclosure, pay really close attention to what I am telling you now.

In order for the bank to get full retail value on the home, the bank would have to hold and maintain the property for a long time. The bank would have to maintain the taxes on the property. And the bank will have to give up the standard 6% to the real estate agent who lists and sells the home, the same as the homeowner would have to do.

But, in order for the bank to get the full retail value on the home, the bank would need to hold onto the property, perhaps for several years.

The bank does not want the expenses of holding and maintaining your property, nor the expenses of keeping the taxes up to date on the property. The bank is in the business to loan money and to collect interest on the loan - not to own the property.

Most banks simply don’t know how to make money on your property even if they owned it outright. But the bank does not own your property outright when they foreclose the property. Do you remember that original $90k to $100k they loaned to help their customer buy the property to begin with? The bank borrowed that money from someone else to finance the loan to their customer. So the bank still has payments to make on the money it borrowed to loan to you.

When a bank forecloses a home or other property, they need to get out of that property as quickly as possible. So, they put the property up for auction. Did you know that investors who flock to the bank sale tend to buy those properties for as little as 40 cents on the dollar as a general rule of thumb?

So the bank loaned you $90k to $100k to buy that home valued at closing at $100k. And now that home has lost some of its value and it is now worth only $85k. But, the bank will only get 40 cents on the dollar at auction. So, once your home is sold at auction, the bank will collect on average $34,000 against their initial outlay of $90,000 to $100,000. Once the auction is done and the bank has sold your house, the bank will have lost $56k to $66k on the deal for having taken a chance on you to help you to buy a home. No wonder a home foreclosure will stain your credit for a minimum of 7-10 years.

If you are facing foreclosure now, you should now realize that your bank has more to lose by taking your home, than to work with you to get a deal that both of you can live with. I know that sometimes it seems that the bank is eager to take your home from you, but they only seem eager when you are unwilling to talk to them to find another solution. The bank cannot work with you, if you are unwilling to talk to the bank.

So, if you are in a financial bind, you need to call your banker and seek to find a solution to your financial problems. Renegotiate with your bank to find a solution that both of you can call a good arrangement.

If you don’t call your bank, you will lose your house and your bank will lose money. If you do call your bank to work out new arrangements, then you could potentially keep your house and your bank will not lose as much money as they would have otherwise.

When you are in financial trouble, it is easy to believe that your bank holds all of the cards. But now that you have an education on your side, you may finally realize that you hold more of the cards in your hand than the bank holds in its hand.

If you are in a financial mess and fear losing your home to foreclosure, pick up the phone and dial your banker right away. Your banker will likely thank you, and you will most probably get to thank your lucky stars that you were able to keep your home.

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There are different regulations that apply to loan companies, depending on the licensing options selected by the loan company. When you understand the differences between loan companies, you will quickly understand where to get the kinds of loan products you actually need.

Types Of Small Loan Lending Companies

It must be noted that while the federal government has some regulatory power over finance companies, most regulations on loan companies are defined at the state level, by state governments.

• Payday Loans / Cash Advances - Generally, payday loans are dictated by the idea that the loan duration is for the amount of time required for the borrower to receive his or her next paycheck. Most states dictate that a payday loan company may set the duration of a loan between 12 days and 45 days. Most payday loan lenders only permit the loan to run until the borrowers next payday period, with no exceptions. While some states permit a payday lender to roll over one loan into another loan, the state where I live - Oklahoma - prohibits payday lenders from rolling over a loan to another payday, and Oklahoma also limits payday loans to a maximum of $500. (As previously noted, regulations on payday loans vary from state-to-state.) Most payday loan lenders charge loan fees, as opposed to interest rates, so as to not violate the Usury Laws that prevent companies from collecting huge interest rates on a loan.
• Small Loan Companies - Small loan companies and finance companies are permitted to collect a higher interest rate than a bank, savings and loan, or credit union. But, small loan companies are limited by the amount of money they can loan. In Oklahoma, the maximum that one of these small finance companies can loan is $1000, and loans can be made for a duration of several months. In Georgia, the maximum that can be loaned by small loan companies is $3000.
• General Finance Companies - Certain finance companies can loan more than the previously stated $1000 and $3000, but because those finance companies fall under different regulations, the amount of interest they can charge for a loan is significantly reduced. As the loan values increase, so does the potential length of the loan.

State Regulations

Some states make exceptions to payday lenders to make loans that are in effect charging in some cases triple-digit interest rates for loans. As a matter of terminology, most payday lenders call their fees “loan fees” to bypass usury laws, and in some states this is an acceptable route for lenders to take. Other states do not see “loan fees” any different than “interest rates”, so many states regard existing state usury laws to be the final word on the matter.

While most states will permit loan companies to charge from 24% to 48% annual interest on a loan, not all states will permit such high interest rates.

For example, New York State draws the line at 25%, declaring that its criminal usury cap is 25% annual interest, which in essence means that any interest rate above 25% is criminal in nature.

Arkansas had set its usury cap at 17% many years ago, and in 2008, the Arkansas Attorney General demanded that payday lenders terminate lending altogether, void existing loans and stop collections on loans currently in default.  Recent Arkansas Supreme Court decisions focused on Arkansas’ Constitutional usury limit of 17%, and the potential violations of the Arkansas Deceptive Trade Practices Act.

Getting The Two-Month Loan

As shown in this review of lending company types, it is clear that our reader should not have been focused on searching for a payday lender at all. The reader needed a two-month loan of $600, but the payday lender is restricted to offering loans that will not exceed the length of time required for the borrower to get his or her next paycheck.

If this reader would have wanted to go to a payday lender, he or she will have needed to take the loan and roll it over four times. But if that individual were in a state that had regulations like those found in Oklahoma, then rolling the loan over even one time is a forbidden practice. Besides, rolling a loan over-and-over is a bad idea just from the fee side of the payday lending industry, as explained in more detail here.

The best option of course would be to go to a small loan company for that two-month $600 loan. The small loan companies and small finance companies specialize in loans that can be paid back over anywhere from five months to one year. In addition, the small finance company will charge lower fees and interest rates than the payday loan company, which is an extra bonus.

Some banks even offer their customers two-month loans or six-month loans, for those smaller financial needs. If you have banked at a particular bank, savings and loan, or credit union, don’t forget to check to see if they offer customers small loans for short periods of time. You might be pleasantly surprised at the answer you might receive from them,  especially if you live in one of Forbes 2008 strongest metro economies.

In Conclusion…

The final answer for you is that if you need a loan that can be paid back beyond your next payday, then you should be seeking your loan from someone other than a payday loan / cash advance lender.

Payday loans are simply one option for acquiring a short term loan, but it is not the only option, and it is not always the best option.

It is important to understand all of the loan options you might have available to you, so that you can make the best decision regarding your short-term financial needs.

Good luck in your search for funds…

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Cash Advance / Payday Loans are designed for people who need short-term loans (up to two weeks). These loans are similar in nature to the short-term bank-to-bank loans spoke of in this article. You borrow the money today, and in two weeks, when you get paid, you pay back the loan.

Now, the Payday Loan company needs to make money, and a 2% interest rate (the bank-to-bank rate) on a $100 to $500 loan will not allow the Payday Loan company to make enough money to make the service worthwhile to them. The Payday Loan company would not survive financially, if it were only able to collect $2 to $10 on a two week loan.

As such, the Payday Loan company typically charges 15% on a two-week loan. Since there are 26 two-week periods in the course of a year, the 15% rate for a two-week loan translated to 390% APR. That is a lot of money to pay back if the borrower keeps refinancing that loan from paycheck to paycheck.

If you need $100 for two weeks, then a $115 payback is not a bad deal. If you needed a $500 loan for two weeks, then the $575 pay back is not a bad deal either.

It is when the borrower keeps rolling that money back over into itself where it becomes a real problem. If this were the situation, then the compounding payback would reach an incredible percentage in very short order. After all, if you do not pay back the loan in two weeks, then the new loan will be for the amount of the loan and the interest on the previous loan. The second loan will be for $115 on the $100 borrowed, and the rate of the loan will be 15% or $17.25. The third rollover will charge 15% interest on a loan of $132.25, or $19.83 interest. As you can see, this can quickly get out of hand, as in six weeks, a $100 loan will require a payback of $152.08.

When compounding the interest, from loan-to-loan, the interest calculation is figured as an Effective Annual Rate (EAR), which if the interest rate on each loan is 15%, the EAR is 1.15²⁶ - 1 × 100% = 3686%.

With the EAR of 3686%, a $100 loan rolled over again and again, for one year, will require a payback of $3686 !!!

Don’t take a Payday Loan if you do not intend to pay that loan back in two weeks !!! You cannot afford to keep paying that compounding interest !!!

We only recommend Cash Advance Loans or Payday Loans if you are going to be a responsible borrower. Take the two week loan if you need it, but don’t roll the loan over into another loan. If you expect that you will have to do that, get your loan from another source.

The original Playing Chicken With The Train article shows you how the banking industry went belly up, through bad lending practices and bad borrowing practices. Take this lesson from the bankers to figure out how to keep your own personal finances in good working order.

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In September of 2008, the White House proposed and the U.S. Congress ratified a plan to invest $700 billion dollars into the U.S. banking system to stave off disaster and to put banks back into the lending mood.

Although I tend to stand in the “small government” community, I initially supported the $700 billion bailout package, because I believed the U.S. Treasury Secretary Paulson would put the money where it needed to go to resolve the credit crunch we are facing.

Looking at current conditions seems to suggest that the $700 billion government bailout only succeeded to resolve half the problem. Banks have stopped failing in large numbers, so the plan succeeded in half its goals. But, the credit market is still tight, so the plan failed to achieve its second goal of getting banks to free up capital for lending.

The Failure Of The Auto Industry Rests On The Failure Of The Banks To Lend Money

As the Big Three automakers teeter on the brink of failure, everyone from Main Street to Wall Street to Capital Hill point to the inefficiencies of the Big Three and their failure to produce cars people want to buy as the reasons for the problems in America’s auto manufacturing sector.

Although I still stand against a bailout for the automotive industry on the principle of not bailing out companies that are failing - after all, I own a small business and if I am not profitable, no one is going to bail me out - I hesitate on suggesting that we should absolutely not bail out the American auto industry.

I would be happy to see the American auto industry go into Chapter 11 bankruptcy, so that they can reorganize their business for a brighter tomorrow. But, I hesitate on letting the car companies go down, BECAUSE the current crisis in the auto industry can be tied directly to the credit crunch, brought on by the banking crisis.

The banks began to see the writing on the wall for the financial meltdown, in late 2007. At that point, banks stopped giving consumers auto loans. When the auto loan money dried up, the auto industry began to suffer, unable to sell cars, because consumers were unable to acquire auto loans!

Beginning in late 2007, car sales began to suffer - not because of rising fuel prices or unattractive vehicles, but because of the consumer’s inability to get loans to buy those cars. That pain continued through 2008 unabated. The car industry is struggling to hold up against 15 months of cars sitting on car lots unsold, because banks are not loaning money for the purchase of automobiles. The $700 billion banking bailout has not altered the ability of consumer’s to get new loans for cars and trucks, and as a result, the automotive industry is trying to figure out how to stay afloat until their new big-budget hybrid-electric cars can be brought into the marketplace.

The Electric-Hybrid Cars Are Not Going To Save Their Bacon

With the Chevy Volt debuting in September of 2010 at $40,000, not too many people will be buying it either. Once again, it seems that Chapter 11 restructuring will be the best medicine for General Motors, but until the banking industry frees up capital and starts loaning money for automotive purchases again, General Motors, Ford and Chrysler will remain hopelessly doomed.

The automakers have hemorrhaged money since the banking industry slammed the door on auto loans. For 15 months, the auto industry has been bleeding out along the roadways of the United States. Up to this point, they have bled money for 15 months, and their reserves are nearly gone.

I initially supported the $700 billion bailout of the banking industry, because I believed the infusion of that capital would free up capital in the lending industry, enabling banks to be able to comfortably start loaning money again. But here we are, nearly two months after the bailout was approved, and there is no indication that the banking industry is ready to start loaning people money again.

If banks would simply start loaning money to consumers again right now, then we would not have to struggle with the question of whether we should bail out the auto industry or not. If people could actually be assured that they could get an auto loan, then people would be happy to buy the cars currently being built and sold in the United States.

Of course, consumers would be happier to buy cars that got better fuel mileage than many of the vehicles sitting unsold today, but as the price of fuel has continued to drop in recent months, people are more inclined to buy what is currently available at the car lots - if only the bank would loan them the money they needed to make that purchase. After all, how many of us have twenty- to forty-thousand sitting in the bank to finance our next new car.

Bank Loan Opportunities Do Exist, If You Shop Around

What most people do not realize is that not all banks have sewn up their purse strings. There ARE still banks out there loaning money, even for cars. There are two banks in my hometown that are ACTIVELY advertising car loans that are available right here, right now. While your bank might be suffering from bad lending practices in the past, not all banks are hurting.

In conclusion, there is money available to keep buying, if you are willing to shop around and find out which banks are actively loaning money now. And as for the auto industry - oh my, they are offering some exceptional car deals to clear out their inventories! Find a bank willing to loan you money, and then start shopping for a car deal that you would be hard-pressed to pass up.

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Somehow, some way, the Feds needed to shore up the American economy, by providing banks some kind of backstop against the bad mortgage paper in the financial market.

One area where the pundits had it wrong these last two weeks is that the bailout was designed not to backstop the greed and corruption of Wall Street, but the greed and corruption of predatory lenders on Main Street USA.

On the bill’s first pass through the House of Representatives, the bill was shot down, because the American people were pissed that they were being asked to bail out Wall Street. Granted, Wall Street was going down in flames, and now we have no U.S. based investment banks left in the marketplace and billions were lost by the investors who had invested in these great institutions. But, Wall Street’s only blame was for having bought bad paper from Main Street Banks who had taken advantage of their customers, writing bad loans and selling loan packages full of bad paper to Wall Street.

As described in our previous post, the financial catastrophe that nearly sent the global economy (foreign banks own a lot of American debt, so our problems would have rippled through the global economy in days) into the next Great Depression (it is not that much of a stretch to suggest that) was affecting Main Street USA in a desperate way.

Banks could not risk loaning money to each other, and as such, many of the biggest banks in the country and many of the smallest were teetering on the edge of bankruptcy. Some of the banks fell, and others are breathing a great sigh of relief tonight.

But the problems in Main Street USA banks - the lack of trust between lending organizations - was negatively affecting the entire global economy:

• Banks were unable to sell their loans in packages to other banks and investors, because no one knew how much bad paper was in those loan packages.
• Since banks were unable to sell their paper to others, banks had to tighten up on all lending, because many were pushing against the asset / lending ratios dictated by the U.S. Federal Reserve, which regulates all banks in the United States.
• Since banks were holding all of their own paper, other banks worried about how much bad paper their neighbors held in account. So banks began withholding money from each other.
• As banks felt all of these mounting pressures, many had to turn away their lending customers. Sonic Restaurants had their credit line closed. Then McDonald’s Restaurant had their credit line closed. And if government had not taken any action at all, one of the largest corporations in the world General Electric could have fallen, as they had their credit lines drying up too.
• Banks and major corporations rely on a multitude of short-term loans to ensure that payrolls can be met and product purchases can be made. Without freely accessible capital, businesses would drop like flies, dead where they fell.
• Once again, this mounting credit problem in the United States could have bankrupted Main Street banks across the country, and it could have bankrupted the businesses that keep Americans working. The auto industry has been facing this crisis for more than a year, as banks could see the writing on the wall, and they were refusing auto loans across the board for everyone except those with double-A and triple-A credit ratings… and some of those triple-A’s were being refused loans as well.
• As employers failed across the country, Main Street USA would have found itself standing in unemployment lines that would stretch for blocks.

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As this chain of events illustrates, this $700 billion bail-out was ABSOLUTELY necessary, even though we all wish it would never had come to this.

Right now, Wall Street is America’s favorite dog to kick, but Wall Street’s only blame was in trusting that Main Street Banks across this grand country were doing as they should have done. They were trusting that the people who had bought homes could afford to pay for those homes, as it is the banks responsibility to ensure that people can pay back their loans.

Personally, I feel that it is an excellent idea for banks to be able to sell their mortgages in order to replenish their financial assets to fuel more lending.

Where the problem begins is when predatory lenders on Main Street USA can loan money to anyone under the sun and then sell that bad paper to someone else. Once the bad paper is sold to another, then the predatory lender is no longer responsible for having made bad loans, because they have passed the buck and the bad paper to someone else.

The predatory lenders in your town and in my town have preyed on the innocent, who simply desired to buy a home, and they preyed on the investors who were willing to invest in those mortgages.

And as the recent two weeks illustrates beautifully, the predatory lenders get off scott-free and get to dodge any blame, because the American people love to kick the rich and the Wall Street tycoons who were unfortunate enough to buy large portfolios of bad loans from predatory lenders.

It really is too bad that those lenders in your town and my town got the opportunity to take advantage of so many and then to successfully dodge the blame for their bad behavior. Now, you and I and everyone else on Main Street and Wall Street are going to have to pay the price for predatory lending, because honestly, if we had chosen not to support this bail-out of the American banking system, we would have met a financial meltdown more full and more crushing than the one felt by our grandparents just eighty years ago.

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Your Financial Observer

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