February 24, 2017
I recently read The Money Problem: Rethinking Financial Regulation by Morgan Ricks (University of Chicago Press 2016). While it is not a book for the financially faint of heart, it does provide a great introduction to money is and what banks and other financial intermediaries do. The back matter reads,
Years have passed since the world experienced one of the worst financial crises in history, and while countless experts have analyzed it, many central questions remain unanswered. Should money creation be considered a ‘public’ or ‘private’ activity—or both? What do we mean by, and want from, financial stability? What role should regulation play? How would we design our monetary institutions if we could start from scratch?
In The Money Problem, Morgan Ricks addresses all of these questions and more, offering a practical yet elegant blueprint for a modernized system of money and banking—one that, crucially, can be accomplished through incremental changes to the United States’ current system. He brings a critical, missing dimension to the ongoing debates over financial stability policy, arguing that the issue is primarily one of monetary system design. The Money Problem offers a way to mitigate the risk of catastrophic panic in the future, and it will expand the financial reform conversation in the United States and abroad.
I particularly recommend Part I to those trying to get their hands around money (the concept, not hard currency itself) and how it is created. Ricks reviews the “standard textbook description” of bank money creation and others’ account of it before providing his own “modified story.” (58-59)
Parts II and III provides a far-reaching blueprint for reforming the monetary system. This reform agenda is not without its critics, but I think Ricks gives a fair reading to competing views so you can make up your own mind as to who is right.
- In a recent article titled, “How ARM Rates Help You Get More Home When Fixed Rates Keep Rising,” Dahna Chandler forces borrowers to be smarter about their home purchases. On average, U.S. homeowners move once every seven years due to family size, school districts, or career sustainability. Chandler explains why home buyers must consider the length of time they will live in the home to ensure they choose the loan type that is more cost efficient.
- The lending market is drastically shifting. Once upon a time banks were the dominant lenders for homeowners in the U.S. However, as homeowners grow more worried about interest rates and terms of the loan, non-banks are becoming more and more attractive to potential homeowners. Today, the three largest bank lenders of 2005 share a total of 21% of the lending market which is astounding because they once held 50% of the market.
February 23, 2017
OppLoans quoted me in Bad Credit Loan Coming Attractions! It opens,
Everyone is talking about bad credit loans these days, and Hollywood seems to be taking notice. (Editor’s note: They’re not.) All the newest films are about bad credit lenders! (Editor’s note: They’re really not.)
With so many people wondering what their loan options are, we thought you might enjoy hearing about the hottest upcoming films that deal with bad credit loans, which we may or may not have made up entirely (Editor’s note: We did).
If you have a not-so-hot credit score and you’re worried about getting a loan, these upcoming blockbusters might help you figure out which bad credit loan works best for you.
THE INTEREST RATE DECEIT
Tammy is just an everyday woman who needs a loan for some car repairs. Unfortunately, her credit is quite low. She sees some advertisements for bad credit loans, and figures the safest choice would be to pick the one with the lowest interest rate.
But, spoiler alert, there’s a big twist! The loan she chose had so many fees, it ended up being more expensive than the loans that had higher interest rates. If only Tammy had made sure to compare the loans using their APR, or annual percentage rate—she might have met a better fate. The APR tells you the full cost of a loan, including interest and fees, so it’s the best way to avoid an unpleasant twist in your story.
David Reiss, a law professor and editor of REFinBLOG.com (@REFinBlog), gave us an example of why APR is so important: “It would help a potential borrower compare the cost of credit between one loan with a 5 percent interest rate and one with a 4 percent interest rate that charges a point at origination.”
In other words, a loan that charges a fee when you take it out could actually be just as expensive or more expensive than a loan with higher interest rates and no fees.
- In the Midwest, there is a different approach to affordable housing. Instead of focusing on multi-family units, like in the larger urban areas, CDCs in the Mid-west are working to build more single-family homes. Their method of affordable housing entails smaller homes and homes built in factories.
- A recent study by the Urban Institute, found that African American home ownership is at its lowest levels since the 1960s, which was during a time of heavy discrimination. Furthermore, the housing crisis of the early 2000s, affected African Americans more than any other ethnic group. As a result, many African American households were forced to foreclose on homes because of the high rates at which they received when purchasing their home.
- Ocwen Financial has suffered another loss. The non-bank was barred from purchasing “mortgage servicing rights in bulk” by the California Department of Business even though the department made a mistake removing the restrictions for the company.
- The Homeownership Experience of Minorities During the Great Recession, Gascon, Ricketts, and Schlagenhauf
- The Effectiveness of Housing Collateral Tightening Policy, Agarwal, Badarinza, and Qian
- The Bancorp: The Long Lasting Effect of an ‘Extend and Pretend’ Commercial Mortgage Operation, by Abram
- Macroeconomic Adverse Selection and Model Instability in Mortgage Credit Risk, by Einloth
February 21, 2017
OppLoans quoted me in How (and Why) to Calculate the APR for a Payday Loan. It reads, in part,
Sure, you may know that taking out a payday loan is generally a bad idea. You’ve heard a horror story or two about something called “rollover”, but if you’re in a jam, you might find yourself considering swinging by the local brick-and-mortar payday loan store or looking for an online payday loan. It’s just a one-time thing, you tell yourself.
It only gets worse from there… Once you start looking at the paperwork or speaking with the sales staff, you see that your payday loan will cost only $15 for every $100 that you borrow. That doesn’t sound that bad. But what’s this other number? This “APR” of 400%? The payday lender tells you not to worry about it. He says, “APR doesn’t matter.”
Well, let’s just interrupt this hypothetical to tell you this… When you’re borrowing money, the APR doesn’t just “matter”, it’s the single most important number you need to know.
APR stands for “annual percentage rate,” and it’s a way to measure how much a loan, credit card, or line of credit is going to cost you. APR is measured on a yearly basis and it is expressed as a percentage of the amount loaned. “By law, APR must include all fees charged by the lender to originate the loan,” says Casey Fleming (@TheLoanGuide), author of The Loan Guide: How to Get the Best Possible Mortgage.
But just because a loan or credit card includes a certain fee or charge, you shouldn’t assume that it’s always going to be included in the APR. Fleming points out that some fees, like title fees on a mortgage, are not considered part of the loan origination process and thus not included in APR calculations.
“Are DMV fees connected with a title loan? Some would say yes, but the law doesn’t specify that they must be included,” says Fleming.
According to David Reiss (@), a professor of law at Brooklyn Law School, “the APR adds in those additional costs and then spreads them out over the term of the loan. As a result, the APR is almost always higher than the interest rate—if it is not, that is a yellow flag that something is amiss with the APR.”
This is why it’s always a good idea to read your loan agreement and ask lots of questions when applying for a loan—any loan.
* * *
Why is the APR for payday loans so high?
According to David Reiss, “The APR takes into account the payment schedule for each loan, so it will account for differences in amortization and the length of the repayment term among different loan products.”
Keep in mind, that the average term length for a payday loan is only 14 days. So when you’re using APR to measure the cost of a payday loan, you are essentially taking the cost of the loan for that two-week period, and you’re assuming that that cost would be applied again every two weeks.
There are a little over 26 two-week periods in a year, so the APR for a 14-day payday loan is basically the finance charges times 26. That’s why payday loans have such a high APR!
But if the average payday loan is only 14 days long, then why would someone want to use APR to measure it’s cost? Wouldn’t it be more accurate to use the stated interest rate? After all, no one who takes out a payday loan plans to have it outstanding over a full year…
Short-term loans with long-term consequences
But here’s the thing about payday loans: many people who use them end up trapped in a long-term cycle of debt. When it comes time for the loan to be repaid, the borrower discovers that they cannot afford to pay it off without negatively affecting the rest of their finances.
Given the choice to pay their loan off on time or fall beyond on their other expenses (for instance: rent, utilities, car payments, groceries), many people choose to roll their loan over or immediately take out a new loan to cover paying off the old one. When people do this, they are effectively increasing their cost of borrowing.
Remember when we said that payday loans don’t amortize? Well, that actually makes the loans costlier. Every time the loan is rolled over or reborrowed, interest is charged at the exact same rate as before. A new payment term means a new finance charge, which means more money spent to borrow the same amount of money.
“As the principal is paid down the cost of the interest declines,” says Casey Fleming. “If you are not making principal payments then your lifetime interest costs will be higher.”
According to the Consumer Financial Protection Bureau (CFPB), a whopping 80% of payday loans are the result of rollover or re-borrowing and the average payday loan customer takes out 10 payday loans a year.
Reiss says that “the best way to use APR is make an apples-to-apples comparison between two or more loans. If different loans have different fee structures, such as variations in upfront fees and interest rates, the APRs allow the borrower to compare the total cost of credit for each product.
So the next time you’re considering a payday loan, make sure you calculate its APR. When it comes to predatory payday lending, it’s important to crunch the numbers—before they crunch you!