Credit Card Brains

From the Economist.com: House Prices: Through the Floor (hat tip Ryan)

Earlier this week, the S&P Case-Shiller National Home Price index was released showing a 14.1% decline over the last four quarters. The Economist has a chart (from Professor Shiller) putting this decline into historical perspective by showing the YoY change in U.S. house prices since 1920. The Economist notes:

Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression.

During the Depression, the rapid decline in house prices was primarily due to the extremely weak economy and high unemployment. This time prices are falling rapidly because of the excesses of the housing bubble - especially excessive speculation and loose lending standards.

This doesn’t mean the economy will fall into a depression (very unlikely in my view); instead the current rapid price decline shows how ridiculous house prices and lending standards were during the bubble.

From Boston Fed President Eric S. Rosengren: Current Challenges in Housing and Home Loans: Complicating Factors and the Implications for Policymakers .

Here is an excerpt from the section: Length and Duration of Housing Downturns, and Other Recent Research from the Boston Fed

New England is no stranger to falling asset values. As you no doubt know, during the early 1990s, New England experienced a steep decline in housing prices. We at the Boston Fed think it may be useful to compare that experience to what we have experienced to date with falling housing prices, and we are pursuing a number of research avenues to do that. …

As you can see in Figures 4 and 5, Massachusetts moved quite rapidly from a situation of relatively limited foreclosures in 1990 to a period of very high foreclosures in 1992. The timing is interesting. By late 1989, Massachusetts house prices had begun to fall, but delinquencies and foreclosures did not really accelerate until there was also a significant weakening of the economy. In fact, the unemployment rate in Massachusetts, which had declined to 3.1 percent in late 1987, peaked at 9.1 percent in the second half of 1991. Declining housing prices alone did not cause very elevated foreclosures; it was significantly compounded by an economic shock such as the loss of a job which disrupted the ability of many borrowers to make payments. As house prices fell, many homeowners who lost their jobs in the early-1990s recession could not sell their homes to pay off their mortgages because they owed more than their homes were worth. For unemployed homeowners with “negative equity,” foreclosure was often the only option.

The more recent period also points to the importance of falling house prices and negative equity in foreclosures. In the more recent period (shown in Figures 6 and 7), the foreclosure rate – which was not particularly elevated in 2005 – had become quite elevated by 2007 as house prices softened. This increase in foreclosures occurred even though the Massachusetts unemployment rate averaged 4.5 percent for the year.

Why are foreclosures so high today, given that the economic situation is so much better than it was during the early 1990s? Even in expansions, many homeowners undergo adverse life events – like a job loss, a divorce, a spike in medical expenses, or the like – that disrupt their ability to make mortgage payments. Of course, with regard to unemployment, such household-level disruptions are not as prevalent in expansions as they are in recessions. But when such a life event does occur, it can still precipitate a foreclosure if the homeowner has negative equity because of a fall in house prices.

Another reason for elevated foreclosures today concerns changes in the susceptibility of mortgages to economic shocks. In the late 1980s, many borrowers had made significant down payments and had good credit histories. But the recent ability of borrowers with weak credit histories and little or no down payments to purchase homes, often with subprime loans (and sometimes with minimal income verification), means that a greater share of today’s mortgages are a good bit more susceptible to the types of disruptive life events that precipitate foreclosure. These borrowers were fine when housing prices were rising because if needed, they had the ability to refinance or sell their homes and pay off (or more than pay off) their mortgages. In contrast, in the current environment of falling housing prices, borrowers who made small down-payments or have otherwise risky mortgages are now more likely to end up in foreclosure if they experience an adverse event that interrupts their ability to make mortgage payments.

So, in short, we have seen similar foreclosure numbers this time around without a technical recession, and with a more modest fall in home prices. Boston Fed researchers attribute that to the prevalence of riskier loans and higher combined loan-to-value ratios in general.
…
Several lessons from the historical comparison can be highlighted. First, should the economy worsen and suffer a period of significant job losses, the housing problem could become much more severe. Second, past episodes of elevated foreclosures lingered well after the peak in foreclosures had passed, indicating that the duration of today’s situation may be longer than some are anticipating. …
emphasis added

Forgive me for once again falling into despair over the media’s inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.

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The headline: “New Overdue Home Loans Swamp Effort to Fix Mortgages in Default.” We will take this as a promise that the article is going to demonstrate something about the relationship between newly delinquent loans and workout efforts.

The lede:

May 30 (Bloomberg) — Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.

In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

The last of eighteen paragraphs:

Last month’s 54 percent “cure ratio” among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:

WASHINGTON, D.C. May 30, 2008 – Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.

As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.

MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.

I assumed when I read this that somebody–a large somebody, since it significantly impacts the data–switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a “one-time adjustment” to the data collection. Burying that in the last paragraph is . . . disingenuous.

I’m also a touch troubled by the statement that “Last month’s 54 percent ‘cure ratio’ among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March.” That is literally true. However, the cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?

So what about the second half of the claim?

“Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis,” Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. “People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes.”

In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.

Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? “Foreclosure start” simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a “start” because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure “completed.” My own view is that the “best practice” is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also “best practice” to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.

Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment–which would most likely exceed the cost to the investor of a foreclosure–and 30% doesn’t sound so shabby.

As far as the second claim–the increase from 15% to 22% of homes in foreclosure “taken over by lending banks,” I’m prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders “winning” the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.

So put these dubious statistics together–the rest of the Bloomberg article is basically filler–and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?

You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts–delinquency reporting methodology, foreclosure processes, various ways of reporting “cures” and “starts”–were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on “the foreclosure crisis” for a year or more and you still can’t ask basic questions about the press releases you read, you aren’t doing your job.

For a lot of young women, negotiations are as uncomfortable as stepping into a wet swimsuit, and as painful as walking in too-small stilettos. Asking for more money, or getting a service for less money, feels awkward and unnatural. But in a negotiations workshop I recently attended at the Kellogg School of Management, I learned the importance of asking for what I want, and the harsh consequences of not negotiating.

Our class started with an exercise in humility. Half of the room played the role of a “new hire” asking for a signing bonus, while the other half played the role of an HR person charged with giving the bonus. The goal of the new hires was to get as much of a signing bonus as they could – up to $30,000. The goal of the HR rep was to “make the hire” with a bonus of $20,000 or less. Neither side knew of the other’s goal.

I played the HR rep in my exercise. While I was prepared to go up to $20,000, my new hire started the bidding by asking for only $10,000. I pushed back a bit, but she ended up getting her inital ask ($10,000) out of me, and felt good that she secured her initial ask. I felt great that I saved my company $10,000 dollars on the deal.

We then rejoined the larger group, and learned that a few other women – about five out of 100 – had secured a $20,000 bonus. When my partner learned I could have given her up to $20,000, she was surprised. “I should have started at $30,000!” she declared. And she was right. In fact, nearly all of the women in the room ended up negotiating a $10,000 signing bonus because they felt awkward asking for more, or didn’t feel they deserved more. That’s a lot of money left on the table.

Kellogg Professor Vicki Medvec has seen this scenario play out time and again without fail. She’s a professional negotiator, professor of management and organizations and executive director of the school’s Center for Executive Women. “Women don’t ask,” she says, “and it’s costing them in the long run.”

In her research, she’s observed that from day one in the workforce, men negotiate for greater salaries and benefits than women. In general, men aren’t afraid to ask for more, or to jump on an opportunity for advancement, while women feel they will eventually be rewarded with a promotion or raise for the good work they’re doing.

As young, working women, think about the effect this can have in the long-term. If your male colleague gets hired to do the same job for $20,000 more than you as a starting salary, what’s the effect when you both get five percent annual raises? If a new position is open and you apply but don’t follow up because you don’t want to seem pushy, what’s the cost of missing the opportunity for advancement?

The above examples aren’t made up, they came from women in my workshop (and were echoed by the experiences of many other attendees). Medvec noted that women often feel so “honored” to receive a job or promotion, they often don’t think about negotiating for more to go along with the position. This might mean accepting a new title, or new account, without additional pay, vacation days, benefits or support. It’s flattering to be recognized, right? Most women probably feel they’re “pushing it” to ask for more.

Interestingly, research shows the “women don’t ask” rule generally applies to negotiations on behalf of ourselves only. Women actually do quite well negotiating on behalf of their companies. So why are we afraid to ask for ourselves?

Medvec shared some insights from her research that stem all the way back to childhood household chores: girls are given primarily indoor tasks, like washing the dishes or sweeping the floor, while boys are frequently given outdoor tasks, like washing the car or shoveling show. Outdoors, neighbors might approach the boys to ask how much they charge, sparking the idea that “free” chores can also be done for profit for neighbors. (Medvec called this “exposure to external labor markets.) For the girls indoors, this isn’t the case. How many neighbors ever asked you what you charged for vacuuming the rug or dusting the bookcase? Me neither.

So how can women learn to be better negotiators for themselves? Luckily, there are a host of techniques and tactics that can help us collectively improve our bargaining results. Here are a few that I learned:

1) Be prepared.
Know what you want before you go in, and know why you deserve to get it. Don’t think about your argument in terms of your life (ie. I should get a raise because I can’t possibly afford the cost of living in Chicago on my current salary.), think about it in terms of value you bring to the company. Come prepared with a list of your accomplishments, praise, client satisfaction, etc.

Under this point, doing research is also a top priority. If you’re landing a new job, know what others in your industry are making. This is particularly helpful if you’re moving to a new city, where salaries may vary greatly – you don’t want to start your new job with an earnings gap!

Finally, figure out exactly what you’re asking, what you’re prepared to give up and what your best alternative is. (In other words, how low can you go before you walk away? And where would you walk to?)

2) Find a mentor outside of your circle.
We tend to ask our mentors before making a business move or attempting a negotiation. But what if we’ve filled our ranks of mentors with people exactly like us? Sometimes, we need to ask for opinions outside our trusted circle. Medvec takes this a step further and actually argues that women should have a male mentor to bounce ideas off of. I can vouch and say that in my experience, men in my field often have completely different views of what is “risky,” when advancement should happen and what raises and promotions should look like. I’m always blown away by their perspective. Maybe that’s why in PR, our entry levels are filled with women (like 90 percent) and our managers are all men.

3) Money isn’t always the main goal.
Develop an inventory of all the points that would be “wins” for your negotiation. If your boss can’t give you a raise, are there other points you can talk about? More vacation days, better support, new responsibility, advanced training or perhaps a better understanding of your career path?

The idea here is that it’s much more difficult to negotiate when you’re only negotiating on one point. If money is your main goal, and you walk into your boss’ office and ask for $10,000, and she says, “I can’t right now due to the economy,” you’ve lost. Medvec says it’s much more effective to go in with an A, B, C approach, so you can say, “OK, if I don’t get A, how can I still get B and C from this negotiation?”

It’s important to think this way outside of your career, too. If you’re buying a house, and the current owner won’t meet your price, are there extras she can throw in that would help bridge the gap? New appliances, repairs, etc. Think about how you can close this deal in a way that’s satisfactory to you.

4) Ask first.
Though it seems counter-intuitive, the person who asks first sets the price point for the entire negotiation. Think of it this way: in the exercise I referenced, the new hire could have asked for $20,000. Since my new hire started at $10,000, she automatically closed the door on anything from $10,000 - $20,000. She set the window of her negotiation at $0 - $10,000 by starting too low. Had she started at $30,000, I would have been desperately trying to get her “down” to $20,000.

Don’t close your window low, and don’t let your window be closed. Start first, and ask high to “anchor” the price point in your favor. It’s a tried and true technique that professional negotiators, corporations and everyday people use all the time. Don’t be afraid of it!

5) Concede.
Concessions are relationship builders. Always have an option you can afford to lose as part of your negotation points. For instance, if you really want a $10,000 bonus, and you ask for a $15,000 bonus plus two additional vacation days, conceding down to your desired $10,000 makes your company feel like they scored a “win” somewhere.

That said, don’t be outrageous about it. If you’re company’s freezing salaries, don’t go in and say “I need a 20 percent raise and I want to work Fridays from home.” Understand what’s reasonable and what’s not. Be sensitive to the company’s needs and the business/economic climate. You may need to wait a few months before making your move. Don’t propose something outrageous unless you’re really prepared to walk.

As you can tell, I felt really enriched by the workshop I attended. I’ve always been of the “work hard and you shall be rewarded” mindset. I probably have even resented people who do what they can to get ahead and bypass those who “really deserve” to get a promotion or raise. The challenge I have coming out of the workshop is to take greater control over the direction of my finances and my career, instead of always just waiting around for the next big thing.

Now I know you have to ask! And I’ll be more mindful and respectful of those who do ask to get ahead, because it’s definitely a necessary skill.

Do you have a story about negotiations to share? I’d love to hear how you learned about the importance of asking, or how you realized you had missed out on a big opportunity because you didn’t ask.

Real Time Economics at the WSJ has a nice summary today: Oil Bubble? The Debate Rages

For reference, here is Justin Lahart’s article today: Commodity Prices Soar, But Are They in a Bubble?, and Professor Hamilton has a new research paper on the subject that covers all the key issues: Understanding crude oil prices

First, what is a bubble? Back when I was arguing there was a bubble in housing, I wrote: Housing: Speculation is the Key

A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation …

From Real Time Economics:

It is far from clear that the first part of the bubble definition — prices in excess of their fundamental value — is in place. But the second part — that people are buying in anticipation of selling at a higher price — certainly is.

I’m not so sure. Speculation requires storage - something that was obvious in the housing bubble, but isn’t so obvious for oil.

From Real Time Economics:

Harvard’s Jeffrey Frankel, has argued for the idea that speculation is behind the run-up in price. He says that such behavior is due to the sharp reduction in interest rates by the U.S. Federal Reserve. Low rates encourage commodity stockpiling, he says, by making it less attractive to sell commodities and put the proceeds into bonds and other debt instruments.

Critics of Mr. Frankel’s theory, including Paul Krugman, say the expected rise in commodity inventories hasn’t shown up.

Mr. Frankel has acknowledged that, but also notes that perhaps oil producers are leaving those inventories in the ground.

Frankel’s argument is similar to the one I suggested here (based on research from Professor Krugman!): Petroleum Prices and GCC Spending.

[T]here is a possibility that what has looked like peak oil to some observers (something I believe is coming), was actually GCC countries investing by not extracting oil. If oil prices start to fall, and with rising expenditures, the GCC countries might increase production - causing prices to fall further.

So is oil a bubble? Is there evidence of speculation and storage? Some people have cited recent comments by Saudi Arabia’s King Abdullah as evidence of storage, from Reuters: Saudi King says keeping some oil finds for future

“I keep no secret from you that when there were some new finds, I told them, ‘no, leave it in the ground, with grace from god, our children need it’.”

I’m skeptical of this comment (and similar comments from Saudi officials over the years), because I think it is intended for domestic purposes.

The alternative to speculation is that oil prices being driven by the fundamentals of supply and demand - with strong growth in global demand, even as demand weakens in the U.S. - and suppliers are struggling to keep up.

On supply, from the WSJ: Energy Watchdog Warns Of Oil-Production Crunch

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world’s top 400 oil fields. Its findings won’t be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.
…
For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

The decision to rigorously survey supply — instead of just demand, as in the past — reflects an increasing fear within the agency and elsewhere that oil-producing regions aren’t on track to meet future needs.

Oil prices aren’t an obvious bubble like housing or tech stocks. It seems the key question is: Are the oil exporting countries producing as much as possible - or are they investing by cutting oil extraction (and leaving the oil in the ground)? The lack of transparency for the GCC countries, and several other oil producing countries, makes it unclear.

From Bloomberg: KeyCorp Slide Foretells Losses at `Delusional’ Banks

KeyCorp … doubl[ed] its forecast for loans that won’t be repaid, prompting concern that regional banks have underestimated the cost of bad mortgages.

KeyCorp [said] debts may be as much as 1.3 percent of average total loans this year. The figure may rise even more, KeyCorp said, as the Cleveland-based company cuts holdings tied to homebuilders.

The revision by the Ohio bank, which last month quadrupled its provision for loan losses to $187 million, may foretell similar increases at U.S. commercial banks as home prices keep sliding, analysts said.

And they are also having problem with home improvement loans. Here is the KeyCorp release from the 8-K SEC filing:

KeyCorp (the “Corporation”) is updating its previous outlook for net loan charge-offs for 2008. The previous estimated range for net loan charge-offs was .65% to .90% of average loans. The Corporation now anticipates that net loan charge-offs will be in the range of 1.00% to 1.30% for 2008, with second quarter and potentially third quarter net charge-offs running above this range as the Corporation deals aggressively with reducing exposures in the residential homebuilder portfolio and anticipates elevated net loan charge-offs in its education and home improvement loan portfolios. The Corporation announced in the fourth quarter of 2007 that it had: (i) decided to cease conducting business with “out of footprint” nonrelationship homebuilders, (ii) recorded additional reserves to address continued weakness in the housing market, and (iii) decided to exit dealer-originated home improvement lending activities, which involve prime loans but are largely out-of-footprint.

From Spiegel Online: Investor-Legende Buffett attackiert gierige Banker (attacks greedy bankers)

Die Rezession werde “tiefer gehen und länger dauern, als viele denken”.

The recession will be deeper and last longer than most people think.

And on the bankers:

“Sie brauten ein Giftgetränk und mussten es am Ende selbst trinken”, sagte Buffett. “So etwas machen die Banker normalerweise ungern, sie verkaufen es lieber an andere”, fügte er sarkastisch hinzu.

Loosely translated: The bankers brewed a poisoned drink, and then had to drink it themselves. Usually they prefer to sell the poison to others (said sarcastically).

Meanwhile, on Friday, Goldman Sachs forecast a “double dip” recession, with a mild pick up in the economy mid-year from the stimulus checks, followed by another slump in the economy later this year.

Update: changed headline to more accurate reflect Buffet’s comments.

While I typically spend my weekends dining, drinking and catching up with friends at social functions, I spent much of this weekend at the Kellogg School of Management’s
Women’s Leadership Workshop in Evanston, Ill. Kellogg is one of the world’s top business schools, and I was honored to be a participant. The session featured valuable classroom workshops on negotiations, interviewing techniques, values-based leadership and relationship dynamics for leaders.

I’m going to reflect on those themes and share learnings from the workshop in coming days, so look for more on that. In the meantime, I noticed that many of the women attending the session were grappling with the issue of funding and student loans. Serendipitously, I had already been working on a story about college loans with the good folks at Simply College, a company that specializes in simplifying financial aid for those applying to college and graduate school.

Since the job market’s looking pretty glum these days, and the news about student loans has been drab as well, I posed some questions about loans to Rene Bolti, Vice President of Simply College, and an educator with 17 years’ experience creating and administering programs and services for elementary, secondary and higher education. I hope you find her answers helpful.

Here’s the Q&A…

1. In layman’s terms, what’s changed in student loans over the past six to twelve months?
Probably the most significant change is a new trend toward eliminating loans from financial aid packages of students below certain income levels. As a result, students at many top-name colleges may find themselves being awarded grants (which don’t need to be repaid) instead of loans.

But, the vast majority of students attend colleges that still include loans in the financial aid equation, so unless you are accepted at one of the top-tier, no-loan colleges, you’re likely to have to grapple with the question of student loan debt.

Although some lenders are exiting the student loan market, there are still many education loans available through a variety of lenders, including federal loans. In fact, the maximum annual limit on federal loans and grants for undergraduate and graduate students has recently increased, making the loans go further toward paying for a year of school.

2. What are three things I should know about college loans today?
1) There are many different types of college loans.

- Federal Stafford loans are available to students who complete a Free Application for Federal Student Aid (FAFSA).

- A family’s financial situation determines whether a student qualifies for subsidized or unsubsidized Stafford loans. (In subsidized loans, the government pays the interest while you’re in school; in unsubsidized loans, you’re responsible for the interest that accrues while you’re in school.)

- Federal PLUS loans are a low-cost option available for parents of students.

- Private loans, made directly by banks or specialized lenders, which tend to be the most expensive option, are available to students and parents to fill any gaps that remain once financial aid has been awarded.

2) Not all education loans are taken in the name of the student; some are student loans, some are parent loans, some need to be co-signed by the student and a credit-worthy adult.

3) Private education loans need to be researched for terms of repayment, length of repayment, total cost over the life of the loan, special qualifying characteristics (like minimum grade point average), and whether all terms and special offers (like interest reduction based on a certain number of on-time payments) are guaranteed for the life of the loan.

3. Can’t parents help their kids navigate the process?
The financial aid process is complex and overwhelming, even for parents who are college-educated and highly motivated. It is a multi-step process requiring attention to timing and detail, with many significant decisions compressed into a very short period of time. To minimize the anxiety and stress inherent in the process, it is beneficial for parents and students to work together, using trusted resources, to be sure they pay attention to each critical component.

Our program, Simply CollegeTM offers a step-by-step workbook/organizer, “Financial Aid Simplified”, to guide students and parents through the entire financial aid process beginning as early as January of junior year in high school, including researching scholarships and loans, completing required forms, comparing financial aid award offers, building a “college life” budget, and more. Go to www.simply-college.com to view video segments that accompany each tab of the workbook.

4. Is the financial aid process different for grad students?
The financial aid process for graduate students typically includes the FAFSA (to make federal loans accessible), but also may include looking for fellowships, assistantships and private loans. FinAid.org has a page dedicated to information for graduate students, including information on specialized loans.

5. Are working professionals at a disadvantage when it comes to loans?
While it is true that income will determine eligibility for certain loans and grants,
working professionals might consider financing their graduate degree through a combination of: employer tuition reimbursement, fellowships, grants, loans.

If you research the possibilities, you’re likely to be able to put together a package that meets your needs. In addition to discussing all possible funding sources with your selected university’s financial aid office, be sure to discuss assistantship and fellowship opportunities with your selected department.

If you are currently employed, talk to your human resources department about tuition reimbursement options (even if you’re unsure whether your employer has a tuition reimbursement program). As mentioned above, finaid.org is a good source of information and fastweb.com has loads of scholarship opportunities, including some for graduate students.

6. If I’d like to quit working and go to school full-time, using student loans, what special considerations might I have to take?
Giving up a salary and returning to the classroom full time will mean making some adjustments to your current lifestyle as student loans are unlikely to equal your salary. Each person needs to weigh personal responsibilities, career aspirations and financial goals when considering full time graduate study and how best to finance it. Here are some specific questions you should ask.

- Is there an alternate source of support available while you’re in school, like a spouse or parent? Even if it’s a loan from a family member, the terms of repayment and amount of the loan would likely be more favorable than any formal education loan.

- Is it possible to work part-time to cover basic living expenses while in school?

- Will a post graduate-degree job in your field draw a salary sufficient to afford and justify educational loan payments?

- Do you already have employment prospects that will be enhanced by a graduate degree?

- If you need to take an educational loan, how soon will you be expected to begin repayment?

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To read some of my personal thoughts and other research on college loans and education, click here and here and here.

Good luck with your applications!

Note: It is not my intention to embarrass Mr. Kudlow, rather to simply show why his analysis was wrong (typical of many back in 2005) - and why the “housing bears” were correct.

Back in June 2005, Larry Kudlow wrote: The Housing Bears Are Wrong Again

“If [the housing bears] had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years.”

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Click on graph for larger image.

This graph shows housing starts from 1970 to the present. Kudlow’s claim that housing starts “haven’t changed much” and “hovered around 1.5 million to 1.75 million per year” was not quite accurate. Housing starts did average 1.59 million per year from 1970 through 2005, but there was a wide variation in starts.

Then Kudlow goes on to state:

“During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences.”

According to the Census Bureau’s Housing and Homeownership data, the number of occupied housing units increased from 63.6 million in 1970 to 108.2 million in 2005, or about 44.6 million.

Looking at the same Census data, we can see that total housing units increased from 69.8 million in 1970, to 123.9 million in 2005, or about 54.1 million during that same period. We can obtain a similar number by adding the total starts from 1970 through 2005, about 57 million starts.

Some of these housing units are second homes, but why is it “plain to see” that demand for homes had “outstripped” supply? There were significantly more housing units built (57 million starts) during this period than new households formed (44.6 million) in the U.S.!

Perhaps Kudlow, when looking at those peaks of housing starts in the ’70s and early ’80s, was fooled into thinking that the recent peak in activity wasn’t extraordinary, especially since the U.S. population is growing. This was an inaccurate view.

The second graph shows the trend of people per household (and people per total housing units) in the United States since 1950. Before the period shown on this graph there was a long steady down trend in the number of people per household.

Note: the dashed lines indicates estimates based on the decennial Census for 1950 and 1960.

Starting in the late ’60s there was a rapid decrease in the number of persons per household until about the late ‘80. This was primarily due to the “baby boom” generation forming new households en masse.

It was during this period - of rapid decline in persons per household - that the peaks in housing starts occurred. Many of those starts, especially in the ’70s, were for apartments. Even if there had been no increase in the U.S. population, the U.S. would have needed approximately 27% more housing units at the end of this period just to accommodate the change in demographics (persons per household).

Now look at the period since 1988, the persons per household has remained flat. The increase in 2002 was due to revisions, and isn’t an actual shift in demographics.

Here is a simple formula for housing starts (assuming no excess inventory):

Housing Starts = f(population growth) + f(change in household size) + demolitions.

f(change in household size) was an important component of housing demand in the ’70s and early ’80s. In recent years, f(change in household size) = zero.

So, unless Kudlow is arguing for a significant further reduction in housing size, he shouldn’t have been comparing starts in recent years to starts in the ’70s and ’80s.

And finally, Kudlow should have been looking at the rampant speculation in 2005, both with flippers and homebuyers using excessive leverage. That is what defines a bubble, and that is what I focused on in April 2005: Housing: Speculation is the Key.

Graph of 12 month rolling total U.S. vehicle miles added:

Click on graph for larger image.

From the Department of Transportation: Eleven Billion Fewer Vehicle Miles Traveled in March 2008 Over Previous March

Americans drove less in March 2008, continuing a trend that began last November, according to estimates released today from the Federal Highway Administration.
…
The FHWA’s “Traffic Volume Trends” report, produced monthly since 1942, shows that estimated vehicle miles traveled (VMT) on all U.S. public roads for March 2008 fell 4.3 percent as compared with March 2007 travel. This is the first time estimated March travel on public roads fell since 1979. At 11 billion miles less in March 2008 than in the previous March, this is the sharpest yearly drop for any month in FHWA history.

It appears that prices are finally impacting demand in the U.S.