November 14, 2019
More Retirees Today Have a Mortgage
In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses.
Thirty years ago, just one of every four homeowners in their late 60s to late 70s still had a mortgage – today, nearly half do. Once people hit 80, mortgages used to be extremely rare – only 3 percent had them. Today, it’s one in four, Harvard’s Joint Center for Housing Studies recently reported.
Retiree’s financial condition depends on much more than how much they spend on housing – in particular the size of their retirement savings accounts and Social Security checks. But rent or a mortgage payment is typically the largest item in the monthly budget. Being free of both can be a significant boost to one’s standard of living in retirement.
Jennifer Molinsky, a senior research associate at Harvard’s housing center, described several developments over the past three decades that may explain the dramatic increase in the share of retirees with mortgages.
First, she said, Americans today “seem to have less aversion to debt” than the generation that grew up after the Great Depression and was instilled with frugality. Although consumer debt levels always ebb and flow with the economy’s cycles, total debt as a percentage of disposable income is significantly higher today than it was in the 1990s. The 1986 tax reform act also made mortgages a more attractive form of debt to hold. The reform eliminated the income tax deductions for interest on credit cards and other types of consumer debt, with one exception: mortgage interest.
Having a mortgage isn’t necessarily a bad thing. Mortgage rates have fallen dramatically in recent decades. Many retirees who are still making monthly mortgage payments were able to reduce the payments by refinancing old, partially paid off mortgages into new 30-year loans with lower interest rates.
But another factor that may have pushed up the share of retirees with mortgages has been the long-term run-up in house prices, relative to earnings, which makes it increasingly difficult to pay off a house before retiring. In the late 1980s and early 1990s, house prices were about three times the typical household’s earnings, according to the housing center. Today, prices are more than four times earnings. …Learn More
October 2, 2018
Subprime Crisis Lingers for Minorities
As Americans were riveted to the spectacle of teetering Wall Street behemoths in 2008, another ruinous tragedy was beginning to unfold: a national foreclosure crisis.
Black and Hispanic homebuyers were hit hardest by the foreclosures that resulted from unbridled sales of predatory subprime mortgages, which exceeded $500 billion annually at the market’s peak.
In the decade since the financial crisis, the stock market has rebounded smartly, but the damage to minority communities remains. At the height of the foreclosure crisis, entire neighborhoods were littered with bank foreclosure sales and realtors’ signs advertising sales of the properties.
About 30 percent of black and Hispanic borrowers’ homes in total have gone into foreclosure in the years since the housing market crash, compared with 11 percent of whites’ homes.
“For [minority] families, financially destructive foreclosure events delayed and potentially derailed the dream of homeownership,” the Federal Reserve Bank of St. Louis concluded in a report on the continuing impact of the financial crisis.
But the damage goes deeper than that. Because home equity is often the most valuable asset that people own, the foreclosure crisis “severely damaged the balance sheets of minority families,” the Fed said. …Learn More
April 19, 2018
Credit Unions a Popular Antidote to Fraud
The 1980s featured bankrupt Texas savings and loans. Then, in the mid-2000s, Countrywide failed to clearly disclose to customers the spike in their subprime mortgage payments in year 3. In 2016, 5 million customers learned about their fabricated Wells Fargo accounts. And last year, Equifax breached 140 million customers’ privacy.
No wonder people are flocking to the friendly credit union in their church, labor union or workplace.
The widespread fraud reports making headlines with regularity have fed a perception that “fraud happens in the banking world and a lot of it goes unpunished,” said Mike Schenk, senior economist for the Credit Union National Association (CUNA).
“It’s not just Countrywide as an abstract concept. It’s that Countrywide put people into these toxic mortgages to make a buck.” The 2008 stock market and housing crashes, fueled partly by the collapse of several subprime lenders, hammered this point home.
CUNA has a bold marketing message: credit unions care more about their customers than impersonal banking behemoths. Schenk said he has the evidence to prove credit unions are benefiting from Wall Street’s financial shenanigans: membership increased an “astonishing” 4 percent in 2017, as the U.S. population grew less than 1 percent.
Of course, most banks aren’t bad guys, and they provide services that small credit unions can’t. Banks frequently upgrade their technology – Bank of America’s ATMs are cutting edge. Large banks also have much larger networks of ATMs and branches, and they can service the large corporate accounts credit unions aren’t equipped to do.
So, what do credit unions do better? Here are their three big advantages: …Learn More
March 20, 2018
New Use for College Loans: Spring Break!
Yup, more than half of college students are using some of their student loan money to pay for spring break.
It’s the peak season, and 21st century ingenuity is being applied to the age-old problem of paying for college trips to popular, sunny climates like Miami and Cabos San Lucas in Mexico’s Baja Peninsula. LendEdu decided to do a survey to answer a question that Mike Brown put so succinctly in his blog:
How can “so many students living on a shoestring budget afford to go on a not-so-cheap weeklong getaway”?
The mechanism allowing this can be found in college financial aid offices, which funnel loan money directly to students after, wisely, deducting tuition and fees.
Fifty-one percent of the students who were surveyed are financing their beer, hotels, and air fares with another popular source: parents. Spring break is typically paid for with whatever they can scrape together from parents, loans, and part-time jobs – frequently in that order.
LendEdu, a New Jersey credit card and student loan refinancing firm, hired Pollfish for its March survey of 1,000 college juniors nationwide who have student loans and are planning spring break 2018.
Brown is 24 and earned his University of Delaware degree in 2016. His parents paid for his Cancún trip during junior year, and he did not have to use his loans, which he’s still paying off.
“If my parents found out I was using that loan check to pay for spring break, they would’ve had a couple words with me,” he said.Learn More
February 8, 2018
Cautionary Tale of Defrauding the Elderly
Two Morgan Stanley investment advisers agreed last week to plead guilty to stealing nearly $500,000 in a set of schemes that took particular aim at their elderly or retired clients, the U.S. Department of Justice charged. One client is in his mid-80s.
Multiple allegations detailed in the federal complaint demonstrate the creative ways that trusting older individuals might be deceived. For example, the Justice Department (DOJ) indicated that college tuition may have been the auspice or motivation for adviser and broker James S. Polese’s alleged fraud to obtain $320,000 from the client in his 80s – labeled Client B in the complaint.
The allegations included that Polese, age 51, knew a $50,000 loan from Client B for his children’s college expenses was prohibited by Morgan Stanley and was “a conflict of interest between the client and his adviser,” said the complaint, which was filed last week in U.S. District Court in Boston.
Polese and Cornelius Peterson, who both live in the Boston metropolitan area, also worked together to divert money from Client A and also a Client B to a failed wind farm investment without their knowledge, the complaint said. A third client allegedly paid inflated fees.
The brazen allegations in this case come amid reports that financial fraud against the elderly is on the rise. Retired people with nest eggs can be enticing targets for scam artists, and the elderly are “likely financially vulnerable” if they are experiencing cognitive decline, one study said. Further, a trusting senior might have more difficulty detecting financial deceptions that involve complex transactions. (Little detail about the clients’ personal situations was disclosed in the court documents.)
Morgan Stanley said that it fired Polese and Peterson in June 2017 immediately after uncovering the fraudulent activities and “referred the misconduct to regulatory and law enforcement agencies.” The two are registered brokers, and the Securities and Exchange Commission was involved in the investigation. The brokers agreed to plead guilty, said a statement from the U.S. Attorney in Massachusetts. A plea hearing is scheduled for February 15.
Client A and Client B were involved in the wind farm investment, the complaint said: Client A lost $100,000 after Peterson made “false statements” to his employer “when he signed a form stating that Client A had verbally authorized the $100,000 [wind farm] investment.” Client B, a businessman, was unaware that his funds were being used to support the wind farm, in the form of a loan account that could be used as a collateral backstop to the project, according to the charges. Although the funds were never used, Client B’s money was nevertheless put at risk, DOJ said, and he paid $12,000 in fees associated with the transaction.
Boston attorney Carol Starkey said her client, Peterson, age 28, was a “minor participant” and noted that Polese, who is 23 years his senior, was Peterson’s supervisor. Polese’s attorney did not respond to requests for a comment. …Learn More
July 5, 2016
Parents, Start Student Loan Homework!
Here’s a reminder that parents should start their homework this summer to minimize college loan repayments over the long haul. A few basic decisions can add or subtract thousands of dollars.
A little help came last week, when the interest rates on all federal student loans were reduced. Despite the declines, the rates for the PLUS loans available to parents remain much higher than the loans available to their offspring – taking out a PLUS loan will nearly double the interest paid on $50,000 over 20 years, compared with an undergraduate Stafford loan.
This is an argument for having prospective students take out the loans, rather than the parents. As for paying them back, financial advisers tend to agree that young adults with decades of work ahead of them can share in that responsibility at a time their parents are facing retirement. This complex family decision depends on myriad factors, including how much income the graduate can expect to earn after college and how comfortable the parents are.
There are one-time, upfront fees on federal student loans, and they are also much higher for parent PLUS loans: 4.272 percent of the loan’s principal amount versus 1.068 percent for Stafford loans for undergraduates – these fees will go up for loans disbursed after Oct. 1.
The Institute for College Access & Success has put together an excellent cheat sheet explaining the federal loan options, who qualifies for various types of loans, and the costs of each. To see this sheet, click here.
Below is the institute’s summary of the new loan rates, effective July 1: …Learn More
May 16, 2011
College Debt’s Impact is Growing
Forty percent of college graduates today have difficulty repaying their student loans, but few realize how many options they have to get relief by renegotiating them.
The non-profit American Student Assistance (ASA) counsels students on how to deal with onerous loan payments. When students call ASA, repayment counselors tell them their options include extending the life of the loan, which reduces the monthly payments, or making graduated payments, which increase as their paycheck increases in future years.
Some borrowers may even be able to qualify for postponing payments or canceling some of their debts.
Borrowing on college campuses has reached crisis proportions, according to ASA. Total student loans outstanding have surpassed the $900 billion mark. Rising tuitions and stagnating household incomes due to the recession have only increased American families’ reliance on debt to fund college. …Learn More