A friend of mine who is not a banker, yet has been involved in the financial world and is an educator made this comment to me. I think it’s great and worth sharing.

The quote has to do with predatory practices, and with the financial reform taking place, predatory lending is a focal point.

‘I hate the word “predatory” with anything related to economics, as it sort of absolves the “victimized individual” of responsibility for being stupid…’ MW

Predatory lending has a hype factor built into it as well. Lack of knowledge though is the real culprit; that’s why I’ve written “Barking With The Big Dogs”.

While driving home, I heard a typical hyped up debt free commercial. The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices. First, live with relatives, who bought a home. However, did they have to get a loan to buy the house? Second, rent. Renting is not always a bad idea, just as homeownership is not always a good idea. Both scenarios have pros and cons. Third, buy a house. Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage. Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving 232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well. If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan. Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages. Mortgages have pitfalls as we all know, but provide benefits. The benefits are not just the ability to purchase property, but can increase wealth as well. Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

I was going over the financial feasibility study with a client today. When the conversation turned toward financial ratios, I brought up return on equity as I usually do.

However, something eye opening hit me during the conversation.

Before I talk about my discovery, let me mention topics we hit on first. You’ll want to pay attention this today if you are interested at all in making money on your investments, etc. If not, both you and future generations to come will miss out too.

When determining if the business was worth doing, we looked at cash flow. Cash flow statements are very easy to understand and it’s this simple…money coming in versus money going out. You can look at a personal checking account just as a business looks at their statements.

Next we discussed income statements. Income statements show business the items such as depreciation of assets on and other tax write-offs which reduce the taxable amount of income. The income statement, however, does not affect cash flow – money spent does. The income statement gives an idea about the net profits which are taxable.

From there, we reviewed return on equity. A difference between return on equity and return on investment is different, but in short, the return shows how hard the money is working. In just a minute, I’ll demonstrate some simple math; but first, let’s look at the Rule of 72 as it relates to how hard your money is working.

The Rule of 72 will tell you how fast the money will double in value.

To figure the time, you will only need the calculator between your ears. If you know the rate of return, which is mentioned on the feasibility study ratios page – or a CD at the bank, simply divide 72 by that number. The answer will be the number of years for your money to double.

For example, if you earn 6%, take 72 and divide it by 6. The answer is 12. Your money will double every 12 years.

Now comes the eye opening part.

I was looking at a money market account paying .01%. That’s right, 1/100th of a percent. At this rate, money will double every 7,200 years!

Without reinvesting the interest earned and simply setting it aside, in order to double the money, 11,920 years will pass.

Looking at interest rates on CD’s at .25%, which are not uncommon rates, money will double in 288 years. Can you and your family wait this long? Mine can’t.

Don’t blame banks for offering low rates, there is more to the story and you can read about it in “Barking With The Big Dogs” which is soon to be released.

I tell clients all the time when starting a business, find the money first before signing any contracts. As much of a “no-brainer” as the previous statement seems, it happens.

I know people who paid rent for six months before getting the funding for their business. Fortunately, the time was only six months. Could you imagine being in a contract for three years at $1,500 per month without a business? You would be out $54,000!

Before getting the keys to the property, first do a business plan so see the feasibility of the project. Next, find the money.

When finding the money, where do you look?

As I’ve stated before in my article, “Why Small Businesses Can’t Get Loans”, only about 4% of money for start up business comes from banks. Some of the big banks (such as Bank of America as I am told) have blanket policies not to lend to start up business. Wells Fargo had an advertisement talking about new business owners having friends around in the beginning, but now the people are gone and Wells Fargo is there to help. Is this a way of Wells Fargo saying they don’t lend to start up businesses?

Some banks won’t make a commercial loan for under $200,000 as well.

When a bank doesn’t lend to start up businesses, this practice may be their policy; however, if the project is good enough, the bank can seek the backing of the SBA and still do the loan.

The SBA (partially) guarantees loans to bank. The idea is when a loan falls outside the banks normal lending practices and/or the client cannot get money elsewhere, the SBA comes in to help businesses get the funding. The SBA has been called “the lender of last resort”. Businesses do not deal directly with the SBA. However, the ultimate decision still rests upon the bank.

So where does the money come from?

55% – your savings

10% – relatives

7% – partners

6% – charge cards

4% – venture capitalist

3% – friends

3% – Angel investors

3% – mortgage property

5% – other

Now consider grant money.

Grant is money that does not have to be repaid.

Most grants however require matching funds meaning the recipient also has to come up with funds in addition to the grant money they are receiving.

Grants are usually available through public or private community foundations primarily granting monies to not-for-profit agencies and rarely, if ever, grant money to for-profit businesses. The grant money for small business may come in the form of assisting you with help and education, not direct funds.

WATCH OUT FOR GRANTS – some grant wording changes throughout the conditions to terms such as – grant – to loan – to equity position. In addition, to satisfy the conditions of a grant, you may have to spend the money received to do so, thus netting you no additional funds to operate.

When getting help from the government, there’s one thing you need to know right up front about getting money from the government…

They don’t have a single dime to directly lend to you for the start-up of a small business.

You may believe this statement to be untrue because of the way the term “government loan” is thrown around, and we hear about government loans all the time. (Refer back the the SBA. The bank is the SBA’s client, not the business.)

The bottom line is there is no direct money. But that’s okay…

If the government had to give money to any American who wanted to start a business, just imagine how much money they would have to collect in taxes to fund such a program.

Besides, a capitalist system works best when the government uses a hands-off approach with regards to the competitive market system. Having the government choose who gets funded and who doesn’t is socialism not capitalism.

Finally, getting a funding may not be as difficult as it sounds because money is out there. If you have a good plan, collateral, credit scores, etc., you can find money. However, be prepared to face rejection and get creative if you decide to follow your dream.

Getting money for a small business is not easy for many reasons.

First of all, owners and prospective owners need to cut through the sales hype.

Advertising my say the President has ordered banks to loan money to those who qualify, but in reality, the President can’t simply do such actions.

Banks have internal business practices and structures just as any other business operates. Did you know some banks won’t loan on start up businesses or until a business has operated for two years? Some banks won’t make commercial loans under $200,000. Not all banks or credit unions do commercial lending.

Not lending is not always a bad thing. When we put money in a savings account, for example, we want our money protected. In order for our money to be protected and safe, we should want to bank to make prudent lending decisions, not risky loans. Risk is more for investors and with the added risk, investors should reap the rewards knowing the potential losses could be great.

In addition, a bank or credit union has regulations to meet before a loan can be approved on top of their standard operating procedures. If a loan falls outside the lender’s normal business practices, or parameters, but wants to do the loan, the bank can seek the assistance of the SBA. The SBA has guidelines determining lending activities too.

Next, take secondary market issues. Many loans are sold on the secondary market. What may make lending difficult in the future, as we have seen in the past couple of years , is obviously related to people making money on investments. The market has been in the tank starting in 2007; therefore, no one wants to investing losing propositions.

Moving right along, consider taxes. In 2011, tax laws revert back to pre-2003 levels. Dividend rates will go back up to 39%! Higher taxes and less profits on investments may lead to lower values on investments due to lack of demand, thus people once again losing money.

Investments and dividends are not just for the wealthy or Wall Street execs, but also the average Joe’s IRA and 401k accounts, mutual funds, exchange traded funds, etc. (Check out my article, “Kissing retirement money goodbye“.)

So when looking for money, according information derived from the Small Business Development Center, only about 4% of the money for start up business comes from the bank – approximately 55%-65% comes from personal finances or relatives.

Other forms of money comes from selling assets, home equity loans, partners, investors, etc.

Grant money is for another topic, but basically there is not any grant money “for profit” businesses and the government isn’t a direct source of funding (or cash) for business, which is not a bad thing either; but I’ll go into this at a later time. In the meantime, consider what our taxes would be if the government provided loans to everyone.

In summary, the business idea and creating a business plan may take the least amount of time, but finding money could take months so be prepared and possibly be creative.

Whether a bank is privately held or nationalized, loans still work the same way.

A 30 year fixed is a 30 year fixed, and so are 15 year fixed rate mortgages as well. However, there is more to it than what is the rate, what is the payment. You can read what I mean in Barking With The Big Dogs. I’ve posted several chapters.

What may be different in the private sector banking versus socialized banking are limited loans types, such as an interest only.

I’m not suggesting that everyone get an interest only mortgage, but it is not a stupid loan as some would say. It’s actually a very good loan. You just have to see beyond the hype, or negative hype.

Limiting products is good for the bank, not the borrower.

With all of the problems in the financial world today, the pay option mortgage is said to be the problem that started it all. I would disagree.

The real problem is when the government passes laws and regulations, such as the Community Reinvestment Act of 1977 under Jimmy Carter, basically forcing banks to lend to risky borrowers. Also, lack of education in our schools.

I was watching a person talk about these pay option mortgages on his website and he made this point over and over about the cause of the meltdown which started the financial crisis a couple of years ago.

He used lots of graphs and charts that were overwhelming and compelling. However, on his very own site, an article (that he put up) went on to say that these loans were very good for the borrower and lender for the last 20 years!

It should be clear that the loan is not the problem, but rather the problems are much deeper.

It’s not a particular loan, but the action of people and businesses that create the problem.

I’m not sure who actually said it, but the quote was something like this, ” it takes more knowledge to borrow than to save.” Possibly Robert Kiyosaki.

Maybe having more knowledge is tough and is why the “get out debt” or “all debt is bad” people are so popular…it’s easy for everyone to talk about, and easy for some people to sell – such as a talk show host. If a person has a degree in finance, why would that person not teach what he knows versus saying debt is dumb? The answer, debt is dumb is easy to sell the masses.

In actuality, borrowing is the simple side to finance and very easy to understand, it’s just made very complicated.

Not all people should borrow money. Not all loans are meant for all people. But for those willing to learn how the banking game is played, they can come out winners of tomorrow.

Therefore, the real key to success and building wealth is knowledge.

The odds are always with the house, or the bank. I was playing poker with my son. We are simply playing a game of cards, but it is fun to win. (And yes he won too.) Someone wins and someone loses, that just the fact of life. It doesn’t matter if it is checkers, cards, football, baseball or whatever. However, we have the choice to play or not to play games.

But in the game of life, we don’t always have choices when it comes to playing with our money.

No, I’m not talking about poker or any other game. Rather, I’m talking about taxes, inflation, loans, insurance or the stock market. These are “games” that we play everyday. If you don’t learn the rules of the games, the house has the odds.

Have you ever noticed the size of the financial institutions or government monetary figures? Sure you have.

$900 billion or a trillion, such as in the bailout figures.

These institutions use debt and loans all of the time even if they do not use the terms debt or loans. For example, a certificate of deposit at a bank is really a loan from us to the bank. The bank pays CD holders interest and uses the money to turn around and make more money.

The thing about it is that it is not necessarily the debt that causes problems as the debt free pundits proclaim, but rather the actions the action people take when buying items and spending money regarding the financial decisions made. What I mean is did money get spent on vacations, jewelry, boats, or whatever? I $100 or $200 here and there starts to add up. Or, is money invested at random just because some said buy this stock or mutual fund rather than research the markets, trends, etc. Another example might be to buy and hold instead of selling at the appropriate times.

In reality, who has more money, the institutions that use debt properly or the people who tell tell you to get out of debt?

Some banks will go broke, as we have seen, and some will win big. Some win. Some lose. But these players know the game and are playing against other experts.

Most homeowners, and I have made mistakes in the past too (as a result, I have decided to delve into the real estate and banking business rather than just take someone’s word for it), are really not an expert in real estate. Neither are many realtors or bankers that I’ve come across for that matter either. To give you an idea of what I mean, is a house really an investment? The property can be, but in most cases it’s not – except to the realtor (or person who loves real estate) giving the sales pitch, or the people who write the tax laws, such as capital gains. More on this in Barking With The Big Dogs. You can also get an idea of housing from my post dealing with the property being a hedge against inflation by reading here.

Therefore, keep your poker face on when it comes to looking for a house.

Even people who preach getting out of debt don’t always tell the whole story. Maybe because they don’t want to tell you or because they don’t know the game itself.

Similar to playing poker, if you are playing poker, you don’t show your hand. You bluff and make it look good if your hand is not very good.

When listening to a show on getting out of debt, or all debt is bad, how much would you put in their “pot” just to sit at the table and learn what you already know… such as don’t spend more than you make. I would hate to have a 15 year mortgage and lose a job just simply trying to avoid debt. That’s pretty risky. Are you willing to bet the house?

Losing income is much more damaging than having debt. But if you do lose income by all means you do want to get out of debt as fast as possible provided you do not give up additional income in the process, i.e. liquidating income producing assets. Rather, if you are not making money, then it’s time to walk away from the table.

Before you sit at the table in a bank or at a real estate office (or wherever), you had better learn the rules of the game so you can level the playing field. Otherwise, they may just clean house.

Copyright secured by Digiprove © 2010 Mark

Many people realize banks borrow money, i.e. CD’s, savings accounts, etc., and turn around and make loans from those funds. The savings rate is lower than the loan rate. This spread between the rates is just one way the bank makes money.

Another way banks make money is from deposits as well. Sure, savings accounts and CD’s are deposits, but so are free checking accounts. (I describe this in my book, Barking With The Big Dogs, got into the process much deeper than I do on my post on my website.) Free checking is generally free as long as you keep a balance. Therefore, the bank uses the money as well to make money.

I do not have a problem with the bank making money. After all, how could I make money from investing in the financial institutions (or any other business) if they do not make a profit? I couldn’t.

What I don’t like is a practice in making money, which happens, by holding my money longer than necessary and penalizing me when I could be using my money.

To explain, when deposits are made, money is not always available for immediate use. First the bank needs to protect itself to make sure other checks (deposits) clear coming into the bank. Next, this also protects me.

No problem so far regarding holding the money. In addition, on larger deposits, only a portion may be available for use and the bigger portion may be held for a week for example. Holding money in this fashion doesn’t really bother me since I know some funds are available and when the remainder of the money will become available for me to use.

However, I made a deposit and the portion that was supposed to be available along with the date the remainder balance was to become available didn’t happen. Yes, I had a receipt, but the bank decided to do something different…and didn’t tell me.

Where the story gets interesting is that I wrote some large checks based upon the information I was given. What I wasn’t given was notice the extended hold was put in place. My wife and I noticed something wasn’t right and called people we had written checks to and asked them to not deposit our checks until I found out what was going on at the bank.

When I went to the bank, I spoke with the branch manager. I explained I knew how banking works. She even said she didn’t want to waste my time, since I knew what I was talking about, and got right down to business.

The lady (at Chase) stated the “back office” decided to put an “extended hold” on my deposit and the initial amount to be used was not available. I was going to have to wait another week.

Therefore, I had discovered while meeting with the banker I had some NSF check fees. The banker stated Chase went ahead and paid the checks.

By now, I was not very happy at all. I showed the manager my receipt and a copy of the check I deposited. I told her the people who had assisted me in the previous transaction and assured me of what to expect. The manager stated Chase would pay on any check and refund the fees. I also demanded a letter stating the actions and errors that occurred or may occur are the fault of Chase, and not my own. I wanted this letter from the bank in case something negative showed up on my credit report and I needed a document to justify the transactions.

While sitting at the manager’s desk, she made call to see if my deposit from the previous week had in fact gone through and if the funds were available. Guess what, the money was there.

I stated that I knew what Chase is doing is floating my money. (Before electronic banking, people could float money using the time delay of the mail system. Not anymore. Only I wasn’t doing it, the bank was doing it to me.)

Instead of making it available when they said it was, an extended hold was placed so they could use the money longer. She smiled, but the smile was one of those “I just got caught” kind of smiles.

The manager requested a release, and guess what? My money was available within minutes. The manager also credited back may fees as mentioned.

Here is the kicker. Chase Bank put an “extended” hold on my money to use for a longer period of time while charging me NSF fees to earn money when the deposit had actually cleared and should have been in my account to begin with – or else they wouldn’t have paid my checks since I’m not set up for loans. Fortunately, I know enough about banking not to just to let things slide and wait another week…

…and Barking With The Big Dogs will let the fat cats know the game is up.

  Copyright secured by Digiprove © 2010 Mark