Lazy Man and Money

Time to Pull Out of the Market?

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Over the last couple months, I’ve noticed a bit of a change in the articles in Money Magazine and Kiplinger’s. They’ve started to be more proactive in warning people about planning for an upcoming bear market.

And you know what? I understand why and agree with it.

Here are some of the red flags I’ve seen cited:

  • Seventh Year of a Bull Market – We are in the seventh year of a bull market and they rarely last that long. It’s not that we are “due” for a bear market, but… well yeah I’ll say it, “We are due for a bear market.” Why? Because…
  • The Market Looks Expensive – Last June I asked if it was Time to Sell Your Stocks?… which should cast doubt on the validity of me asking the same question in the title today. If you read that article, you’d know about Shiller P/E and how a number over 25 seems to lead to crashes. Last year it was just over 25… now it is 27.42, which is what it was before the 2008-2009 crash. However, crashes typically need catalysts, so…
  • Interest Rates Rising Soon – It seems that everyone agrees that the Fed is going to start raising interest rates. Typically this does not bode well for the stock market. Right now, there are few places where people can put money to work for them. Are you excited about earning a fraction of a percent in your savings account? If interest rates rise, other investments could look better. People could shift some money out of the market and into alternatives.
  • Sell in May? – There’s a theory that actually has significant statistical basis that one should sell stocks in May as they don’t perform well from May to October in any given year. Whether there is legitimate causation or if it is just correlation is still a question of debate. My take is that it is a warning sign that shouldn’t be ignored.

I’m not a big believer in market timing. If I had pulled all my money from the market and put it in cash last year, I’d have missed out on some significant gains. On the other hand, I see some value in taking some gains on any equities that you feel are “expensive” and holding in cash, or putting money in an under-performing area. I know I’ll be looking to rebalance my portfolio.

Lower the Interest Rate on Your Mortgage Without Refinancing?

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On my trip to Boston a couple of weeks ago, I met up with a couple of my best friends from college. One is probably more into personal finance than me – but he’s just not the blogging type. He can dazzle with Excel and Quicken and probably could tell you exactly how much money he has to the penny with a single click. The other friend is a lawyer specializing in real estate. When I closed on my condo purchase, he was the guy I went to and it was smooth sailing.

Somehow, we got onto topics of the economy. We gabbed about the sub-prime crisis. They thought that the mortgage holders were to blame because it’s their responsibility to know what they can afford and not get sucked in a mortgage lender/salesman. I took a different view and thought it was the mortgage lender, because they are expert trying to explain a topic that most people are unfamiliar with (mortgages) and pushing them into more complex vehicles with escalating interest rates. The answer is that it’s probably a combination of the the two. It’s almost like a homerun in baseball, sometimes the hitter does a tremendous job of hitting a good pitch and sometimes the pitcher does a lousy job of pitching the ball making the hitter’s job easy… and there’s a lot of homeruns that fall in between those extremes.

We also got on the topic of mortgage rates. They are historically extremely low right now. I lamented that I couldn’t take advantage of the low rates. I had lost a lot of the equity on my home and if I tried to refinance I wouldn’t have the 20% down that mortgage lenders like to see – especially in this market. I am also self-employed (with a less than impressive income) which probably doesn’t make them light up with joy. Lastly, since I moved to California and now rent the Boston condo, it’s not owner-occupied – yet another thing that banks would like to see. That’s three pretty decent strikes against me if I’m looking to lower my rate from 5.875% to some of the 4.875% rates available today.

My lawyer/real estate guru friend told me the solution was simple. He asked me if I came up as self-employed or unemployed on credit reports (I admit that I don’t know this). He said that if I showed up as unemployed, it would be very easy to get a lower rate. I could simply call up the lender and tell them that the ecomony is bad and ask if they could lower the rate – no refinance or paperwork necessary. The theory is that lenders would rather give you a lower rate than risk not getting paid and having to deal yet another foreclosure.

What do you think? I think it sounds plausible and my source is rock solid. Still something sounds almost a little too good be true. Is this possible? Has anyone out there been in a similar situation and tried it?

Loanio Launches!

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In a release so delayed that it made the latest installments of Rocky and Indiana Jones seem like nothing, Loanio has launched. If you go back to the darkest corner of your memory you may remember that Loanio announced it will be a peer-to-peer lending company intending to compete with Prosper and Lending Club. I would mention Zopa in the conversation, but in the US they are not a peer-to-peer lending company. My only interest in them was their potential of negative interest rates, but I’ve found that it’s not practical. I couldn’t even lower my interest a half point with a pretty sizable audience.

I had long been looking for the peer-to-peer industry to grow into it’s own. I reasoned that it makes that margins could be better if people acted as their own loan officer. I also reasoned that being a loan officer can’t be all that difficult if you are diversifying your risk. Well, Prosper had some missteps. Lending Club had more as they’ve effectively had their doors closed over the last 6 months while, popular rumor has it, they catch up with the regulator’s regulations. So with Lending Club down, the industry needed another player… and it looks like Loanio is finally ready to step off the bench.

So what sets Loanio apart from Prosper? I’m glad you asked. The biggest thing I’ve noticed is that they introduce the concept of co-borrowers. You probably don’t need to click on the link to figure out what this is. It’s a co-signer on a loan. It make the loans less risky for the lender to take. While that sounds good to me (especially because I’m lender on Prosper and Lending Club) why on Earth would someone want to be a co-borrower? What’s in it for me? I guess the answer to that is friends do it to be a good friend. Plus if you default and cause your co-borrower to have to pay off your loan, you are probably setting yourself up for a few free punches to the face. Maybe that’s enough incentive. What if the co-borrower doesn’t pay though? After all, he would want to pay even less than the original borrower as he didn’t receive any money in the first place.

I don’t know how it will all end up, but before I jump in I’m going to be following Loanio’s Blog and subscribe to it’s RSS Feed.

Zopa Scam? I Borrowed Money On Zopa. Here’s Why…

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A couple of weeks ago, I went to Finovate Start-up to learn whatever I could from various financial company start-ups and report back to you. I hoped to find three or four gems in the 40 companies that presented. One of the companies that I was least interested in was Zopa. In the UK, Zopa is a very successful peer-to-peer lending company. This lead to their widely anticipated US release. When the product was introduced, critics universally panned the service. For the investor, Zopa is basically a CD – you get a guaranteed fixed rate of return. For the borrower, you get a loan without ever having to deal directly with a bank. There simply didn’t see anything “Finovative” about the company.

At Finovate, they reinvented their reputation. By the end, they had one the coveted award of Best of Show. I was stunned. How did they do it? Borrowers can pay negative interest rates.

Let me repeat that, because it took me a bit to wrap my head around it… you can pay negative interest rates. How can that happen? When someone invests in a Zopa CD, they choose a borrower to help. This “help” reduces the rate that the borrower has to pay back. Zopa showed a couple of examples where borrowers are paying negative interest due to all the help they’ve received.

So if the borrower can make negative interest, the investor must be getting the short end of the stick right? Not exactly. A Zopa CD pays 3.75%, which compares well with the US Avg (2.90%) as well as the Top 10 US Bank CDs (3.65%) (source: Bankrate.com, 24-Mar-2008). The Zopa CD is insured up to $100,000, so it’s a steady investment if you like the returns on a CD.

I didn’t need a loan, so why did I get one? I have often written about peer-to-peer lending. I created the Carnival of P2P Lending. I felt that it would be interesting to be on the borrowing side. Most importantly though, I wanted to experiment to see if I could achieve a negative interest rate. If I can’t achieve a negative interest rate through connections like you, the odds are very long against the average Joe doing it. So the results of this experiment lie in the Lazy Man community… If you want to help me achieve a negative interest rate simply visit my Zopa profile and click on the Help Me Now button. I put up my favorite YouTube clip and a couple of pictures on that profile for your enjoyment.

Before my wife reads this and I get a nasty phone call… Honey, I only took a $1000 loan – the lowest amount possible. I got the lowest possible interest rate 8.49%. This means that if I keep the loan for a full year, I’ll pay around $85 to run this experiment. If I don’t receive significant help in 6 months, I’ll probably cancel the experiment and declare the negative interest rate hype and not something that one can expect. I’ll also keep the money that I borrowed in an interest bearing account, which means that it will cost less than $85 in total. With our net worth, income, and spending, this doesn’t really amount to much. One could even claim that it was worth it to realize that I was able to get the best interest rate that Zopa has to offer despite being self-employed.

Carnival of P2P Lending #9 – Cinco de Mayo Edition

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Happy Cinco de Mayo! In a few hours from now I’ll be having tacos and maybe a cerveza. I draw the line at doing a hat dance. Grab yourself some nachos and chew on these articles about P2P lending…

Moolanomy spectulates why Lending Club has stopped taking new lenders. Interesting thought that “If they are successful, I believe they will emerge as the industry leader.” I think Prosper already has a head start on Lending Club, so I think they’ll just emerge as a stronger #2 than before.

Not to be outdone, Cash Money Life speculates on the future of Lending Club.

Prosper Lending Review tells you how you can buy your own P2P Lending company. I’m guessing that it’s not going to come cheap.  I wonder if my credit score is good enough to get a loan on Prosper to buy it – just kidding.
Wiseclerk covers the launch of Cashare in Switzerland. It’s similar to Prosper except that you have to submit paperwork for each loan.

The Prosper Blog notes the value in social capital in getting a loan funded. I’ve got more to say about this in the future – perhaps later this week.

RateLadder says that with the Fed dropping interest rates, buy a Zopa CD. It seems like you might even be able pay your loan back at negative percent if you can convince people to help you.