One of the positive developments of any economic downturn is the number of businesses which are started; young college graduates cannot find work and start a new business, laid-off employees use this as an opportunity to scratch their entrepreneurial itch and some find themselves as accidental entrepreneurs as a way to survive the downturn. Correspondingly, investors are burnt by the stock and real estate market and are looking for something “different” to invest their money in.

Start-up business in need of money meet the jaded investor. Match made in heaven? Maybe. Maybe not.

I saw a lot of businesses practicing law. Some great. Some middling and some that should have never started. For conflict of interest purposes, I never invested in them even though I was offered many times. The advice you give changes once you have an ownership stake. However, I would consider the p2p lending industry for business purposes an example of the growing trend towards investing money in private enterprises.

If you are thinking of investing in a “hot new start up” or some private businesses, there are a few things to consider:

• The best idea is not always the most profitable idea. I believe the most over-used terms I ever heard were “this is a great idea” or “I need to find a great idea in order to start a business.” Great ideas are not necessarily the most profitable ones. Take Apple for example. If you opened up an iPod, there’s nothing breath-taking in terms of its technology. Apple’s value is that it knows its market well and executes on getting the most out of that market. How an idea is executed is more important than the idea. An often quoted mantra in entrepreneurship is “better to have Grade A execution and a Grade B idea than a Grade A idea and Grade B execution. The lesson for the investor being don’t invest purely on how great the idea is, instead invest in …
• Good management who knows how to return cash back to investors. A friend of mine, a successful entrepreneur, said something interesting last month-”you can’t teach common sense in business.” Finding good management is an elusive task in publicly traded companies; think of how hard it is for start-ups or small private businesses. As an investor, you should spend a lot of time looking at management- do they have experience in the field (or are you providing seed money for them to make their mistakes), do they have a track record of success, do they have different skill sets or all they all in tech, sales etc.? What you are ideally looking for is management that has: (a) technical competence; (b) sales acumen; and (c) prior history building a business. If you have a management team that has all three, you have hit upon something. Ideally, ask yourself this question: “does this management team know more than I do about business?” If not, best to run away.
• Invest in businesses which are “scalable”. Venture capitalists use this term often. Scalable is really plain English for the concept that the business can be grown and “scaled” in size and revenue over time. As an investor, the greater the potential the business is scalable, the more likely you will get a better return on investment. An example of a scalable business would be a software company that develops applications for the masses (although tech companies die lots of terrible deaths), a mining company that has test results for a potentially large mine or someone building old age homes: there are lots of growth opportunities in these ventures. Examples of non-scalable businesses would include someone engaged in an arts and crafts business, someone buying a truck to deliver goods or someone opening a non-chain retail store. Chances are that these businesses will hit their peak very quickly and your investment return capped.
• What is the business’ exit strategy and how will you get your money back? This is what stumps most start-ups and private businesses- what exactly is its exit strategy? Is it being built to sell to a larger competitor? Is it going public? Or is it merely going to operate to pay the owner-managers well? As an investor, you need to know this going in just as you would investing in any publicly traded stock. If the exit strategy expectation is clearly set out, you won’t end up in a situation where you mistakenly thought the business was going public but it was instead built to give the owner-manager a comfortable life-style. The best place to find an exit strategy is in the business plan. I am not a big advocate of writing business plans for the sake of writing business plans but, if the business is trying to attract investor money, it better have a thorough plan setting out clearly how the investor will do if the assumptions are met.
• What rights do you have to get your money out? The issue with private-businesses is that it is very difficult to get your money out. There is no real market for your investment so you need to negotiate rights to request your money out when you want to. If you loaned the business money, this is an easy determination to make. At some point in time, the loan will mature. If you purchase shares in the company, this becomes more difficult. The easiest way is to negotiate a shareholders agreement (which is an agreement among the shareholders to govern the operation of the company and exit strategies) where you have a “put option” to ask for your money back plus interest at any particular period of time. You also want to make sure you have the ability to sell your shares without undue interference from the business. What you want to avoid is giving the business an option to buy you out at any particular period of time (unless it is at a premium to monies invested) or restrict your right to sell your interests in the company.

Investing in start-ups can be risky ventures but, with such risk, comes great reward. Remember to look very carefully at what you are investing in. It is your money so don’t be afraid to ask some probing questions. Good luck.

Million Dollar Journey posted in December of last year a comparison of the listed net worths of bloggers and it is still generating comments! If nothing else, it shows our natural curiosity (or our innate sense of nosiness) on how much people make or are worth. But, as is often commented on by others, net worth does not give a true indication of wealth in and of itself. It is merely a balance sheet value which is only really worth something if you liquidated all your assets. Many American found this out the hard way recently; as paper millionaires, their net worth was dependent largely on paper gains on their real estate holdings. Once that valuation collapsed so did their net worth (assuming they valued net worth of real estate at market value and not price of acquisition).

What, then, is a true determination of wealth? The “get rich quick” industry, for lack of a better term, certainly presents a viable measure of wealth: true wealth is determined by how long you can survive without any employment income. In other words, how long can you live on your investments? This concept of wealth has certainly been seized upon by Robert Kiyosaki, author of the Rich Dad Poor Dad series of books, as the true indicator of wealth and used as a selling tool into why people should invest in real estate (although one suspects he’s backed away from such naked support of real estate investing in this day and age).

It certainly makes sense to me from a business perspective. Business need assets to survive just like we do but businesses who do well generate the most of amount of cash from the money invested. This is typically business activities which require the least amount of effort. That is why businesses are moving away from labor intensive ventures (such as retail banking for financial institutions or traditional manufacturing for industrials) to ventures which can make money with smaller amount of employees or employs technology for operational efficiency (hence, explaining the rush for financial institutions be deal- making investment bankers). No one would argue that Bear Stearns was asset rich; its undoing was that it didn’t have enough short-term cash to get through the crisis.

On the personal finance level, and to extend this analogy, the business of “you inc.” requires more focus on activities that make you money with smaller effort than the traditional job. This would involve investing money into dividend yielding stocks, stocks that pay interest or return on capital, cash flow from real estate or returns on investments on private business.

Anyone have any other definitions of financial wealth?

I filed my taxes on Wednesday. Perhaps, influenced by blogging, this was the first year I truly looked at my tax return closely above and beyond looking at the refund or payment line on the last page of the return. Reading the last page of the tax return is akin to buying a book and reading the last page and ignoring the rest- you know how it ends but you miss all the details.  And, as they say, the devil is in the details.

If you flip to your tax return, there should be a page devoted to “Total Income” which, as the name implies, is the aggregate of all the income you have made in any tax year. Income for tax purposes is typically divided into the following sections (I am going to skip the government benefits like Old Age pension and child care benefits):

• employment income
• taxable dividends
• interest and other investment income
• interest from income trusts (known as “other income”)
• business income
• professional income
• commission income

The lines that should really concern all of us are the passive income items: taxable dividends, interest and other investment income and interest from income trusts (collectively, “Passive Income”). You want these to grow faster than employment/business/professional/commission income (collectively, “Working Income”) for two reasons.

Passive Income is generally taxed more favorable than Working Income. For example, the effective tax rate for dividends in Canada is as low as 3% to 30% depending on you income tax bracket and jurisdiction. The dividend tax rate in the United States is 15% (until 2011). This is generally lower than the top tax rates for Working Income (which can be upwards of 46% of income). In other words, the government, through its tax policy, is encouraging you to invest in passive income instruments.

The other reason is simple- you are putting a smaller amount of effort to yield Passive Income than Working Income to gain a greater reward (and greater take-home due to lower tax rates). The typical reaction to making more money is to increase Working Income by asking for a raise, working more hours (if that’s possible), selling more in the your business etc. This requires a lot of effort and, given that our tax systems is progressive in nature (income tax rates rise as your income does), you are, in many respects, being discouraged by the government to work harder since the harder you work, the more tax is being taken off.  Whereas, Passive Income, such as dividends payments, require less effort to generate and is taxed more favorably.

I am going to use my “taxable amount of dividend” line in my tax return to track my progress towards achieving multiple streams of passive income.  Instead of completing your taxes, filing them and then putting them in a drawer for the rest of the year, consider using it as a tracking tool if you are interested in making passive income.

_____________________________________________

I am privileged to be a part of the Carnival of Personal Finance-Chasing Dreams edition hosted by the Happy Rock. Please visit the Happy Rock blog and all the carnival entries.

Have a great weekend.

Nancy aka the money coach is a regular contribution on this blog. As a newly minted insider to the credit union world, I am more than happy for her to discuss what exactly a credit union is, how a credit union is regulated, the social responsibility of credit unions and what the difference is between a credit union and a bank and provide some information we don’t know about credit unions. Thanks for the post Nancy!

Thanks, Thicken My Wallet, for the opportunity to guest post! Some readers may recognize me as “nancy, aka money coach”. Citizens Bank of Canada recently created a position for me (yahooo!) as their bank evangelist. Citizens Bank is one of Canada’s best-kept-secrets, and I’m very passionate about it (hence the nerve to pitch myself to the CEO). Here’s why.

Citizens Bank is a federally chartered bank, but owned by a credit union. We’re also a virtual bank, high interest, low/no fees (a home grown alternative to … errr… you know who). This combination makes the bank very unique. To understand why, we first need to understand the difference between a credit union and banks.

Fundamentally…

Banks, of course, are ultimately accountable to their shareholders and have as a chief mandate generating profit for their shareholders. Shareholders vote for the board of directors who then set the direction of the bank.

Credit Unions are cooperatives, and accountable to the members of the cooperative. Members vote for the board of directors, who then set the direction for the credit union, within the principles of the cooperative movement.

What does that mean for Citizens Bank? It means that we’ve been freed up to operate for the triple bottom line: People.Planet.Profits. It’s a little deeper even than behaving like a good corporate citizen. Around here, we say “csr is in our dna”.

Here are some specific examples.

• RRSPs: for every $1000 a member contributed in Jan/Feb this year, we donated $10 to Habitat for Humanity.

• Visas: cardholders can pick from an Amnesty, Oxfam or Shared Interest Visa. In addition to the usual points, we donate 10 cents to the chosen beneficiary, every single swipe.

• Shared Interest: a portion of our profits get pooled. Members nominate non-profits and charities as recipients. We choose 12 of these nominations, and then members vote on them. The profit pool is divided in direct proportion to the votes. (sneek peak of 2007 recipients available next week!)

• Shared World Term: you’ve likely heard the breathtaking story of economics professor and nobel peace prize laureate Muhammad Yunus, who founded the Grameen Bank. The bank provides micro-credit loans (et alia) allowing thousands of people to move out of poverty. We have a term deposit that does the same - every dime is lent out as very favourable rates to individuals in impoverished conditions around the world.

We have a clearly articulated ethical policy.

And oh yeah… we’re carbon neutral as of Dec 2007, 2 years ahead of plan. (deets on how we did it, here.)

If you haven’t guessed, we’re a bank with ideals. We’re full of staff with imagination, some of whom are blueblood bankers, some of us (*cough* that would be me *cough*) quirky, and all of us committed to doing banking differently in a way that contributes to a better world.

There’s an inside joke among lawyers that you basically have to set your workplace on fire before your employer has cause to fire you - and, even then, there’s no certainty that may happen! The point being that, in this day and age, employment law for most white-collar workers is quite employee friendly. However, because of the feelings of inadequacy and rejection most terminated employees feel (regardless of whether such dismissal is with or without cause), this group of employees tends to feel they have no leverage when it comes to cutting a good deal upon dismissal (now I am taking about being dismissed as part of a larger slow-down in business). What’s the worse that happens if you negotiate your exit? They can fire you? They already did.

Most quasi-progressive to progressive employers want to appear to be humane in dismissing employees. There’s also a business rationale as well; if you land on your feet because of how your former employer treated you, you may have cause to refer them business sometime down the line. There’s always a few things you can do if you think you may be laid off or just been told you have been laid off:

Negotiate a deal before they swing the axe

If your employer is not doing great, and you have no reason to believe your job or department will be around as part of a down-sizing or you simply hate your job, negotiate your exit before they do it for you. Because a standard severance package has not been set yet, those who get to human resources first may be able to negotiate a customized severance package which is a little out of the box in its thinking (they pay for re-training as opposed to giving you conventional working notice, they give you a lump sum of money, they structure your exit to maximize tax savings etc).

I interned for the provincial government during the 1990’s when a third of the bureaucrats got axed. Those who voluntarily exited before they announced massive lay-offs tended to get better deals since you are not a number at that point but an individual who may be able to personalize their severance package.

Become a contractor

Related to the above point. To avoid the axe, volunteer to convert yourself from an employee to a contractor and save your ex-employer paying your employee benefits (a hidden costs employers obsess over). Again, do this before the axe comes down. Suitable more for industries where the labor market is very fluid (computer programmers comes to mind) rather than your traditional jobs (accountants, lawyers etc). This will allow you to make some income as a contractor while you try to figure out what to do next.

Do not sign a release until you see a lawyer- and ask them to pay for it

Most employers will present you a severance package and ask you to sign a legal release. Don’t sign it until you have reviewed it with a lawyer and ask your employer to pay for an hour of a lawyer’s time. Employer’s hate getting sued over employee grievances- lots of dirty laundry gets aired about the boss, the work-place and the powers that be. It becomes a public mud slinging contest. An employer would much rather pay a few hundred dollars to give you piece of mind than engage in tens of thousands of dollars in litigation. Typically given to middle management and up assuming you are not part of a massive layoff since a lawyer’s review basically consists of checking to see whether your severance is industry standard. If you are part of a massive layoff and are given the same package as everyone else, you don’t have that much leverage.

Ask what everyone else is getting

This is one of those socially awkward situations but if you are getting less than everyone else, there may be grounds to negotiate for more. If everyone got 2 weeks severance for 1 years of service and you only get 1, ask why you are being treated differently. Different in severance, where the different is less, is not good and grounds for some negotiations.

Employers get away with this because the natural human reaction is to isolate yourself once you have been rejected and not try to band together and compare notes. Think about being dumped; lot of people withdraw and lick their wounds. In this analogy, I am advocating calling all their old ex’s and comparing notes to make sure your dumping wasn’t worse than anyone else’s.

The little things to ask for to help you land on your feet

The goal after being laid off is to find a new job. If you are a real go-getter and want or need a new job immediately, there are a few things to ask for to help you with that goal:

• The obvious one is to obtain a letter of reference. Try to obtain 2 or 3. You never know if your boss is next in line. If your boss is lazy and asks you to write it for her, always remember to write the letter outlining a challenge at work, how you solved it and the result. Be specific and cite examples. It makes the letter sound less generic.
• Ask that they keep your voice-mail and email up for the length of your severance. It looks like you are still employed that way and employers like hiring employed people. Come to an agreement on what you can and cannot use those accounts for.
• Make sure that they extend your benefits for the length of the severance. Having access to health care or the gym (assuming it is not in your ex-employer’s premise) are always good things to have around during trying times.
• Ask human resources to give you a list of resuming writing centers and outplacement services if they don’t have one on hand.

These are tough concessions to negotiate because they are small in scope but a pain to administer so there’s a lot of resistance not from a legal/cost perspective but from a sheer laziness angle.

Hope that helps. Anyone care to share other tips?

Our regular columnist, Mom2KG, is back for this month’s updates on what’s happening with her family on the finance front. This month she needs your help! Please read on and provide any comments, suggestions or encouragement. Thanks.

Hello readers. This month I have to report on a huge setback that occurred over the last few weeks. You might think I’m referring to the market crisis, but I’m sanguine about that. We said good-bye to that money when we invested it, intending it to be long-term, and knowing we’d have to weather market fluctuations. It’s in nice secure (Canadian) bank stocks, and if historical data can be trusted, we’ll be fine in thirty years when we cash out.

Instead, my husband and I had a setback personally. Lately there have been some…emotions, surrounding money. In the last several weeks, I began feeling like something wasn’t right. I felt like the budget and goals were actually working negatively: there were too many constrictions. The goals were too long-term. What about now? What about if we ever wanted to move to another neighbourhood? What about a manicure?

We have prioritized paying off the mortgage and making major savings. In spite of my feelings, I do not want to change that. But where will the money come from? Perhaps a better question is, what do I want? A manicure is not exactly a budget-buster. Even a new patio set won’t kill us financially. But will those things help?

I think I may just be looking for more flexibility and less guilt related to spending. I do most of the family-related purchasing, which means I’m “at fault” if we blow the budget. Which we do, pretty much every month.

And maybe that’s another point. TMW readers, please, please help me here: I know you don’t meet budgets by increasing them to meet a certain lifestyle. You set a budget and live within it. But we’ve been blowing ours every month for years now, in spite of genuine best efforts. The guilt. The frustration. What do we do? Comments and advice welcomed.

On another front, we are doing a reno of the kitchen. It’s old, not just dated. We debated long and hard about whether to do basic changes (new cabinets, countertop, backsplash and a few new appliances), or really go all out. That would mean tearing down walls, at least very least. But we put off the dream kitchen to be a little more prudent. We bought at IKEA on their big kitchen sale (we were literally the last couple to place an order on the last day of the last extension – we were really waffling!). So far, we are even on budget! We saved up for the kitchen and aren’t putting any on credit. My husband will do the demolition and most of the installation as well. We’ve been planning this for a long time – can’t wait to see how it turns out.

Yesterday was the first anniversary of this blog. Kinda. I actually pre-wrote a bunch of posts and quietly posted them on blogger as a soft launch before an official unveiling on this site last year. Since I took down the blogger site, my recollection of the official launch date of this blog is hazy at best 225 plus posts later. This anniversary is equivalent to proposing to your spouse on public transit- everyone tries to forget it and substitutes a better story in its place (”it was a bus, honey, but on the way to the Eiffel Tower…”). Thanks for everyone who has read, linked, commented and provided suggestions over the year. Your support is greatly appreciated.

If I learned one thing in the year of blogging about personal finance, and at the risk of giving the owners of Seinfeld an idea to expand into financial publishing, it is to act like George Constanza.

I better explain.

My favorite Seinfeld episode of all time is the Opposite. George, at this point of the show unemployed and living at home with his crazed parents (”serenity now!”), comes to the realization that every instinct about his life is wrong and he decides, for the course of the episode, to do the opposite of what he would normally do. Of course, this all works out swimmingly for George, cumulating in the greatest pick-up line of all time: “My name is George. I am unemployed and I live with my parents.” He promptly gets a date out of that line/candid admission which leads indirectly to him getting a job with the New York Yankees.

How does this relate to personal finance? Through the course of blogging, I have learned or researched or been taught that almost every conventional truth about personal finance is wrong and the best way to get ahead in many instances is to do the opposite of what you are conditioned to do. The easy example is the often quoted mantra of “buy low, sell high” but think about all the other things we take as conventional wisdom that if we did the opposite we would be better off:

• You have to be fully invested- yet, most value mutual fund managers have upwards of 20% in cash
• You need a million dollars to retire- well, if I had Conrad Black’s life-style
• You can beat the market- really? Most professional can’t, what gives me the edge (yes, I am a new convert to passive investing- subject of a future post)?
• Be active in trading and invest in trends- sitting on your butt on blue-chip stocks would probably do you well over time
• Invest in mutual funds for a safe retirement- your mutual fund company will do well but, statistically speaking, you’ll do worse than the market and you are paying fees for that return
• real estate is the best investment- consider it shelter and no more; statistically speaking, less than 50% of real estate investors polled make money (this pool was taken before the real estate bubble burst)

… and, on and on and on.

I really think there should be a book called “Investing Advice by George Constanza” that applies George’s wisdom in the Opposite by listing all the major investing convention and tests them in a down to earth writing style and gives a verdict of “true” or “the opposite.” Donuts to dollars, I would suspect you see more “the opposite” than “true” verdicts. Just my pie in the sky idea.

Would you buy this book?

Here’s looking forward to another year of blogging. Thanks for reading.

_____________________________________

I am part of Rocket Finance’s carnival of P2P Lending with my post on the regulatory and compliance issues of the P2P lending industry. Thanks for Rocket Finance for hosting.

Welcome to the latest edition of my insider’s conversation series. The goal of this series is to speak to insider in a particular industry and get their viewpoints from within the industry. Our last insider took us inside the world of hedge funds. Today, we are joined by Melanie McLister from Mortgage Architects who has kindly agreed to take us inside the world of mortgages whether obtaining a mortgage, renewing a mortgage and what happens if you are in default of a mortgage. Melanie and her partner run a great blog on mortgage trends.

…of course, the disclaimers! Melanie is not giving any advice or recommendations and the information she is providing on mortgages may not apply to every jurisdiction. Please contact her directly about your particular situation.

My questions in bold; Melanie’s answers in italics…

Melanie, thanks for agreeing to participate in this month’s insider series interviews. This month we tackle mortgage financing. Why don’t you tell us a little about yourself and what your organization does?

First off, I’d like to say thanks to you Thicken.  The insider’s series is a fun idea and we appreciate the chance to participate. 

To answer your question, myself, Robert McLister (my partner and “other half”), and our team at Mortgage Architects are mortgage planners.  We identify and secure the optimal financing for our clients, and make sure the process is educational and as hassle-free as possible.

The thing that I guess separates us the most is our interest in education and advocacy.  Our overriding objective has always been to ensure people know we have their best interests at heart.  Whether we get their business is absolutely secondary because we eat or starve based on our reputation.  In fact, we often do what some in our business find illogical:  we send clients to non-broker lenders that happen to have a better offer that day.

Last fall’s HSBC Prime – 1% variable-rate special was a prime example.  We sent dozens of clients to HSBC branches and didn’t get paid a dime.  But it was the right thing to do, and that’s how we feel an advice-based business should be built.

Walk me through a typical mortgage application from a lender’s perspective. After a lender vets the initial data, what type of process do they undertake internally? How many people touch an application and who makes a call on whether to proceed to loan- is it one person or a committee?

 The process is a different with every lender, but here’s an example.

After a lender receives an application, it goes to an underwriter.  The underwriter scans the application and checks the borrower’s key details against the lender’s guidelines.  For example, if the lender’s minimum credit score for a product is 680, the underwriter will look at the applicant’s credit score to ensure this key metric is satisfied [TMW note: any credit score over 720 is considered the ideal score for obtaining the best mortgage rates].

The lender than analyzes the applicant’s credit report, job history and debt ratios to ensure the borrower can service the mortgage payments without problem.

If the main guidelines are met, the underwriter then reviews each detail of the application to check for inconsistencies or red flags.  They also do things like call the applicant’s employer to confirm employment.

If no issues are found, the underwriter might then issue a conditional approval.  The conditions of the approval will be based on things like submitting a satisfactory property appraisal and all the proper documentation (e.g.  an employment letter and pay stub).

For typical residential deals there is only one underwriter assigned to a file.  If it’s a big or complex deal, or the mortgage planner questions the lender’s decision, the file might be escalated to senior underwriters for further review.

Can you answer a question that always bugs me? Assume I am a long standing client at XYZ bank. Why do they not give me the best deal when I apply for a mortgage? I can see this happening if I approached a new bank but I bank with XYZ Bank! So much for client loyalty!

Banks have found that it is more profitable to negotiate with their customers instead of quoting their lowest rate up front.  In general, this is because bank reps have more experience and preparation in the negotiation process than the average consumer—many of whom accept the bank’s first “discounted” offer at face value.

In a lot of ways it comes down to a matter of principle.  I don’t like to badmouth banks because they’re in business to make a profit too.  Moreover, we send them a lot of business and have close friends in the banking channel. 

Nonetheless, banks are known for coming in at the 11^th hour to try and snatch clients from brokers.  They miraculously come up with “revised discounts” to their prior highball offers.  It’s a game that wastes everyone’s time.  In the end, assuming the rates are similar, who deserves the business?  A bank who knowingly tried to convince a client to take an overpriced rate, or the mortgage planner who pledged the best rate, and a fair rate, up front–and then took hours to counsel the client and put the deal together?

To dovetail on the above question, a friend of mine used to be an assistant branch manager at a bank. He had the discretion to discount the listed mortgage rate by up to 0.5% How much discretion does a financial institution have to discount the listed interest rate?

Every lender is different.  If you go through a mortgage planner, you’ll typically be quoted a lender’s lowest published rate up front.  In some cases, planners might even be able to do better than this.  Quick-close specials are a prime example.  As of today, April 14, 2008, the best deals (for fixed rates at least) are for people who are closing in 30-45 days.  These are unpublished specials available only through mortgage planners.

In most cases, Canada’s big banks have more ability to discount their rates because their rates are almost always much higher to begin with.  Their net rates, however, are usually not the best in the industry (although there are exceptions).

On the topic of rates, here’s one key point.  Always ask your broker if there is another lender who might have better rates or terms than the one they’ve recommended for you.  Some brokers deal with only a handful of lenders.  If they’ve recommended one of their preferred lenders, you’ll want to make sure they’re doing it out of benefit to you, and not because the broker is incentivized to do so.  (By the way, it is often beneficial to use a lender that your broker has preferred status with, but it depends on the case.)

So, the lesson to be learned is to ask your broker which financial institution they are preferred with in order to get the best deal. In other words, not all mortgage brokers have the same access to the same lender…Let’s talk about the top three things someone can do to make sure they obtain a mortgage for the first time.

 These are very general but here goes…

1.      Maintain excellent credit and a pristine repayment history

2.      Be prepared to put more money down, or get a co-signor, if you cannot qualify with the downpayment you had planned.

3.      Use a mortgage planner to identify the lenders that have the most lax qualification criteria for your circumstances.  Mortgage planners are also very good at preparing applications properly the first time, so as to meet lenders guidelines, and avoid needless red flags.  This is important because once a lender turns you down, it’s very hard to convert that decline into an approval.

I believe on your blog, you mentioned that a staggering percentage of people never ask for a lower rate when they renew a mortgage. How much money are they leaving on the table? Is the discount on a renewal that significant?

Many lenders often send out renewal letters with “discounted” renewal rates.  However, these rates are almost always higher than you could find by having a mortgage planner shop around for you.  The difference depends on the lender but I’ve seen cases where a client’s renewal offer was over 1.25% above the going rate at the time.

Just as importantly, there are always new products in our industry.  It’s very likely that a new mortgage has come out with even better features and perks than your present lender can offer.

I don’t want this next question to imply that you or I are supporting anyone defaulting on mortgage payments because we are clearly not but let’s address a reality today- what should someone do to minimize their “damage” when they start to fall behind on mortgage payments? Should they pay something rather than nothing?  Can a mortgage broker help someone in this situation? If so, how?

This is best decided on a case-by-case basis.  I would strongly advise a person in this situation to contact a mortgage planner first to evaluate potential solutions.  Refinancing or a getting second mortgage is sometimes a solution if you have the equity.  Or, if you have fallen onto hard times (e.g.  Become ill and cannot work) your lender or insurer may be able to create a “workout plan” with you.  Genworth’s Default Management program is one such example.

This is really a last resort however.  In Genworth’s case, they will not consider a workout plan if the following apply (quoted from Genworth’s guidelines):

·         When borrowers have the capacity to make payments and there has been deliberate default or mismanagement.

·         When borrowers are uncooperative and unwilling to resolve the situation.

·         When it is unlikely that borrowers will be able to return to making regular principle, interest and tax payments within a reasonable time (i.e. 6 to 12 months).

·         When borrowers have sufficient liquid assets such as RRSP’s, investment certificates, etc. These funds must be applied towards the mortgage payments prior to obtaining assistance from Genworth’s Default Management program.

In general, if you miss a mortgage payment your options diminish considerably.  Therefore, never avoid the pain of facing the problem.  Always act proactively and focus on finding a solution.

Two quick observations about that list: (i) attitude does matter when you are in trouble- it appears if you are willing to “play ball” with lenders, you may have a better chance of negotiating a good deal in hard times; and (ii) you have to show you are willing to bail yourself out too by putting some skin in the game. You can’t expect the lender to do all the work for you

I know you can’t speak for an industry but there has been a lot of criticism in wake of the subprime meltdown that mortgage brokers encouraged low income borrowers to obtain unsuitable mortgages. Do you have any comments to this and is the solution more regulation as some have suggested?

I’m guessing you’re referring to U.S. mortgage brokers.  To date, there have been few such improprieties evident in the Canadian brokerage industry.  Canadian brokers are governed by different rules and lending guidelines.  The difference between the American and Canadian mortgage industries is therefore night and day.

 As for U.S. brokers, the whole process obviously needs to be (and is being) reviewed by regulators.  In some case, more regulation may be the answer.  In others, borrower education is the key.

Last question- tell me why someone should hire a broker rather than do it themselves?

 Here are 10:

1.      Mortgage planners generally charge nothing to plan a typical residential mortgage (they are paid by the lender the client chooses)

2.      Professional mortgage planners always know who has the best deal, out of dozens of different lenders.

3.      Mortgage planners can fill out and manage all the paperwork for you, saving you a boatload of anxiety and hassle.

4.      Some clients–especially subprime clients–have a greater chance of getting approved through a mortgage broker, who can properly structure their application [TMW note: “subprime clients” and “subprime mortgages are two different concepts.  One does not necessarily equate the other.]

5.      Good mortgage planners help clients develop strategies that minimize interest and reduce amortization time.

6.      Professional mortgage planners are impartial.  They owe allegiance only to the client, not to any particular lender, a branch manager, or to shareholders.  In addition, most planners rely on referrals.  Their future success is closely linked with doing a great job for their clients.

7.      For tough deals, mortgage planners can sometimes suggest valid creative financing methods to get deals done.

8.      Mortgage planners are typically only a phone call or email away.  If you need advice, it’s often a heck of a lot easier to call your broker than to try and reach a lender.

9.      Mortgage planners just do mortgages.  As a result, they’re excellent at counseling borrowers on all the various mortgage procedures, the current interest rate climate, the latest and greatest products, and the best type of mortgage terms to choose.

10.  Mortgage planners do all the negotiating for you, saving you one of the most stressful parts of the process.  They also often get faster responses on applications because they have existing relationships with many lenders.

 
Thanks for your time and valuable insight Melanie. Melanie’s blog is listed above  and here is her  related mortgage site.

I noticed a lot of articles recently on finding a job, interviewing and doing more to make your job secure. Many of them are written from human resource consultants and offer great tips but does anyone ever ask what the boss thinks? I am currently a boss of three people. In the past, I have had employees who had a daughter 3 years younger than me (I would more accurately describe that working relationship as my assistant told me what to do and I obeyed), Generation Y employees, temps, my boss’ kid, employees who talked to much, employees who said nothing…in other words, I have been the boss of many types of employees.

…and you know what? I’ll let you in on a secret. I am still stunned people think I am in charge. Call it the impostor syndrome. But, outside questions of a technical nature, I get asked a lot of questions that completely stump me. If you ask your boss a question and they pause, they are probably thinking the same thing I am in a similar situation- how do I not sound stupid to a question I can’t answer? A lot of my friends who are bosses admit the same thing. There really is no “boss school.” A MBA teaches you great theory but being a boss require a lot of soft skills you develop through life experience- in other words, it can’t be taught and what you get promoted for (being good at some technical skill) is different than what you have to do after you are promoted (manage people): it is a really strange contradiction of business.

But, here’s what I learned about what makes a good employee:

• Be a work geek. You remember that Star Wars or Star Trek geek in high school? They knew EVERYTHING about the shows and would talk to everyone about it. Be the same thing at work. Know what you do better than anybody else. Its hard to replace someone who is that technically good at their job since a potential replacement would be that far of a step down.
• Make your boss’ life easy. Tell her the problem and how you intend to solve it. Make him look good in front of others. Figure out what your boss is terrible at and make that your strength (in other words, cover up for my weaknesses). Solutions, solutions, solutions instead of problems, problems, problems…If your boss has to solve all your problems, why does she need you? I will give you an example. My friend complains that his employee sees him every 10 minutes after an assignment is given to look over their work- why did he assign the work in the first place if he’s basically doing it for them?
• Reliability is sometimes worth more than talent. What drives boss’ insane are the employees with potential who coast at work; they are unreliable- which version will show up? The employee who delivers on potential or the one who coasts. If you are a sports fan, you know what I am taking about- the player who’s good enough to break your heart aka the “coach killer.” Bosses don’t necessarily need geniuses at work (cue the boss being stumped even more) but we like reliability. Doing what you say you are going to do goes very far in life and at work. Bosses like grinders (to use the sports analogy)- they know they will get into the trenches and work hard.
• Attitude counts. I sometimes hate corporate-speak. Being a “good team player” really means “people respect this person professionally and likes them personally.” Why can’t people write that? The issue is that an employee may be technically proficient but people hate them. This causes the boss a huge problem (you are not making my life easy- see above).  Bosses hate employees who complain what they don’t have (I don’t make enough, I don’t have enough responsibility, I want a promotion). I have seen employees with a good attitude who are reliable getting ahead faster than their more talented counterparts.

Anyone have any other tips?

Last week, Four Pillars emailed me on my business trip to inform me that Lending Club stopped accepting new loans while it registered with the Securities and Exchange Commission (SEC), the regulatory body that governs all aspects of selling securities in the U.S. This set off wide speculation in the blogging world ranging from Lending Club is dead or this is a good thing for Lending Club to what will happen to Lending Club in interim. I am going to try to put some legal context to this move and attempt to explain what happened and its impact on p2p users.

In essence, there are a wide variety of larger structural/regulatory issues of the p2p industry that, for obvious reasons, are not highlighted and should give pause to anyone who wants to use p2p lending as an alternative source of income. As a caveat, I am not a securities lawyer by training (but I know how to read securities regulations) and some of the below is speculation on my part given the documents I could retrieve. I also have no affiliation with either Prosper or Lending Club as lender, advertising source etc.

P2P in a Nutshell

Here’s p2p lending in a nut-shell from the lender side (the longer explanation can be found in a previous post about Prosper’s legal documents; incidentally, I emailed the post to them and got no response…):

1. You pick the borrower you want at the rate you want;
2. Assuming you win the bid, the p2p company, issues the loan to the borrower (i.e. they are the lender) and then assigns the loan to you. In other words, the lender of first instance is not you but the p2p company.
3. However, the p2p company “services” the loan (collects money, updates records, chases defaulted payments)

REGULATORY ISSUES

Here’s the regulatory issue- IF A PERSON INVESTS MONEY AND HER EXPECTATION OF PROFIT IS DERIVED SUBSTANTIALLY THROUGH THE ENTREPRENEURIAL AND MANAGERIAL EFFORTS OF OTHERS, IT IS DEFINED AS A SECURITY. These are known as “investment contracts” (another example of this is an investment club that hands over their trading to someone not belonging to the club; that advisor has to be registered to make trades). Since the p2p companies are “selling” the loan that you bid on and then managing it, it is trading in a “security” and subject to SEC jurisdiction. I am speculating that the p2p industry is caught under this provision of securities law but the larger point is that the p2p companies have to become SEC “registrants” (there is some speculation as a broker-dealer) in order to sell the loans. Thus, they fall under SEC regulatory scrutiny.

HOW DOES THIS AFFECT ME?

You are probably asking yourself- what does this have to do with me? SECURITIES COMPLIANCE IS EXPENSIVE. A SEC registrant can spend anywhere from $250,000-$500,000 for a small registrant to $1 million plus a year in compliance (filing fees, new staff, legal fees etc). In all likelihood, the costs will be passed down to the users of the p2p system which, in turn, will cut into the return on investment. With the government beating the drums of increased regulation, it appears that the p2p industry will be subject to greater and greater compliance costs.

WHY IS LENDING CLUB BEING TREATED DIFFERENTLY?

The $64,000 question is why did Lending Club stop taking new lenders while Propser continues on business as usual?

Simply put, Prosper filed in October 30, 2007 paperwork to become a registrant of the SEC. Lending Club filed SEC documents on three separate occasions for their transactions to be exempt from SEC jurisdiction (section 4 and Reg. D are sections exempting a persons from registration requirements); the last filing on February 13, 2008. Obviously, something happened between February and last week between Lending Club and the regulators in which the latter disagreed that Lending Club could be exempt from the registration requirements of the SEC (the fact that Prosper filed to become a registrant probably made the SEC start looking at Lending Club’s operations closely- but I am speculating. However, I note that Propser has a lawyer in their listed management ranks and Lending Club does not).

To be clear, as far as I can tell on the SEC’s website, Lending Club is not publicly under investigation or a party to an administrative proceeding. It is just filing the proper paperwork.

And, yes, this also applies to Canada as well- so CommunityLend will have to file with in jurisdictions where it operates as well if it works on a similar business model.

FINAL THOUGHTS

I disagree with Four Pillars that Lending Club is done. More likely, their law firm is done.

However, the Lending Club saga brings to light the fact that p2p lending will be subject to the same rules as a “traditional” banks when it comes to regulation. It will not be free to operate as it wishes.

The industry’s implicit branding of free-market swashbuckling DIY capitalist has crashed with a resounding thud against the regulatory wall. More to the point, this regulatory issue has highlighted the fact that the p2p lending industry is a intermediary just like a bank or credit union. It is just subject to different rules and a different set of over-heads. You can’t run a business with some type of overhead so buying into the industry’s claim of “sticking it to the man” by undertaking p2p lending ignores business realty. P2p is a viable alternative investment. However, as with all investments, just understand what you are getting yourself into beyond the sales and marketing pitch.