Beating Broke

Are You Prodigal?

August 19, 2013 By Shane Ede 11 Comments

I have to admit a bit of ignorance here folks. For years, I associated the word Prodigal with the word Prodigious. They have the exact same root structure, only different suffixes. Prodig -al -ious. Whoops. The story of the Prodigal Son should have tipped me off, but never did. It wasn’t until I was reading the opening chapter of Popes and Bankers (that I received for review) that I realized my mistake. Here’s the definition of Prodigal as it is shown at dictionary.com:

–adjective
1.wastefully or recklessly extravagant: prodigal expenditure.
2.giving or yielding profusely; lavish (usually fol. by of or with): prodigal of smiles; prodigal with money.
3.lavishly abundant; profuse: nature’s prodigal resources.
–noun
4.a person who spends, or has spent, his or her money or substance with wasteful extravagance; spendthrift.

You can be prodigal, or you can be a prodigal. To me, there are several words that jump out from that definition. Wastefully. Extravagant. Lavish. With the exception of wastefully, the others are words that we’ve been conditioned to think of as good. We want our things extravagant and lavish. It’s a sign of money, right?

And yet, day after day, we read and write articles on sites just like this one about the other end of the spectrum. Frugality, Savings, and even Cheap are words that are valued. Even so, I think that each of us could find an example or two in our lives where we are prodigal. A pretty strong argument could be made that cable TV is a prodigal expenditure. A third car. Eating Out. Leaving your computer on. If we keep going, we could create a very long list!

What’s my point, you may be asking? My point is that, despite all our practicing of frugal lifestyles and saving money, we might still find ways in which we are prodigal. Rather than beating ourselves up over it, however, I would suggest that we use those things as motivation to eliminate them. Or to offset them as a whole. Maybe you’ve chosen to keep cable TV. Find a way to reduce spending in another area to make up for that monthly charge. The single expenditure may remain prodigal, but your overall spending does not.

Which brings me to a further point. We often beat ourselves (and each other) up over spending too much here or there. We miss the forest for the trees. Being prodigal in one area does not make you prodigal overall. And let’s not forget that being miserly or cheap can be just as poorly looked upon.

Added: It looks like I’m not the only one thinking about these things today. Check out The Balance between splurger and miser at Get Rich Slowly.

Note: This post was originally posted on March 18th, 2010. It was somewhat popular then, and is worthy of a second look, so I’m re-posting it today.

Eminent Domain as a Mortgage Fixer?

August 12, 2013 By Shane Ede 7 Comments

The housing crash of 2008 is still sitting heavy on many homeowners. Many who bought a house during the peak of the market were left with houses that they’d bought at nearly twice the current value of the home. Much has been said about the dilemma that those homeowners find themselves in. As the economy receded, so too did their jobs, and their pay, causing many to simply walk away from their homes when they could no longer afford the mortgage.

Foreclosure is a bit of a messy deal. The bank takes the home back, and then sells it, attempting to recoup some of the value of the mortgage. We’ve seen many different methods of attempting to avoid the bulk foreclosure of homes in America. From Government sponsored programs that help with restructuring of the loan, to banks voluntarily restructuring the loan, to what is a rather disturbing new program in Richmond, CA.

The program is laid out in this recent article on CNN Money. (California city’s drastic foreclosure remedy: seizure) In the article, the City has started a program to attempt to purchase the mortgages of many underwater loans in the city. It’s an attempt to avoid the decline of low-income neighborhoods, and those neighborhoods already hit hard by the economy. Seems pretty normal, until you read a bit further.

But if the holders of the loans, who are mostly investors, refuse to sell by Aug. 14, the city said it will invoke eminent domain to seize the mortgages so it has more control over the process of making them affordable.

That’s right. If the investors refuse to sell by August 14th, the city will invoke eminent domain and seize the mortgages in order to bring those mortgages into the program.

There are several things at play here. I don’t argue that there are many who are nearing foreclosure, and that in many cases, they were preyed upon by the banks and investors by being given loans for houses they couldn’t afford in the first place. I don’t think that excuses the buyers from not knowing that they couldn’t afford the mortgage. I’m sure there are those that could afford the house at the time of purchase, but have since fallen on hard times. In some cases, I do think that there should be something in place to help people ease the pain of their mortgage. But, that’s another article.

Back to Richmond, CA, and their silly new program. They plan on using eminent domain to seize the mortgage. As is pointed out in the CNN Money article, eminent domain is usually used by public entities to seize physical properties to make way for public parks, malls, and right-of-ways for transportation initiatives.

[Tweet “The city of Richmond, CA is threatening to use eminent domain to seize the mortgages of home nearing foreclosure.”]

The article alludes to the fact that eminent domain, to be legal, must be used for that are in the public interest. Meaning that the people of the city (or neighborhood) must have something to gain from the seizure. I think this is a bit of a grey area, and is likely to end up in court. It’s legality, in the seizure of only certain mortgages, and not the mortgages of the entire neighborhood, makes its usage for the public interest somewhat shaky. After all, who among us wouldn’t want to participate in a program that cut our mortgage in half and reduced the payments by the same? Absolutely! But, who among us has anything to gain by having our neighbor across the street participate in the program, and not us? Yeah. Even if I can afford my mortgage, I’d be a bit jealous. If I really wanted to cause a scene, I’d sue the city.

Legality aside, I still think the program is a mistake. Many places around the country are facing the same dilemma, and many are trying to find innovative solutions to fix the problem. The city of Detroit just declared bankruptcy because the population of the city, and thus it’s tax-base, has dropped so drastically over recent years. Perhaps the city of Richmond fears the same problem. What they should be spending their time fixing, however, is their local economy. They’ll spend all kinds of money executing this program, then defending it in court, only to still have the same economy.

If they can find ways to improve the economy by pushing local businesses, promoting local producers, and making improvements to the structures to do so, I think they’ll find that many of those foreclosures start getting picked up by new homeowners.

Maybe I’m wrong. I’m certainly not an expert in economics, least of all economics in California. What do you think? Is the usage of eminent domain here a valid one? Will it be challenged legally? How would you feel if your city had a program like this?

Original image credit: End Eminent Domain Abuse by Paparutzi, on Flickr

Lending Club Return Update 2Q13

August 5, 2013 By Shane Ede 5 Comments

Lending Club is a peer-to-peer lending service. People (like you and me) sign up for their site, and list a loan to be funded by investors (like you and me). I like to think of it as replacing the bank in a loan with me. (Except I’m not “too big to fail”.) Of course, with that comes the same risks that the bank assumes when it issues a loan. There’s a risk of late payments, missed payments, and default and it’s associated collection activities. Luckily, Lending Club and Prosper (another p2p lending site) take care of most of the paperwork for the lenders (and borrowers). This post is the second quarter update on my Lending Club account, and the return I’m getting on my money.

If you’d like to catch up a little, here’s links to the last few quarterly updates. (1Q13, 4Q12, 3Q12)

First Lending Club Default

I’ve been mentioning in the last several updates how lucky I’ve been that I haven’t had a loan go into default yet. Well, that streak ended recently. I knew it was only a matter of time before one of the notes defaulted, and one has. Luckily, the loan that defaulted was a small one, and my portfolio has grown enough that the value of the default didn’t really affect the account too much. The value of the defaulted loan is about 1% of my Lending Club portfolio.

There’s also a loan that is in the 31-120 days late category, that has the possibility of going to default, but at this point, the borrower is making attempts to pay the loan. The reason it’s still in the late category at all is because the most recent payment was only a partial payment. This loan is a larger loan than the defaulted one, so I may have to consider taking the loss on it and selling it at a discount to get it off my books.

Diligent Reinvestment

One of the things that I like most about Lending Club, and p2p lending as a whole, is that you get a relatively high churn on your money. It’s not a buy-and-hold scenario, per se. Yes, you invest in a note with the expectation of holding that note until it is fully paid off, but, as the payments come in monthly, that money is available for reinvestment. In my 1Q13 update, I mentioned that I’d been a bit lazy in my reinvestment of those funds. I was slightly better with that in the second quarter, and was able to keep most of the money pretty actively invested.

[Tweet “I knew it was only a matter of time before one of the notes defaulted, and one has.”]

Passive Income from Lending Club

Many people (myself included) call p2p investing a form of passive income. While not strictly meeting the criteria in that it does still require some activity on the investors part, it’s pretty close. Maybe we need to start defining passive income in terms of it’s passivity? Something like levels. Each level is achieved by it’s decile of passivity. For instance, I think p2p investing could be somewhere around 90-95% passive. That would make it a Level 9 Passive Income source. With about 15 minutes of work a month, I’ve earned almost $60 in interest payments as of the end of June of 2013. Last year, with the same amount of work, I earned $75.37 in interest payments. If I had significantly more money, that amount would be larger, but I think that the time spent each month to earn it would be a bit larger as well. Still, a pretty close to passive means of making some money.

Lending Club Return Update

We’ve talked about most of the rest of the account, but the title did say that it was a return update, right? Yes. In my 1Q13 update, I mentioned that the rate of return then was being shown as 14.63%. As of 8/3/13, it’s being displayed as 14.08%. The combination of the defaulted loan, and the payoff of a couple of higher interest paying notes is bringing the rate down. I’ve been happy with the return I’ve been getting, but I truly think that a more reasonable expectation of return is somewhere in the 10-13% range. I’ll take the 14%+ returns I’ve been getting though.

Click here to learn more about how I select my Lending Club investments.

Overall, I’ve been really happy with my results at Lending Club. And, with the p2p lending industry as a whole issuing over 200 Million in loans in July, it would appear that there are plenty of other happy users too.

Have you gotten your feet wet in p2p lending? Why or why not?