Category Archives: Personal Finance

Big Data, Spending Habits, and Bundle.com

So I thought this was a rather interesting concept.  There are lots of sites out there like Yelp! and Angie’s List based on customer reviews.  Personally I’ve found that these sites are hit or miss.  It’s a great place to find new restaurants and read a some anecdotal reviews, but it can be very inconsistent.  The restaurant may have had an off day, or the reviewer is the owner’s cousin/nephew/uncle.  So along comes bundle.com, a site which is based not on reviews, but instead on the average consumer’s spending habits by using big data and R to analyze over 20 million citibank credit card accounts (billions of transactions!) to figure out where the popular businesses are, which establishment gets repeat business, what the real average cost of the bill is and even to a degree what the demographics of the consumers patronizing the establishment are.  As their tag-line says, “unbiased, data-driven ratings".

image

It’s empowering and maybe just a bit “big brother”… But it seems like they do a good job on securing and scrubbing the data of personally identifying information.  And while not totally unbiased (as they only use citibank cards at the moment) I think it’s a great concept, because people vote with their dollars, not with anecdotal reviews.

“America Underwater”, Putting a Face on the U.S. Housing Crisis

America Underwater. This is a website where American families can upload photos of themselves and their homes that are currently underwater in their mortgages. It’s harder to ignore the crisis when confronted by the faces of men, women, and children who are affected. We bailed out the banks- now what can we do to help families stay in their homes?

What the Hell was NetFlix Thinking?

Sadly, I do own stock in NFLX, and looking back on how they’ve handled themselves this summer I have to say what the hell?  This company is probably a textbook case of how to take a perfectly good business model and run it into the ground.  Perhaps they were trying to encourage their competitors over at BlockBuster to stick around a bit longer?  Better yet, why take great brand recognition and create the Qwikster debacle?  Don’t take your perfectly good service and make it more expensive, harder to use, and alienate your customer base.  I can only assume that Mr. Reed Hastings didn’t want to pay so much tax on all those stock options he’s been exercising…

In the understatement of the year, this is what they had to say in their letter to investors:

While we dramatically improved our $7.99 unlimited streaming service by embracing new platforms, simplifying our user-interface, and more than doubling domestic spending on streaming content over 2010, we greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service. In doing so, we’ve hurt our hard-earned reputation and stalled our domestic growth.

I think this graph says it all:

image

And that my friends, is how you cut 75% of your company’s market value before year end, make $12 billion in shareholder wealth plunge into the void and lose 800,000 subscribers.

The Cost of Going Organic

Just read a great article from Motley Fool on going Organic.

I thought one of their best tips was the following:

Learn how to cook. If your definition of cooking is mixing the neon orange powdered cheese into macaroni noodles, then you’re likely to be stuck with the overpriced and overpackaged grocery store organics. To take advantage of fresh organically grown produce and meats, take a few courses at a local cooking school or pay a culinary friend for lessons.

Raw, unprocessed food are not only better for you, but cheaper as well.  I’m not a master chef by any stretch of the imagination (although I do like to watch Top Chef).  I know how to brown things, barbeque, smoke and dehydrate.  Between my wife and I we can take most foods, throw some spices on them, and call it a meal.  This saves us a ton of money every month.

Some of the other tips included:

  • Going late to the farmer’s market: last minute bargains are great when the farmers just want to get rid of their stuff.
  • Thinking Seasonally: not only are things cheaper, but since they come from local areas, the carbon footprint of shipping these items is way less.
  • Grow your own: because nothing tastes better than food you’ve just harvested from your backyard.

Not everything will save you money – sometimes going organic is not just about the quality of the food though.  I’m raising chickens in my backyard as a way to teach my daughter about how we get certain foods (and they make great pets) but I figure that in order to get my first egg, I’ll probably be about $300 into this project (I’ve spent about $250 for the coop materials and designed and built it on my own).  Given that we might get 300 eggs in a year from our two chickens, that puts me at about a $1/egg.  I’ve seen prices  range from $5-$8 per dozen for organic eggs. ( $.42 – $.66 per egg ) so my break even for this little adventure is somewhere around 2 years.  If we bought regular eggs at $1.20 a dozen ($.10 per egg), then doing the math it will take me 10 years to break even (this is of course, not including the additional food I have to buy every couple of months).

Sub-Prime Mortgage Market

imageI’ve been involved with the sub-prime mortgage industry for about 10 years, and recently got out of the industry right before the big fall.  With all the press that has been going on recently, how could I not chime in with my 2 cents.

There was a recent article on Yahoo talking about GreenPoint mortgage closing its doors and in it they said:

As the nation’s housing market has cooled, the mortgage lending industry has struggled with a dramatic rise in mortgage defaults and foreclosures. Many homebuyers have been forced into default or foreclosure because they haven’t been able to sell their homes or end up owing more than their home is worth.

I wasn’t a broker or an underwriter or an agent; I was and continue to be a computer programmer.  Which means I was responsible for building the systems and programs that helped fund the millions of mortgages that are now defaulting.  What has been truly amazing is just how quickly things are falling down around everyone’s ears.

During my employment at various mortgage companies, I was in a unique position of not only building the various systems, but since we had to know the entire life cycle of a loan because we were often building these system and modifying them on the fly, I actually took time to study and understand how mortgages work from origination to selling on the secondary market.  In fact, for a while, I taught a weekly “Lunch and Learn” course that we called “Mortgage Industry 101″ that lasted for 12 weeks at a time.  What I couldn’t believe was how little even the employees understood about anything outside of their department.  I shudder to think about the lack of understanding that our customers had when getting a loan and all the implications and obligations they were committing themselves to.

The basics of the loan lifecycle go like this:

  1. Client applies for a loan
  2. Underwriter approves the loan
  3. Mortgage company funds the loan
  4. Mortgage company sells the Client’s note to an investor
  5. Servicing company collects payment from client and sends money to investor
  6. Mortgage company uses proceeds for sale to investor to fund another loan

 

So, how do people make money in the industry?  Here is a very simplified example…

  • imageThe mortgage company has overhead and expenses, lets say it costs them $3,000 for every $100,000 they loan.  So to create a $100,000 loan, it costs the mortgage company a total of $103,000 (This is called origination cost at 103%)
  • Investors generally buy the loan for a premium, let’s say 105%, so It would cost $105,000 for an investor to buy the above loan.  The mortgage company has now made $2,000 (This is sometimes referred to as the spread or gravy)
  • The servicing company will then collect payments from the borrower on behalf of the investor and take a small percentage of the payment to cover their own expenses (generally .5% of the payment)
  • The investor receives the payments of principle plus interest for the life of the loan.  Obviously the higher the rate, the more money the investor makes.  And if the borrower refinances then the investor is paid off and must go out and buy more loans to fill their income portfolio.

Now, there are various tweaks to the above scenarios – mortgage companies will charge origination fees, tack on prepayment penalties, lower interest rates by having the borrower pay points, but the above scenario for the most part holds true for the vast majority of loans out there. 

Here is why this is breaking down so quickly now…  The investors (also called the secondary market) don’t have the money to buy anymore loans because they are not getting paid.  Without that money from the investors, the mortgage companies can’t fund any more loans, and even if they could they don’t have anyone to sell them to.

So, in effect, the mortgage companies are manufacturing loans, but nobody out there is buying them.  Even if the Fed continues to lower their rates so the mortgage companies will borrow from them, investors don’t want to buy them and be left holding the bag when the borrowers can’t pay.

 

hands bound with contract in graspAnd here’s the thing that kills me.  Many of the borrowers went into the loans knowing they couldn’t pay the mortgage.  They aren’t defaulting through some great hardship like losing their job or a natural disaster.  They took these teaser rates at 2% and were expecting to refinance before the big payments came up.  But if the investors aren’t buying these products, the mortgage companies aren’t going to be making these kinds of loans, and many borrowers are now stuck with the high payments that they originally agreed to 3 or 4 years ago when they signed the loan docs.  And without banks willing to refinance them and support their (IMHO stupid) decision, they’ll lose their house that they couldn’t really afford anyway.

 

imageSo, the big question is… When does the federal government step in and declare a state of emergency, bail everyone out and reward them for their stupidity and greed, and we end up looking back on the “great mortgage crisis” of 2007 the same way we we’re looking back at the Savings and Loan scandals from the ’90s?

 

With a couple of quick lessons in living below your means and a sustainable lifestyle, I doubt these borrowers would now be in danger of losing their homes and I doubt the mortgage companies would have had to lay off 40,000 people so far this year.