Oct 31 2014

Payday lenders should wipe out loans in wake of Wonga ruling, experts say

Thousands of people who have taken out payday loans from firms other than Wonga should also have their interest and charges wiped out, say consumer and legal experts.

This follows the announcement on Thursday that the payday lender was forced by the Financial Conduct Authority, the new City regulator to write off pound;220m of loans to 375,000 borrowers after the firm admitted those people should never have been given loans.

The company, which charges annualised interest rates of up to 5,853% a year and has been accused by MPs of “legal loan sharking”, said it would entirely wipe out loans to 330,000 people, and scrap interest and charges owed by a further 45,000 customers.

Wonga is the biggest online lender in the payday loan sector with about a 30-40% market share, but there are around 90 other lenders including Dollar Financial UK (the parent company of brands that include The Money Shop, Payday Express and Payday UK), CashEuroNet, QuickQuid, Peachy and Sunny. In 2012 the volume of loans lent between them was pound;10.2m, according to the CMA.

Wonga was required to write off the debts because the FCA found that it had granted the loans without checking people could afford the repayments. But a number of experts who deal with complaints about the payday loan sector have told the Guardian that the affordability tests carried out by many of these other lenders are as bad or worse than Wonga’s. This could potentially open the floodgates to thousands of payouts to other borrowers.

“If this redress package is required of Wonga then what of the other payday lenders in the country?” said Mike Dailly, consumer rights campaigner and principal solicitor at the Govan Law Centre in Glasgow. He also sits on the FCA consumer panel. “From my experience as a lawyer helping consumers there is no doubt in my mind that other payday lenders have failed to comply with the affordability criteria laid out in the Consumer Credit Act in the way that Wonga did.”

He added: “It is likely now that other lenders in the sector who want a future will have to come clean or face action from the FCA.”

Dollar Financial said: “Our UK companies have been working closely with various stakeholders including our regulators to ensure that we offer compliant and responsible products to all of our customers.”

Although the FCA has stopped short of saying that it is proactively investigating other firms, Clive Adamson, director of the supervision at the watchdog said that the action it had taken against Wonga should “put the rest of the industry on notice” and that “some firms still have a way to go to meet our expectations.”

“We have long called for more responsible affordability checks and better advice,” said Which? executive director Richard Lloyd. “The next step must be a clamp down on excessive fees and charges across the board to show lenders that the FCA will continue to clean up the credit market.”

People who have already paid off loans, including those from Wonga, may also be in line for redress if it can be shown that they should never have been lent to in the first place, say experts.

A number of these people were only able to repay the loan with help from friends or family or by borrowing elsewhere, while others are still paying off the loans through repayment plans set up by debt charities and organisations like Citizen’s Advice.

Wonga said that it would be contacting all those affected by 10 October and that this included those whose debt had been sold to a third party or had been entered into an individual voluntary arrangement or a debt management scheme. However, it would not be drawn as to whether former customers would be contacted.

“We’ll work with the FCA to identify if any further remedial action is required and will communicate details, if appropriate, in due course,” it said in a statement.

There are fears that claims management companies, best known for handling PPI claims, will try to entice payday loan borrowers to make a claim using their services. Borrowers who go down this route will typically be asked to pay an upfront fee to the claims management company.

“If people are contacted by claims management companies or solicitors offering to recoup their money for free, we would say hold fire as discussions are still gong between Wonga and the FCA,” the Financial Ombudsman Service said.

It urged anybody who has a payday loan and thought they might be affected not to stop making repayments until the situation became clearer.

Oct 30 2014

Commercial Real Estate Loans

Commercial real estate (CRE) is income-producing real estate that is used solely for business purposes, such as retail centers, office complexes, hotels and apartments. Financing – including the acquisition, development and construction of these properties – is typically accomplished through commercial real estate loans: mortgage loans secured by liens on commercial, rather than residential, property.

Just as with residential loans, banks and independent lenders are actively involved in making loans on commercial real estate. In addition, insurance companies, pension funds, private investors and other capital sources, including the US Small Business Administration’s 504 Loan program, make loans for commercial real estate.

Here, we take a look at commercial real estate loans: how they differ from residential loans, their characteristics and what lenders look for.

Individuals vs. Entities

While residential mortgages are typically made to individual borrowers, commercial real estate loans are often made to business entities (eg, corporations, developers, partnerships, funds and trusts). These entities are often formed for the specific purpose of owning commercial real estate.

An entity may not have a financial track record or any credit history, in which case the lender may require the principals or owners of the entity to guarantee the loan. This provides the lender with an individual (or group of individuals) with a credit history and/or financial track record – and from whom they can recover in the event of loan default. If this type of guaranty is not required by the lender, and the property is the only means of recovery in the event of loan default, the loan is called a non-recourse loan, meaning that the lender has no recourse against anyone or anything other than the property.

Loan Repayment Schedules

A residential mortgage is a type of amortized loan in which the debt is repaid in regular installments over a period of time. The most popular residential mortgage product is the 30-year fixed-rate mortgage. Residential buyers have other options, as well, including 25-year and 15-year mortgages. Longer amortization periods typically involve smaller monthly payments and higher total interest costs over the life of the loan, while shorter amortization periods generally entail larger monthly payments and lower total interest costs. Residential loans are amortized over the life of the loan so that the loan is fully repaid at the end of the loan term. A borrower with a $200,000 30-year fixed-rate mortgage at 5%, for example, would make 360 monthly payments of $1,073.64, after which the loan would be fully repaid.

Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years. In this situation, the investor would make payments for seven years of an amount based on the loan being paid off over 30 years, followed by one final “balloon” payment of the entire remaining balance on the loan. For example, an investor with a $1 million commercial loan at 7% would make monthly payments of $6,653.02 for seven years, followed by a final balloon payment of $918,127.64 that would pay off the loan in full.

The length of the loan term and the amortization period will affect the rate the lender charges. Depending on the investor’s credit strength, these terms may be negotiable. In general, the longer the loan repayment schedule, the higher the interest rate.

Loan-to-Value Ratios

Another way that commercial and residential loans differ is in the loan-to-value ratio (LTV): a figure that measures the value of a loan against the value of the property. A lender calculates LTV by dividing the amount of the loan by the lesser of the property’s appraised value or purchase price. For example, the LTV for a $90,000 loan on a $100,000 property would be 90% ($90,000 à $100,000 = 0.9, or 90%).

Oct 30 2014

What we didn’t learn from the economic crisis

MW: The answer very roughly is this: we have been suffering for really quite a long time from a chronic tendency towards deficient demand in the world economy. That goes back to the 90s.

Second, we dealt with that in the run-up to the crisis by creating a huge credit boom in the US and a number of other economies. That credit boom, which is just an enormous expansion of debt, was itself unsustainable.

Furthermore, three, in the process of creating the credit boom we also inevitably more or less created this huge overextension of and deterioration of credit quality in the financial system.

Fourth, when the crisis hit, this credit boom stopped, clearly, so there was a panic as well, so our economies went into free-fall.

Fifth and final, so far as weve been able to recover out of it, weve had to try to promote a return of the credit expansion system. And because the underlying fragility in demand remains, the demand expansion has been very weak. The problem is our post-crisis recovery is both weak and in important respects fragile.

And an important role was played in making this possible, perhaps the sixth point, with government borrowing. But of course were reducing that, which is again forcing us to try to expand private credit.

Now my view is that continuing that game indefinitely is almost certain at some point to create another crisis.

DK: You point to things in the book that nations have flat-out done wrong post-crisis: austerity, insufficient financial regulation. Why have we failed to learn?

MW: The first question is: how well did we do in bringing our economies back to reasonable levels of activity after the crisis? This is, if you like, the short-to-medium-term management of the crisis.

And then the second set of questions is do we have a credible plan for creating an economic system that will be more stable in the future?

In terms of the post-crisis response, I think we did a pretty good job in the immediate crisis. I dont think there was any realistic alternative to the policies pursued at the time. But there were two mistakes made: The first is an insufficient effort was made to reduce and restructure debt. This is true in much of the overleveraged economies, not just true of the US.

The second issue is that in order to sustain demand when the private sector has been as badly hit as it was in 2007 to 9 — and this seems to me the most fundamental lesson that Keynes tried to introduce in thinking about depressions — it is necessary for governments to run large deficits, provided governments are solvent, they have central banks that are supportive, and have good credit ratings ratings.

And unfortunately, basically in every country, including the US for different reasons, this fiscal support was curtailed in my view too soon. And that meant that the recovery was not sustained. Because the recovery wasnt sustained, business became more cautious. So that made [the recession] longer-term.

Now in the longer term we need to create a more robust financial system, a less-leveraged economy, and a more balanced world economy. These are huge challenges. I feel we have not taken the measures we need to make our economy simply more robust.

I just note one thing: I think we should have made a really big effort to deleverage the whole economy, and one of the ways to do that is to stop subsidizing debt which we now do and actually tax it. We should be encouraging shared equity contracts in housing rather than just straight debt contracts.

We encourage debt too much. So thats an example of the sort of reform we ought to be thinking about, and its just never really gone on the political radar.

DK: But if were not encouraging debt, does that mean central banks are wrongheaded by encouraging people to borrow?

MW: One of the arguments in my view for using fiscal policy more and monetary policy less was that it is one way of reducing precisely the risk you supposed. People seem to have this very strange idea that fiscal policy — which of course means government borrowing more — is somehow much more dangerous than monetary policy, which you rightly say means the private sector borrowing more.

But the one lesson we learned from this crisis is having the private sector borrowing vast amounts it cant afford is not great either. So this assumption that fiscal leverage is bad and private leverage is good just strikes me as completely unsubstantiated and unsupported by the evidence.

There is, of course, the even more radical possibility, suggested by of all people Milton Friedman, of helicopter money, which means direct monetary financing of larger government deficits on a permanent basis. That would have been a perfectly possible policy — in my view, the most effective of all possible policies. Of course it was seen as completely inconceivable.

But the crucial point is you have to regard these things in the round. If you want to deleverage your economies — and I think you do — you have to consider other ways to create money, other ways to allow people to buy houses, for example.

Now these things can be handled, but it is true that reform has to be quite systematic. And thats very, very difficult for any of our governments to handle, and thats certainly true of the US.

DK: Reading your book, I cant help but wonder, thinking longer-term: are we getting better at economics?

MW: So let me just make three or four comments. The first point is I do think — I know this is very controversial in the US, though its not really controversial anywhere else — that we have learned how to deal with extreme panics and how to stop really huge depressions.

And Im one of those people whos absolutely convinced that in the fall of 2008 and early 2009 we faced real dangers of an enormous depression. And we stopped it.

I think its also true that what the US Treasury did in terms of forcing capital on banks, making them recapitalize, proved to be successful in stopping that panic. And in addition, Ben Bernankes astonishing heroics in handling the panic, the seizure of credit markets — all this was incredibly successful.

So I do think economists can say we know much better than we did in the past what to do in a really big panic.

Though this is like a doctor saying, At least we can deal with a heart attack. Well thats something, isnt it? Thats not nothing.

But then the question becomes: what can we do to prevent them? Here I think economics has a very, very big problem. And the big problem is that in the canonical models that evolved in the profession since the Second World War, really the possibility of such crises does not exist within the models. Theyre ruled out by assumption.

I accept that to some degree crises have to be surprises. [But] it is true in my view that it is possible to identify conditions in which crises are likely. My view is that if you look at the past, the combination of huge external imbalances and huge current account deficits and even more rapid growth in credit is a warning sign that the risks of crisis are rising.

The idea that the great moderation meant that crises and risk were declining was clearly a huge mistake because it ignored what I think was Hyman Minskys most important insight about human behavior: stability destabilizes. The more people believe that the economic environment theyre in is benign, stable, and profitable, the bigger the risks theyre going to take. By definition, it must be true, because the risks will be more rewarding.

Thats something economists cant accept, because they believe the right way to model the economy is that everybody can see through to the future on an infinite horizon. Theyre all rational prudent human beings who can maximize intelligently, and theyre not subject to any of the pressure Ive just described.

So for these reasons, economics as practiced is structurally unable largely to to identify the dangers that have been run.

DK: Does this imply that when we send our students to get their PhDs in economics or MBAs, we need to change the whole system of how we teach them?

MW: My view is that economists have to ask themselves whether their models of the economy and how the economy works are the right ones absolutely. And I think the answer they would reach is that for certain important purposes they clearly arent.

If people are going to understand therefore what might go on, what the risks are, and so forth, they need other sources of information beyond the standard models and standard teaching.

I tend to think the most important aspect of this is a profound understanding of economic history.

One of the enormous advantages that the US had in the crisis is that the chairman of the Federal Reserve was not just a very smart man, which he was, but one who missed the possibility of the crisis, theres no question about that, but that man was a profound student of the Depression. So he had been an applied economic historian.

People have to understand, when theyre being taught economics, how little we know, how limited our data are, and how unbelievably complex our economic and financial system is.

I think people have to begin with profound humility and know an awful lot of economic history, as Ive suggested. And they have to be told every day, What Ive just told you is almost certainly wrong.

Doctors are supposed to be taught to be humble in the face of their ignorance. And the human body is in fact a pretty simple thing compared to the essentially insubstantially material thing which is the economic system.

Oct 29 2014

Raising the pressure on payday lenders

The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) about a week ago shut down two schemes that allegedly stole money from the bank accounts of those in search of payday loans. The FTC also continues to advise consumers to consider other options rather than take a payday loan.

Payday lenders, for a fee plus steep interest rates, issue short-term loans that are essentially guaranteed by the borrowers next paycheck. The borrower provides the lender access to a checking account or leaves the lender with a check. Critics of payday lending say those who get them end up in a potentially never-ending cycle of having to borrow against their paychecks.

The payday lending industry is the worst of the worst — using predatory practices to take advantage of their customers, Liz Ryan Murray, policy director at National Peoples Action, said in a statement. Creditors should help build wealth for working families, but payday lenders get rich by profiting off the most vulnerable. Our campaign will expose the ruthless greed and predatory nature of this industry.

Payday lending is also notorious for heavy-handed collection of borrowers debts. ACE Cash Express, which has 1,500 locations in 36 states and Washington, DC, was ordered in July by the CFPB to pay $10 million for allegedly bullying customers who were late on payments. Federal law tightly regulates how debt collectors can operate.

Oct 29 2014

The Top 10 US States Where Chinese Are Investing in Real Estate

In many American cities, the landlords are increasingly Chinese.

Big institutional Chinese investors who want global real-estate portfolios typically look for trophy projects in cities like New York, Los Angeles and London. Just this month, Hilton Worldwide agreed to sell its flagship Waldorf Astoria hotel in New York City to a Chinese insurance company for $1.95 billion–the steepest price tag ever for a US hotel, brokers say, although it isn’t the highest on a per-room basis.

But Chinese investors with smaller war chests want to be seen as international property players too, and they have their eyes on other cities. Over the past two years, more have sought to invest in offices and hotels in inland cities such as Chicago and Houston in the US, and Madrid and Frankfurt in Europe, according to a recent report by property consultancy Cushman amp; Wakefield.

Oct 28 2014

Tim Cook not worried about China slowdown, says Apple is ‘investing like crazy’

In an otherwise gonzo quarter for Apple, there were two notable soft spots. One was declining iPad sales, which was not a surprise. The other was a bit more unexpected: Sales in China were essentially flat.

Yesterday, the company said that revenue from Greater China, a category that includes Taiwan and mainland China, grew only 1% from the same quarter a year ago. Considering that China is Apples third biggest market and the one where theres arguably the most opportunity, any sign of a slowdown is cause for concern.

In a conference call with analysts yesterday, Apple chief executive Tim Cook said he remained confident that the company was on the right track in China.

When I look at China, I see an enormous market where there are more people graduating into the middle class than any nation on earth in history and just an incredible market where people bought the latest technology and products that we were providing, Cook said. And so were investing like crazy in the market.

Earlier this year, Apple announced a breakthrough partnership with China Mobile, the countrys largest carrier, that many thought would put Apples sales on steroids. The partnership put Apples iPhones on China Mobiles 4G network, which the company is in the process of building out. Cook, in the call, described 4G rollout in China generally as being in the early stages.

But the bigger issue, Cook said, was the obvious one: Last year, Apple rolled out the new iPhone 5s and iPhone 5c in China during September, putting sales in the fourth quarter of 2013. This year, the iPhone 6 and iPhone 6 Plus did not debut until October, pushing them out of the fourth quarter of 2014 that was reported yesterday and moving them into the first quarter of 2015.

In addition, Cook said, Apple reduced the amount of overall inventory it had with channel partners in China this year by about $1.3 million in the most recent quarter, which also hurt comparisons.

The bottom line, for Cook, was that if you strip away the accounting issues, the number of iPhones that wound up in the hands of China-based customers grew 32%, year-over-year.

Given that IDC projected 13% smartphone growth in China, Cook said, we feel incredibly great about that. In addition, sales of Macs grew 54% year-over-year, also a strong result considering IDC projected that Chinas PC market would shrink 7%.

Those are two stalwarts that were really driving results, he said.

And as for the iPad in China? iPad concreted some during the quarter, Cook said.

Going forward, Apple is still ramping up its investment in China. The company plans to grow from 15 Apple stores to 40 in China over the next couple of years. The reach of its online store now covers 315 cities in China, and developers in China have created 150,000 apps on the App Store.

I see lots of very, very positive factors there, and I couldn’t be more excited, Cook said.

More information:

Oct 28 2014

Parkview Investing $55 Million Into Randallia Campus (VIDEO)

October 21, 2014

Updated Oct 21, 2014 at 6:39 PM EDT

FORT WAYNE, Ind. (21Alive) — Parkview leaders were joined by Congressman Marlin Stutzman (R-3rd District) to announce a new $55 million investment to the Parkview Hospital Randallia campus.

The announcement was made at an 11:00 am press conference Tuesday. It was noted that this was Parkviews biggest investment into the region since the creation of the Parkview Regional Medical Center, which opened in 2012. An estimated 150 new jobs will be created and many new services will be added.

Oct 27 2014

A Beginner’s Guide To Investing In Silver For Stability

Investors should always be concerned with risk. A major difference between the successful investors and the unsuccessful ones is how they manage risk. The concept of Alpha relates to returns in excess of the return expected to compensate for the risk of a portfolio. However, many investors focus strictly on individual securities rather than taking a careful look at the composition of the entire portfolio. I want to address the role of (NYSEARCA:SLV) in the composition of an entire portfolio and why I think any large exposure to a single risk factor is likely to generate negative alpha.

One way I measure risk is to look at the standard deviation of returns to the portfolio. In my opinion, a focus strictly on the returns to the portfolio undervalues the impact of reducing the risk inherent in the portfolio. In my opinion, historical statistical data is better suited to projecting correlations and risk than to projecting returns. Yes, return projections can be made using beta under the CAPM theory, but I think there are some weaknesses to that approach. What we are really measuring is the covariance of returns. If you want to get technical, we are measuring the covariance and the variance. Then we are plotting the slope of the resulting equation.

While there can certainly be some historical bias in the data sets, the standard deviation of daily returns can be a very useful measure. Im operating on the theory that markets are at least weak form efficient. In short, Im saying that SLV going up or down yesterday has absolutely no bearing on how it will perform today. Most investors and all economists (that I know of) have accepted weak form efficiency in the US stock market.

Is the price of silver going up or down? Long term, it goes up. Inflation makes this virtually certainty, however the increase could be less than inflation so even long term investors could lose wealth. Short term, it will do some of both. However, I dont think SLV should be treated as a typical investment. It does not pay dividends. It does not pay interest. The only reason for a retail investor to hold SLV (outside of speculation) is to take advantage of Modern Portfolio Theory.

Lets talk standard deviation of daily returns

Im going to be using four funds to make my case. Those four funds are listed below:

The following chart contains the standard deviation of returns on a daily basis:

So if you were only holding one asset in your portfolio, SLV would be a very dangerous asset. The standard deviation of returns is indicating that there are several dramatic changes in the price of the security. However, many investors are considering SLV as part of a more diversified portfolio. To better understand the risk that SLV adds to a portfolio, Ill be using several ANOVA tables as I did some regression analysis.

Ive mentioned on occasion that I dont believe that the Samp;P 500 should be considered a proxy for the market of all investable securities. There hasnt been a great deal of convincing research published in that respect, but I will fix that soon.

Some people objecting to using the Samp;P 500 feel that the Russell 3000 is a viable replacement. I think they are right to add more securities to the index, but I dont think the Russell 3000 provides enough diversification because there are still common risk factors. Ill use some charts and tables to show what I mean.

Im starting with a regression analysis using the dividend adjusted daily close values of IWV and SPY.

(click to enlarge)

The correlation is over 99%. In short, the IWV and SPY funds perform about the same. For people that are new to statistics, a picture can really drive home that point.

(click to enlarge)

The blue line is the Russell 3000 and the green line is the Samp;P 500. I think those lines are pretty similar. Therefore, I dont think the difference between using the Russell 3000 and the Samp;P 500 is really important. If investors really want diversification, simply using IWV instead of SPY wont deliver that diversification. Because these indexes are roughly equal, I will simply use SPY for the rest of the article.

SLV is not easily explained by SPY. Ive prepared a regression analysis on this combination as well.

(click to enlarge)

Here the correlation is just under 25%. In terms of correlations, that is fairly low. The low correlation allows us to add SLV to a portfolio of SPY and have a lower standard deviation of daily returns even though SLV is riskier than SPY when they are considered in a vacuum.

I tested several portfolio combinations of SPY and SLV to find the smallest standard deviation of daily returns to the portfolio. The following chart compares the deviations for SLV, SPY, and the portfolio.

In this portfolio the allocation is 88% to SPY and 12% to SLV. If the percentage of SLV goes either up or down, the portfolios standard deviation increased when measured over the time period I used.

Does that mean 12% SLV is ideal from a statistical standpoint?

In my opinion, 12% is about the highest exposure any investor can rationally argue for. Silver does have the potential for very dramatic appreciation within single years and the potential for that appreciation can be very appealing. However, in the long term I believe the security should only be used to improve the stability of the portfolio. In the short term, I do not believe in confusing speculation with investing. Therefore, I would consider dramatic changes in the short term composition of the portfolio to be attempts at market timing.

Do precious metals move together?

There is a strong correlation between SLV and GLD, though SLV is the riskier of the two securities. The following ANOVA table shows the regression results on SLV and GLD.

(click to enlarge)

The correlation of over 80% is fairly strong and indicates that a substantial portion of the movements in silver are tied to the movements in GLD. The importance of having exposure to silver in your portfolio is substantially lower if your portfolio already contains significant exposure to gold.

What is the required return on SLV?

It really depends on who you ask. Different analysts will use very different risk free rates and market risk premiums. The risk free rate could be quoted as the yield on a one year treasury security, a ten year security, or the average yield over the last ten or twenty years. There are legitimate cases to be made for any of these options. The same can be said about applying the market risk premium. However, there is one thing that I believe most analysts will agree on.

The required return should be related to beta. If you ask Yahoo Finance for the beta of SLV, the answer is 1.67, as shown here.

However, when I calculated the Beta using nearly 5 years of data, I came to a beta of only .51. When I modified my strategy to use the last 3 years (10/17/2011 to 10/17/2014) I reached a beta of .65. Yahoo may use other statistical controls or use weekly, monthly, or annual time periods.


Investors should consider their risk and return objectives in the context of the entire portfolio. Based on my research, I believe SLV can be used to lower the risk in a portfolio despite the very high volatility of silver prices.

Oct 27 2014

Investing and Ebola: The Hazmat Trade

Review | Dates to Watch For | Follow-Up | US Economic Calendar | Consensus Estimates | Coming Earnings | Coming US Auctions

It’s an uncomfortable fact that people make money off deadly diseases. Some, of course, are helping to cure or contain them; others are looking for an investing edge. Then there’s the hazmat angle.

In the past few weeks, traders have been plowing money into companies that make gear that doctors and…

Oct 26 2014

SQN’s Amish Mehta: Here’s Why We’re Investing in Blucora

Oct. 21 (Bloomberg) — Amish Mehta, founder of SQN Investors, discusses his investment strategy and explains why hes investing in Blucora Inc. He speaks with Bloombergs Stephanie Ruhle at the Robin Hood Investors Conference. (Source: Bloomberg)