Boston Gal's Open Wallet

As credit card companies face rising public anger, new regulation from Washington and staggering new rates of default and bankruptcy, FRONTLINE correspondent Lowell Bergman investigates the future of the massive consumer loan industry and its impact on a fragile national economy.

In The Card Game, a follow-up to the Secret History of the Credit Card and a joint project with The New York Times, Bergman and the Times talk to industry insiders, lobbyists, politicians and consumer advocates as they square off over attempts to reform the way the industry has done business for decades.

"The card issuers could do anything they want," Robert McKinley, CEO of CardWeb.com, tells FRONTLINE of the industry's unchecked power over consumers. "They could change your interest rate. They could impose an annual fee. They could close your account." High interest rates along with more and more penalty fees drove up profits for the industry, Bergman finds, as the banks followed the lead of an aggressive upstart: Providian Bank. In an exclusive interview with FRONTLINE, former Providian CEO Shailesh Mehta tells Bergman how his company successfully targeted vulnerable low-income customers whom Providian called "the unbanked."

"They're lower-income people-bad credits, bankrupts, young credits, no credits," Mehta says. Providian also innovated by offering "free" credit cards that carried heavy hidden fees. "I used to use the word 'penalty pricing' or 'stealth pricing,'" Mehta tells FRONTLINE. "When people make the buying decision, they don't look at the penalty fees because they never believe they'll be late. They never believe they'll be over limit, right? ... Our business took off. ... We were making a billion dollars a year."

It took the economic collapse in the fall of 2008 to set the stage for potentially historic change in the consumer credit business. President Obama and his team pushed through a credit card reform bill in May, and they're now looking to establish a new Consumer Financial Protection Agency. But the banking and financial services industries contribute huge amounts of money to Congress -- and the jury is still out on whether the new regulations can pass. "It's a step in the right direction, but it's a modest step," says Harvard law professor Elizabeth Warren. "It's a set of very discrete new laws. And the credit industry instantly set to work on how they could run around them. By itself, that set of rules won't change the game."

"It's hard for them to get a bill through the U.S. Senate when the industry is pouring money into Washington," says Martin Eakes of the Center for Responsible Lending of the banks' political clout. "As Sen. [Dick] Durbin from Chicago recently said, 'the banks, even as unpopular as they are right now in this crisis, still own this place.'"

“Now is the time to invest,’’ said Caparell, who has picked up hours working at his girlfriend’s Roslindale flower shop. “But I’m more concerned about taking care of bills than with stocks.’’

Even with the stock market roaring back - the Dow Jones industrial average rose nearly 133 points yesterday, for instance, and the Standard & Poor’s 500 index is up more than 60 percent since March - ordinary investors are not reaping the benefits of the rally. By choice or necessity, they are sitting on the sidelines, unable to put money back into their retirement funds because they lost their jobs or face other economic troubles. Others are still gun-shy about the stock market and instead are pouring money into more con servative bond funds.

The result: Investors have withdrawn an estimated $27.6 billion from US stock funds and put about $329.5 billion into bonds this year, according to the Investment Company Institute, which tracks mutual fund investments.

It can be a cruel twist of fortune: The people who are most hurt in the recession are the people who are least able to benefit from a rising stock market. Meanwhile, people who have the financial means can take advantage of a fundamental principle of investing: buy when stocks are low and sell when they are high.

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don't have any mortgage, according to the Census Bureau.

Sales at That's My Room have slowed to $3,000 to $5,000 a month. The Levys haven't taken a paycheck home since the store opened a year and a half ago.

The Levys are in their 30s and have no children. Before opening That's My Room, Jon had a job in software sales, and Aimee was a physical therapist.

"We kind of wanted to do something together," says Aimee Levy. "He's my best friend, and we actually work really well together — and I just thought, why not?"

Soon after the store opened, the recession hit.

Keeping the company going has taken hard work, sacrifice and an effusive optimism that you'd find only in a couple who drive a pink bunny van with a furry inside to promote the store.

Bed sales are the couple's bread and butter, but the Levys have endured monthlong stretches without any. Over the winter, the couple worked at bars to make ends meet.

"Soon, we were pushing about 80 to 90 hours of work a week," says Jon Levy. His wife says that it took a toll on their relationship.

Then the couple fell behind on making their home mortgage payments. But they wanted to keep the store, so Aimee Levy returned to work as a physical therapist.

But the government's policy of stimulating the economy by cutting rates to try to get people to borrow and spend is essentially robbing the elderly of a vital income stream, argued Greg McBride, senior financial analyst at Bankrate.com.

"It takes money out of the pockets of senior citizens and anyone living on a fixed income and gives it to borrowers, many of whom are overly indebted," McBride said. "It's as if Grandma stuffed an envelope full of cash, walked down the street and gave it to the guy with two new cars, a big-screen TV and who's behind on his mortgage."

For some perspective on the rapid drop in CD interest rates, just look back a year. The interest rate for a one-year CD was 2.53 percent this time last year. Today, it earns just 0.88 percent.

That means a retiree with $100,000 saved in a CD could have earned $2,530 in 2008, or about $211 a month. At current rates, that same $100,000 is earning just $880 year. The retiree's monthly income has sunk to about $73.

Hirsch: What about your cash cushion that you had?

Christine Schoenwald: (Laughs) I don't really have a cash cushion.

Hirsch: Why no cash cushion?

Schoenwald: I don't make very much money. And I didn't save any and the money that I had inherited many years ago is gone.

Hirsch: I want to ask you a couple of questions that might be a little difficult to answer. So first thing I understand is that you may have taken some equity out of your house along the way.

Schoenwald: Yes, we refinanced a number of times.

Hirsch: How many times?

Schoenwald: I've lost count many times.

Hirsch: And what do you think now when you look back at that activity?

Schoenwald: I know definitely we shouldn't have done it the last time.

Hirsch: Just the last time.

Schoenwald: Just the last time, because that really had made it sky rocket up.

Hirsch: Tell me about that process, was it easy to get those refinancings?

Schoenwald: Oh yeah, because I had a lot of equity in my house. This was before, you know, the financial crisis. So they're always happy to refinance me, even though I didn't make that much money, I didn't have very much in savings, but they were always happy to refinance.

Hirsch: A lot of people would call that "using your house as an ATM."

Schoenwald: Totally. Guilty as charged.

"What's the cash in your pocket that you need to check out of the rat race?" Mr. Thompson asks. "I decided I had to have two years' worth of (living) costs...in very liquid, easily accessible assets." He figured he had to cover a lot of transition costs. That included moving expenses, legacy costs (like the remainder of his lease in his old home), and enough money to support his expenses while he changed careers and ramped up his new business. Saving up to two years' worth of costs may sound daunting. But here's the good news: If you are making this kind of move, you are probably moving from a high-cost part of the country, like San Francisco or New York, to one of the cheaper ones. And your money will go a lot further there.

[...]

How far will your savings get you over the long term? Someone investing their savings conservatively should certainly be able to earn about 3% a year over inflation. If you want to withdraw $10,000 a year and make it last for, say, thirty years, you will probably need to have about $200,000, or twenty times as much, saved up now.

[...]

You might not want to go as far as Mr. Zelinski–"I don't own a cellphone, I drive a '95 Camry, and for two years I lived without a sofa," he says–but the principles he espouses aren't crazy. "You're financially independent if you have $15,000 coming in and $14,900 going out," he says.

How much do you need to be free? Maybe you should ask instead: How much do you really want to be free?

Labels: Frugal Females

She tried to find a full-time job without much luck, because the job market was saturated. Temporary freelance design work couldn't cover her bills.

So in January 2008, she filed for Chapter 7 bankruptcy, becoming one of nearly 1.1 million consumer filers that year.

[...]

"The bankruptcy filings are a warning about the risks now facing middle-class Americans," says Warren, chair of the Congressional Oversight Panel on the Troubled Asset Relief Program (TARP). No longer can they count on a college education, a good job and homeownership to protect them from financial collapse.

"It's horrifying for people who are not used to anything but an upward trajectory," says Bob Anderson, a bankruptcy lawyer in Wilmington, N.C. "They are used to calling the shots."

Schubert agrees.

"I'm a highly educated, middle-class woman," says Schubert, who is the single parent of a 2-year-old son, Lincoln. "Until now, I have never in my life been unemployed."

California moved today to crack down on the sale of energy-gobbling big-screen television sets that now account for about 10% of a typical household's monthly power bill.

After nearly two years of study, the California Energy Commission voted 5-0 to approve the nation's first efficiency regulations for TVs of up to 58 inches sold in the state.

The new standards for TVs, which take effect Jan. 1, 2011, are similar to those imposed on refrigerators, air conditioners and dozens of other household appliances since the 1970s.

[...]

"The average Californian should not see a cost premium," says the LCD TV Assn. "They will, however, benefit from dozens to hundreds of dollars in energy cost savings over their TV's lifetime, thus making the proposed standard extremely cost-effective."

Irvine-based Vizio Inc., a market leader, told the energy commission that it would have no problem complying with the new standards even before they officially take effect.

The commission estimates that switching to more efficient TVs would save an average of $30 per set per year and $8.1 billion in electricity bills statewide over the first decade.

Moving to more efficient televisions would eliminate the need to build at least one large, gas-fired electric power plant, the energy commission says. "Increased efficiency is the most cost-effective way of meeting our renewable energy goals," said commission Chairwoman Karen Douglas.

After Sheffield, she moved to Scotland and worked in a hostel. “I was finishing my writing — I was getting ready to submit my thesis. I saved up a bit of money. I thought, I’ll just move to London, because that’s where the jobs are, and I’ll see what happens. So I did. I submitted the thesis but I was still preparing for the viva — there was quite a lot of writing and studying still to do.

“I couldn’t find a professional job in my chosen field because I didn’t have my PhD yet. I didn’t have a lot of spare time on my hands because I was still making corrections and preparing for the viva; and I got through my savings a lot faster than I thought I would. The difference between living in the Highlands and living in London is massive. I hadn’t really thought that one through.

“I have a pathological aversion to being in debt. My mother’s family are Jewish; there’s this hoarding thing, saving, being prepared — if you’re in debt somebody could come and knock at your door and take it all away tomorrow. It got to the point where I didn’t have quite enough money for my rent. I asked my best friend if I could borrow some money and he posted me a cheque.

“I was looking at this cheque. It wasn’t even the total of my rent; it was a quarter of it or something, some stupidly low amount like £120. I thought, ‘But once I deposit this cheque, I’ll still need money for next month.’ And I couldn’t do it. I couldn’t borrow this money knowing that I couldn’t pay it back and that I’d need more pretty much straightaway. And that was when I started to think: what can I do that I can start doing straightaway, that doesn’t require a great deal of training or investment to get started, that’s cash in hand and that leaves me spare time to do my work in?”

I don’t know that prostitution would necessarily be one’s first choice, I say. Starbucks? Waitressing? Bar work? Bunking down on a friend’s floor? “Yeah, you could work behind a bar. But how many hours would you have to do just to pay your rent? I couldn’t even get an overdraft at that point, though of course once I started depositing so much cash they offered me a mortgage, about three months later! And I wasn’t prepared to borrow from friends or family. To be honest, the writing-up of a thesis takes up so much of your time and so much of your energy.”

So: hookerdom. “Yes. I didn’t object to the concept.”

Beyond income, one's vocation has much to do with accumulating wealth. Educators, engineers, business owners and retail store managers have a tendency to live below their means and to be quite efficient in transforming their income into wealth.

It is the home/neighborhood environment that most explains one's ability to accumulate wealth. It may be useful for people to understand that there are 1,138,070 millionaire households living in homes valued under $300,000. This is far more than the 403,211 who live in homes valued at $1 million or more.

[...]

The typical household should be able to put away 5 percent of their annual income while they are in their 30s, 10 percent when they are in their 40s, and 20 percent when they are in their 50s.

This is also related to satisfaction with life overall. There is a highly significant correlation between satisfaction in life and living in a home and neighborhood which are easily affordable.

What is a good rule if you are determined to become wealthy?

The market value of the home you purchase should be less than three times your household's total annual realized income. Also, if you are not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

Even though everyone at his Boston advertising agency knew layoffs were coming, Erik Proulx was still shocked when he lost his job as senior copywriter last October.

With no steady salary and lots of free time on his hands, the 30-something husband and father of two fired up his computer, created a website, and began blogging about his experiences. “I’ve heard so many people express some kind of despair after losing their jobs. I was one of them,” Mr. Proulx says. “It was important for me to discover in myself that this could be the best opportunity of my life – with the right attitude.”

Soon his website (www.pleasefeedtheanimals.com) was attracting hundreds of laid-off ad professionals who contributed their own experiences of creative projects they’d undertaken. Proulx was so intrigued by their stories that he ended up creating a 40-minute documentary about life on the other side of layoffs. In a strange twist of life imitating art imitating life, Proulx found fulfillment in unemployment by filming the stories of people who found fulfillment in unemployment.

“I’ve been exercising this belief that I have that when you do what you love, money just seems to fall in line,” Proulx says. “That’s fairly cliché, but it’s the truth.” In its final edits, the film – called “Lemonade” – has been sent to judges for the Sundance Film Festival.

“Lemonade” revolves around the lives of Proulx and 15 others who were laid off from the ad industry. Instead of focusing on how unemployment crimped their lives, the film looks at how their unexpected downtime allowed them to follow lifelong passions.