Negative Equity - A National Disease

Capitalism has many benefits in a free society. It has inherent benefits to those who are creative and willing to work hard. Nowhere else can such a variety of people from many diverse backgrounds and countries succeed by their own efforts.

An Introduction to Equity Markets An Introduction to Equity Markets An Introduction to Equity Markets guides novices through the intriguing world of equities. This book explains clearly how equity markets work, what the instruments traded are, who trades them, how equities are valued and how the international markets differ. Subjects addressed in this book include equity valuation, share issues, equity-linked securities and derivatives.

However, sometimes our creative efforts cause serious problems. As a people, we have become enamored of things, possessions, and goods. We want to own the biggest house, the biggest automobile and other possessions without number. And for all the things we say we want, there are manufacturers ready and willing to provide them. In order to be competitive these same manufacturers are always seeking better ways to convince us that it is possible to own that Cadillac El Mundo Gordo Magnifico SUV when realistically we can only afford the Ford Sub-Midsized ordinary Sedan. Desire for things, plus superb salesmanship overcomes common sense and basic math. The result can be what the subject of this article is all about.

Let’s clear up a couple definitions.

Equity: The market value of a property (house or car or whatever) minus any mortgage or money owing on the property.

Example # 1 Positive Equity:
You have owned a house for thirteen years. Its market value is $400,000. You owe the bank $225,000 over the next seventeen years. Your equity in the house is $175,000. This is positive equity.

Example # 2 Negative Equity:
You buy a house for $300,000. The housing market changes and the market value drops to $200,000. You owe the bank $225,000. Your equity in the house is $25,000. This is negative equity and sometimes referred to as being "upside down". This is a very bad thing.

Negative Equity occurs frequently with automobile purchases. What do you do if you’ve had the car two years and want to trade it in? The "upside down" buyer frequently adds the amount on the trade-in onto the loan for the new car. They also stretch out the loan to keep the payments low. This is a losing proposition as the longer the loan, the longer it takes to reach a point where they owe less than the vehicle’s depreciating value. It is a financial Catch-22.

How does this happen?
It is a combination of things. In order to sell more cars, manufacturers offer deep discounts on new cars. This has the effect of depressing the value of cars, which coupled with five and six-year loans means it’s going to take much longer for car owners to achieve a position of positive equity. (two to three years is not unusual)

It is a fact that the moment you drive your car away from the lot it is a used car. If you are paying $45,000, the Kelly Blue Book value may be $40,000. If you still owe $43,000, there’s a $3000 difference. How do you protect yourself if you have an accident? Now the vehicle owner has more problems.

Gap Insurance
Why is an auto gap insurance policy so important? Because standard comprehensive and collision auto policies only cover your new car's "fair market value". And that can be as little as 80% of what you paid for your car, starting the minute you drive it off the lot. This condition of negative equity may exist for the first two or three years of ownership.

This means that if you're involved in an auto accident that leaves your new car "totaled", you could end up paying off a loan on a car that you can't drive. This is where gap insurance comes in. A gap car insurance policy insures you for the difference between what you owe on your car and what your insurance company says it's worth. In some cases this insurance will be required as part of purchase or lease.

Gap insurance coverage would also become critical if your car is stolen. Thieves prefer new cars and they seek out specific models, which usually happen to be the most popular models of cars sold. (Honda Accord, Ford Taurus - etc. etc.)

If your car is stolen, the insurance situation is the same as in the case of an at-fault accident on your part: comprehensive insurance will cover the value of the vehicle, but not necessarily the value of the loan that you owe to the bank. You could be stuck paying thousands for a car that's long gone. Add that to the truly disheartening feeling of having your car stolen, and that makes for a really rough time.

We see many situations of negative equity when a case is being settled with an auto manufacturer. Often it is the first time the owner discovers the reality of being upside down on their loan or lease. It is always painful. We certainly could offer scads of advice about this situation. The first piece of advice would be, never buy something that is beyond your means. This advice will surely be ignored over and over. The other thought, which isn’t really advice is, if you get caught in a situation where your negative equity is going to be expensive, bite your lip and promise yourself you will never get in that sort of situation again. It’s bad for you and accepting these kinds of deals only encourages manufacturers and their financial organizations to offer these "good deals".

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Bank Overdraft Fees Are Sucking Americans Dry

Overdraft fees, we have all paid them at one point in time in our financial lives. The cost of over-drafting your account keeps climbing. At Sun Trust as of July 1st they raised the fee from $32.00 to $35.00 every time you go in the negative. Most banks will clear the highest item first so that they can charge you a fee on each of the lower items.

The bank is constantly pushing us to set up over-draft protection with one of their credit cards. So when you overdraft they charge your credit card, charge you a $15.00 fee to do this for you, then if you do not pay your bill on time or in full they are going to hit you with interest and late fees. It is a never-ending cycle.

They will link a savings account to your checking account for protection but again, they will charge you $15.00 for transferring the money in your account to prevent an overdraft fee.

According to a recent study by the Center for Responsible Lending the nations 15 largest banks collected $17.5 billion dollars last year from us for over-draft fees.

I love it when they tell you that they are going to give you a “one time courtesy” return of the over-draft fee. No one is perfect and life happens, banks should give us a set amount of “courtesies” per year. I am sure they would attract more customers this way.

There is a bill “gaining moment” that would require banks to tell people at the ATM and possibly at the checkout counter when their accounts run dry, It would also prohibit banks from charging overdraft fees unless customers have agree to pay them and it would prohibit the bank from clearing the highest check first.

Banks have also held and delayed deposits so that an overdraft incurs and they receive the fees.

We should take more responsibility with our money. The only way to not pay these fees is either not letting your account fall in the negative or for example, keep $1000.00 in your account and vow never to fall below that amount and you will not have to worry about being charged a $35.00 fee.

Banks continue to charge these ridiculous over draft while only offering pennies on CD’s, savings accounts, and mutual funds. No wonder there is a new bank popping up on each corner, they are getting rich!

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You've Heard That Before, Money Brings Money

The Energy Of Money
In ancient times, a fisherman cold go out fishing and with his effort he could bring home a lot of fish. He knew very well that if he wished to keep it until he could eat it all, either he had to salt it or hope it wouldn’t go bad… Salted, wasn’t the same as fresh, so he started to give it away for someone to eat it while it was good. True, there was some sort of exchange, but not always possible… until the invention of money.

Money, Money, Money
If he sold the fish, the money wouldn’t rot and he could keep it as long as he wanted. It was as if his effort on fishing were concentrated and accumulative, giving him the possibility to make it wake up at any time. Then he noticed that if he gave this “energy” to another person who made boats, this man’s effort in turn would be rewarded with this new kind of energy. The fisherman in turn had a better boat to be able to catch even more fish. The same effort but with a better tool, gives better results, right?

Ok, Let’s Get To The Point
What I mean is that money which sits idle, does not multiply its energy. Money was meant to pass on from one hand to another. It can be your cash in the bank or in your wallet, or even big sums of money belonging to investors. If it sits peacefully in the bank, not only does it not give you any profit, but it also loses value. Inflation and the cost of account maintenance will end up by consuming it.

Lenders And Borrowers
There are several great partnerships in this world. A rhinoceros needs the bird on its back to eat the bugs and parasites that live on its skin. The bird needs the bugs to live on. Such is the case of borrowers and lenders. Borrowers need cash to multiply their efforts. Lenders need borrowers to multiply their cash. It’s a never ending cycle, like life itself.

I Don’t Need To Tell You
… what comes next. If you really want to make progress in life, use the principle of the multiplying energy of money. Having lots of money is not bad. It’s what you do with it that counts. It’s supposed to be your friend. After all, the money you generate has your very own energy within. Whatever you get through a loan, is your own energy giving you the capacity to borrow more or less.

I’ve just given you the idea. It should be enough to trigger off your own ideas as to what to do in order to multiply your efforts and the inherent money those efforts will bring.

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