Lessons Learned From the US Financial Economic Crisis
As we enter the 2nd year of the US Financial Economic Crisis that started in August of 2007 with the sub-prime lending meltdown, the impact on the economy and the average American has been devastating. Economy.com is predicting that by the end of 2008 over 2.8 million US households will either be in foreclosure, be forced to give their house over to their lender and move out or sell their home for an amount lower than their actual mortgage balance.
And Federal Reserve Chairman Ben Bernanke said that mortgage defaults wouldn’t harm the US economy!
So far besides foreclosures being at an all time high, we’ve had the collapse of practically every sub-prime lender out there including New Century Financial, which was the largest subprime leanding company in the United States. Even regular lenders like American Home Mortgage and Countrywide Financial Corporation were effected. AHM filed bankruptcy and CFC narrowly avoided it with a last minute loan.
If you brought a home in the last year or so, take a look at your property value. There’s a good chance it is lower than what your mortgage balance is. And to think all of the financial experts bashed Robert Kiyosaki ten years ago when he said your personal residence was a liability not an asset back in 1997 in his best selling book Rich Dad Poor Dad
We also saw the collapse of many of the largest companies in the world in the financial sector. In March of 2008, Bear Sterns, one of the largest investment banks in the world was forced to sell itself to JP Morgan and Chase for a fraction of what it traded for prior to its collapse. The source? Investing in a wide variety of high risk investments, many of which was tied to the sub prime lending crisis.
In September of 2008, the Federal Housing Finance Agency announced that it was taking over Fannie May and Freddie Mac. This was done because there were huge concerns that due to the two companies’ exposure to the mortgage market, increasing loan defaults could result in the companies failing to meet its obligations and commitments. Merrill Lynch was forced to sell to Bank of America due to its massive losses from the subprime lending market. Lehman Brothers was forced to file bankruptcy due to is losses from the mortgage crisis.
Then it was announced in the same month that AIG – American International Group, which was the 18th largest company in the world was at serious risk of going out of business as well. Despite the fact that most of the companies’ business units were healthy, one business unit that invested in debt security derivatives gone bad due to the subprime meltdown threatened to bankrupt the entire company. The company was saved by an emergency federal loan bailout in exchange for a huge stake in the company to the US government.
So what lessons can we as average investors can learn from this crisis? Here are 5 lessons for you.
1. Only buy a house you can afford. Robert Kiyosaki is right. A house is not an asset unless it is making you money. If you are not collecting more rent than you are paying in mortgage, (chances are in your personal residence you aren’t collecting any rent at all), your house is a liability. There is no guarantee a house will always appreciate in value, as we have all learned the hard way from this crisis.
2. There is no such thing as a guaranteed retirement. If your company files for bankruptcy you can kiss your pension goodbye. Think it can’t happen to you? Do a search for an article written in Time Magazine called The Great Retirement Ripoff What would you do if your pension check bounced? Are you prepared to have to go back to work in your 60′s, 70′s, or even 80′s?
3. Be wary of 401K plans. 6 months ago AIG traded for $43 a share. Today it trades for $2 a share. Your 401K plan mutual funds are investing in companies like AIG. If a market correction occurs, you can see your portfolio take a nosedive. In addition, although many companies offer to match your investment in a 401K plan up to a certain amount, their “match” is in the form of company stock. Imagine how all the poor souls at AIG whose 401K plans are loaded with $2 a share company stock are feeling right now.
4. There’s no such thing as a “safe secure job.” Many of the largest companies in the world are laying off people by the thousands. At my 2nd to last job literally a few months after I left, my entire business unit was laid off. At my last job again a few months after I left, my entire business unit was once again laid off.
5. You MUST have a Plan B. If you get laid off tomorrow and it takes 6 months to a year to find a job paying what you make right now, how long can you make it before you are out on the street? If your 401K takes a huge dip right before you are expected to retire, what are you going to do? If your pension gets wiped out how are you going to survive?
Hopefully you have learned these lessons and are doing something about them. Otherwise as the saying goes…”those who fail to learn the lessons from history are due to repeat them.”
Deal or No Deal, Part 1
Depending on who you speak to regarding Subprime, there are either too many leads or not enough quality leads to work. The difference here is one of perception. How you determine your lead quality will ultimately determine whether you have a subprime “deal or no deal”.
If you see your leads as too many, you might want to consider how efficiently you are working your leads. Who do you have making your calls? Are they really calling every lead to secure an appointment, or are they rushing through each call without truly committing the customer to that appointment? Are they trying to sell a vehicle to each customer they contact, or are they trying to secure an appointment? If you are handing out leads to your sales force, are you sure that they are making every effort to contact these leads, or are they making just a token effort to appease you?
No matter how you look at it, to be truly successful in subprime, you need to have dedicated personnel responsible for it. Sales people who are handling primary customers as well will more than likely opt to deal with these “easier” customers, avoiding what they perceive as too much work for too little money. If you have your primary F&I managers dealing with subprime, you’re probably “stepping over dollars to pick up nickels.” Some F&I managers tend to be overly intimidated by subprime. There’s too much math involved, what with maximum advances, PTI, DTI and all the rest of the alphabet soup associated with subprime Finance. Your subprime deals probably end up with minimal front-end grosses but phenomenal back end penetration and profits. Why? Because that’s where they get paid from, so where do their loyalties lie? Keep in mind that, with subprime, front-end gross (profit on the actual sale of the vehicle) is dollar for dollar, i.e. you get 100% of the profit directly to your store. Back end profits (MBI’s, GAP, A&H, Life,) only make you 40-50% on the dollar. And it may be subject to charge-backs. Where do you want your money going?
If you say that you’re not getting enough quality leads to work, this is a perception problem as well. Every lead is a potential sale, whether it’s today or sometime in the future. Once again, you should have dedicated personnel working your subprime leads. Once you receive the lead from you lead generator, time is of the essence. The half life of a special finance lead is extremely short, and in most cases, if you don’t respond to their inquiry quickly, they will seek out another source and apply there as well Your phone staff’s only objective needs to be securing an appointment to bring these customers into your store so your financial experts can review their credit and help them to obtain financing. Your phone staff must continue to attempt to contact these leads until they either arrive at your dealership or are out of the market. Continually leaving messages accomplishes nothing. They must stagger their calls, so as not to try and reach them at the same time each day. Make the initial contact and set the appointment. If you initial contact is say, Monday at 1PM, and you call and get no answer, call back in two hour intervals until you finally reach them. Why call back the next day at the same time? Follow up on Monday at 3pm as well as Tuesday at 10AM. Use this 2 hour stagger arrangement for the next two weeks until you contact this lead and get an appointment.
Make sure that your phone people aren’t pre-qualifying the leads before they get to your store. Every lead should be worked fully. Even if the income is below the minimum threshold your lenders require, even if they tell you there is no co-applicant available, once they are sitting in your showroom, you’ve “awakened the giant”. They know that, somewhere out there is a loan for them; they just have to find a way to get it. Once you present them with the options, you’ll be surprised how hard they’ll work to get what’s needed to obtain a loan. Too many times it boils down to a half hearted effort on the part of the people you have working your leads that make it seem as though the quality leaves something to be desired. Again, a half hearted effort produces half hearted results. By having dedicated personnel working your leads, 100% of their effort is spent getting the appointment and making sure the lead actually shows up at your dealership.
Bottom line here is that, unless you have people who are dedicated and responsible for your subprime business, you’re probably short changing yourself. While you may be saving a few dollars on your payroll expense, the profit potential your dealership is missing out on is potentially enormous. We all know that subprime sales generate considerable profits for dealerships that are successful with it. Talk to them and you’ll find out that they all have several characteristics in common. First and foremost is using a dedicated staff to pursue the subprime customers in their market. Their phone people have one objective to achieve; to contact every lead and try to bring each and every one into your dealership. What happens next…we’ll address that in Part 2.
Sub Prime Auto Financing – Car Lenders For Bad Credit
Is there such a thing as a sub prime auto loan? Well, you could say there is but the term is more of a colloquialism as opposed to an actual term. Sub prime refers to the various loans that were provided to at risk home buyers. A car loan provided to someone with less than desirable credit is far less risky and problematic than issuing a mortgage. No, a “sub prime” auto loan is intended to provide a pathway for someone with less than positive credit with the ability to purchase a vehicle.
Owning a car is not a convenience for most people. Without a vehicle, they would be unable to get to work, take their children to school, or be mobile in any meaningful way. Most people will not be able to purchase a car with cash. That is why a lending source is a must. Yes, a lack of stellar credit undermines the potential to be approved for a loan. This is where the poor credit auto loan providers come into play. Such lenders are willing to provide lending funds to those that would otherwise be unable to solicit approval. While this is certainly helpful, it is also important to be mindful of some of the differences between bad credit loans and traditional ones:
• The interest rates on such a loan will be much higher than what would be common with a standard borrower. The reason for this is fairly self-evident. When you have poor credit, you are a risky borrower. That necessitates higher APRs.
• The terms for the auto loan may prove to be a little less than desirable. How so? Missing one payment could lead to a huge penalty tacked onto the balance of the loan. While some may consider this unfair, that is the “way it goes” as far as sub prime vehicle loans are concerned.
• The duration of the loan may be shorter than with a standard loan. For some, this could be a slight inconvenience although not one that is insurmountable.
Are these points of consideration surrounding bad credit car loans a negative? No, they really are not. Again, you need to keep in mind the fact that when your borrowing options are limited, the terms will be different than what is commonly expected. Consider the terms to not be all that bad since they open the door for the loan you need to buy a new or used auto.