05
The Upside of Downturns…(III. Creative Financing)
Categories: Pre-Post
One small (but noteworthy) benefit of this period of economic downturn is what we learn about creative financial events. For those of us in Michigan, we’ve clearly learned more about corporate bankruptcy than we probably wanted to know. I’m also not talking about TARP loans or other government bailout issues (I try to stay out of politics, but we have certainly seen all sides of the creative financial maneuvers of Wallstreet).
I’m really talking about personal creative finances. During unique periods, it seems, we also find a greater willingness to consider options we might have previously dismissed.
I have heard from dozens of friends here in Michigan that have shared concepts with me that I’ve never heard of previously. Granted, I’m not in the banking business….but I’ve bought and sold 8 different homes in almost as many States and I’ve never imagined some of the creative financial maneuvers I’ve learned about this year.
Everything from mortgage “short sales” which are allowing thousands of people to walk away from homes that they owe more for than they are worth to credit card “cancellation of debt” negotiations which are allowing unemployed/under-employed family write off debt, there are multiple alternatives that I never knew existed for families to consider. It seems that anything is possible and we shouldn’t be constrained in our curiosity for solutions. Talking with your banker might yield more than you think. It’s not the “all or nothing” philosophy I’ve grown up to believe.
There is also a changing landscape with our banking institutions. Not to mention the fact that mortgage rates are at historic low levels (I am hearing that banks are now actually writing more loans after a lengthy dry spell)….people are restructuring their debt loads to levels they never thought possible.
The downside to low mortgage rates, however, is also low investment rates. These days it doesn’t pay to save (outside piece of mind to have liquidity)–making debt reduction the name of the game.
Anyone who has tried to renew a bank CD in the last 18 months have come to the shocking realization that the ANNUAL interest rates for them have been near or under 1%. Saving at a rate less than inflation won’t get you very far.
One growing trend that I personally hope thrives in this next generation is the formalization of personal lending (peer-to-peer loans). I can’t think of any better by-product of difficult times than the closer union of family members and/or friends through direct lending. Why shouldn’t we match family (or a small group of people) with money to invest with family wanting a loan?
Use a third party to facilitate the transaction (online documentation, EFT funds transfer, year end tax reporting, etc). There are many, but I found one that is simple to understand called CircleLending.com (now it is VirginMoney.com). Quite simply, it facilitates skipping the middle men (banks, agents, etc) and uses electronic fund transfers to handle the transactions every month. As long as there is full transparency, documentation of all the “particulars” and annual statements provided, these 3rd party companies serve a terrific void in the market.
Note: I found this company when researching options for someone with rental properties that complained about losing a good tenant who bought another home down the street from the one they were renting. It seems to me that holding a mortgage for 30 years would be better than finding 10-15 tenants over the same period (the house is paid for). At any rate, it is worth considering as an investment alternative for the right people.
Others to read about:
http://www.lendingclub.com/home.action
http://www.kiva.org/ [facilitates lending to low income entrepreneurs]
Clearly, there are multiple silver linings in economic downturns…some of them are even financially related. Creativity, innovation and character are all entering a period of explosive growth during these times. Don’t be shy…encourage those around you to find these upsides to an otherwise lousy recession. The road ahead will be so much more enjoyable.
