A friend of mine who is not a banker, yet has been involved in the financial world and is an educator made this comment to me. I think it’s great and worth sharing.

The quote has to do with predatory practices, and with the financial reform taking place, predatory lending is a focal point.

‘I hate the word “predatory” with anything related to economics, as it sort of absolves the “victimized individual” of responsibility for being stupid…’ MW

Predatory lending has a hype factor built into it as well. Lack of knowledge though is the real culprit; that’s why I’ve written “Barking With The Big Dogs”.

While driving home, I heard a typical hyped up debt free commercial.  The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices.  First, live with relatives, who bought a home.  However, did they have to get a loan to buy the house?  Second, rent.  Renting is not always a bad idea, just as homeownership is not always a good idea.  Both scenarios have pros and cons.  Third, buy a house.  Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage.  Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving  232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well.  If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan.  Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages.  Mortgages have pitfalls as we all know, but provide benefits.  The benefits are not just the ability to purchase property, but can increase wealth as well.  Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

GM, known as government motors since the take over last year by the US government, Canadian government and United Auto Workers union is looking to issue an IPO (initial public offering) to generate money to pay its debt.

What’s wrong with this picture?

First, refer to the ownership as listed above. Instead of solar cars of the future, they can build socialist cars.

Second, GM got billions of dollars, yet is looking to raise cash to pay debt.

Third, a company that his been around for a hundred years and was publicly traded is looking to issue NEW shares because all of the existing shareholders got wiped out in a bankruptcy that lasted one month.

Fourth, the president of a corporation in the private sector got ousted by the President of the country.

Fifth, refer back to ownership. Will I as a taxpayer get shares of the company? Doubtful.

Sixth, dealer contracts were canceled, thus hurting small business.

When the union goes on strike someday as they did in  2007, they will be striking against their own people as the UAW has ownership.  But that will be okay, the customers have been on strike against GM anyway!

I was considering buying a Chevy Traverse or Buick Acadia, but decided to get a Ford Explorer instead as I stated in my auto review. I’m glad I did, because I like the Ford better; it seems to be built better as the Traverse’s door handles seemed very flimsy.

One other thing, I’m not planning on doing business with Ally Bank, or should I say the former GMAC; a majority owner is…you guessed it…the government.  However, Ally has some of the best deposit rates, so maybe I should put my some money there and get paid while getting my loans elsewhere.

When the day comes and the IPO happens with shares traded, I may purchase some stock for a short time, but I won’t be buying a car or truck.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

I was going over the financial feasibility study with a client today. When the conversation turned toward financial ratios, I brought up return on equity as I usually do.

However, something eye opening hit me during the conversation.

Before I talk about my discovery, let me mention topics we hit on first. You’ll want to pay attention this today if you are interested at all in making money on your investments, etc. If not, both  you and future generations to come will miss out too.

When determining if the business was worth doing, we looked at cash flow. Cash flow statements are very easy to understand and it’s this simple…money coming in versus money going out. You can look at a personal checking account just as a business looks at their statements.

Next we discussed income statements. Income statements show business the items such as depreciation of assets on and other tax write-offs which reduce the taxable amount of income. The income statement, however, does not affect cash flow – money spent does. The income statement gives an idea about the net profits which are taxable.

From there, we reviewed return on equity. A difference between return on equity and return on investment is different, but in short, the return shows how hard the money is working. In just a minute, I’ll demonstrate some simple math; but first, let’s look at the Rule of 72 as it relates to how hard your money is working.

The Rule of 72 will tell you how fast the money will double in value.

To figure the time, you will only need the calculator between your ears. If you know the rate of return, which is mentioned on the feasibility study ratios page – or a CD at the bank, simply divide 72 by that number. The answer will be the number of years for your money to double.

For example, if you earn 6%, take 72 and divide it by 6. The answer is 12. Your money will double every 12 years.

Now comes the eye opening part.

I was looking at a money market account paying .01%. That’s right, 1/100th of a percent. At this rate, money will double every 7,200 years!

Without reinvesting the interest earned and simply setting it aside, in order to double the money, 11,920 years will pass.

Looking at interest rates on CD’s at .25%, which are not uncommon rates, money will double in 288 years. Can you and your family wait this long? Mine can’t.

Don’t blame banks for offering low rates, there is more to the story and you can read about it in “Barking With The Big Dogs” which is soon to be released.