Lenders gone wild - Can U.S. curb the 'exotic mortgages' frenzy that puts homeowners at risk?

Rex Nutting,

More than a year after Alan Greenspan warned of the "potential for individual disaster" from a new breed of mortgages that were helping to fuel the housing boom, federal regulators finally are trying to do something about it.
On Friday, in a jointly crafted message on so-called exotic mortgages, multiple government agencies warned banks in strong terms to make sure borrowers can pay back the full amount of what they borrow and that homeowners know that a low monthly payment today could be shockingly high later.
America's real-estate boom may be over now, but millions of homeowners who thought they were borrowing their way into wealth find themselves instead holding a ticking time bomb, a toxic mortgage with a potential payment far larger than they can afford.
Bank regulators knew more than a year ago that lenders were aggressively marketing interest-only and payment-option adjustable-rate mortgages to consumers who didn't fully understand what they were buying. In July 2005, several government agencies teamed up to write guidelines intended to set lenders straight.
In the meantime, the runaway writing of these mortgages went on unchecked, and the fact that nobody in government stood in the way highlights the fact that a patchwork of government bureaucracies was ill-equipped to bring the practice under control, lawmakers and regulators say.
Policing new mortgage products that skate close to the edge of what's legal is no easy task, because it's not the responsibility of any one agency in Washington. The regulatory void took time to fill, as the Office of the Comptroller of the Currency tried to get four other federal agencies to unanimously endorse the guidelines that went into effect Friday.
"We saw the potential for problems occurring," said John Dugan, the comptroller of the currency, a Treasury Department unit that regulates nationally chartered banks. "There have been some very abusive problems" by institutions not covered by the guidelines. "We just don't have jurisdiction," Dugan added, expressing hope that state regulators would follow with strong guidelines soon.
While Dugan's group wrangled among themselves and with the industry about how to word their warning, the popularity of the mortgages exploded, particularly in the booming subprime market that targets borrowers with lower credit ratings who are generally less sophisticated. The subprime market is largely outside the jurisdiction of federal regulators.
About one-third of the mortgages sold in the last year were devised to minimize the initial monthly payment to make it seem as if buyers could afford a more expensive home.
The cost of that Mephistophelian bargain comes later, when the monthly payment is reset to cover all the deferred interest charges, plus, in some cases, the extra principal.
Banking industry officials are quick to defend exotic mortgages as financial innovations that have enabled more people to be homeowners even when prices were soaring.
Countrywide Financial, the nation's largest residential mortgage lender, argued against new rules. "Interest-only and payment option adjustable mortgages have been tested in previous
economic cycles and are fundamentally sound loan products," Countrywide wrote in its official comment on the proposed guidelines. Requiring lenders to qualify borrowers on the true cost of a loan, the company said, "would tend to defeat the intended function of the loan and would significantly reduce the number of borrowers that could qualify."
Collateral-dependent loans
In some instances, according to regulators, the lenders knew that the only way the loan could be repaid was to either refinance or sell the home. Such "collateral-dependent" loans fit the classic definition of unfair and deceptive lending practices under federal consumer protection laws, the regulators reminded lenders on Friday.
Studies show that a large number of borrowers with simple ARMs don't understand the terms and underestimate the amount their mortgage payment could rise. Nontraditional ARMs are even more complex.

The housing credit bubble led to the growth of exotic loans, which, in a vicious spiral, drove prices even higher, said one observer. In a bubble, "the financing gets progressively worse. At the end, you get nuttiness," said Dean Baker, an economist for the Center for Economic and Policy Research, a Washington think tank.
Finally, prices got so high that "the only way people could buy houses was by bending the rules," said Baker, who's been warning about the real-estate bubble for years.
In the Orwellian parlance of the mortgage industry, loans that ignore the true ability of the borrower to pay for the loan are called "affordability" products.
Most of the exotic loans have low introductory interest rates that ultimately adjust to market rates, usually after two years. Some loans require that only the interest be paid, putting off the day when the borrower must start to pay down the principal. Some of the loans allow borrowers to make a monthly payment that doesn't even cover the interest, resulting in a negative amortization when the unpaid interest charges are added to the principal.
And most of such loans sold in the subprime market have large prepayment penalties that make it expensive to refinance.
As long as house prices are rising and interest rates stay low, borrowers can always refinance an exotic mortgage when the interest rate resets. But now, with housing prices flattening out, many buyers will find they don't have enough equity in their homes to refinance, and it may be difficult to find someone who's willing to take the house off their hands at the inflated price they paid. Their only option could be foreclosure.

The payment shock can be extreme even if interest rates do not rise. For example, Sandra Thompson, acting director of supervision for the Federal Deposit Insurance Corp., told senators recently that the monthly payment on a $200,000 option ARM could rise from $643 in the first year to $1,578 by the sixth year. And the unpaid principal would rise from $200,000 to $214,857.
Exotic mortgages are most popular in the metropolitan areas that saw the biggest price gains from 2003 through 2005. They allowed ordinary families to bid up the prices of ordinary homes to nearly $400,000 in Miami; nearly $500,000 in Bridgeport, Conn.; $600,000 in Orange County, Calif., and more than $700,000 in San Jose and San Francisco.
And the loans helped homeowners to convert about $2 trillion in home equity into cash since 2002, a major boost to consumer spending.
The government's newly issued guidelines suggest that lenders refrain from layering risks, such as accepting reduced documentation on income and assets, or selling simultaneous second mortgages on top of an exotic mortgage. The regulators suggest that negative amortization loans not be sold to buyers with little or no down payment.
Under current conditions, lenders are showing no signs of slowing down their marketing methods -- and may even be stepping up their efforts while they're still allowed. The most recent survey of senior loan officers at banks showed that most were still loosening their standards for mortgage lending as the second quarter ended.
The regulators say the risks in exotic loans are manageable.
Manageable for the lenders, that is. Federal regulators' main concern is the security and soundness of the banking system; they are not primarily concerned with the security and soundness of borrowers.
Consumer advocates fear the government's guidelines have come too late to protect millions of homebuyers who have been lured into buying houses they can't afford. They say the Federal Reserve in particular should have stepped in much earlier to stop the spread of predatory lending that could ruin lives, devastate communities and unleash a wider economic ripple effect.
In a sense, the new federal guidelines overlook the biggest part of the problem. The majority of residential mortgages are no longer originated in federal and state regulated savings and loans, but by mortgage brokers and state licensed lenders, according to Felecia Rotellini, an Arizona state official who represents the Conference of State Bank Supervisors.
At the same time, Washington's guidelines could hurt some businesses at the expense of others.
"The guidelines will likely have a chilling effect on option ARM lending at regulated institutions," said Frederick Cannon, a banking analyst for Keefe, Bruyette & Woods. However, unregulated lenders such as investment banks and real estate investment trusts, could have a competitive advantage because they aren't covered by the new federal guidelines, he said.
Some members of Congress say the guidelines may not go far enough.
"Further steps may be necessary by federal and state regulators to ensure borrowers understand what they're getting into when they sign up for one of these mortgages," Sen. Jim Bunning, R-Ky., said at a recent hearing.
Sen. Paul Sarbanes, D-Md., the ranking Democrat on the banking committee, agreed it will take more than just issuing a warning to lenders. "It's not the final step, but it's a good start," Sarbanes said.
A patchwork federal and state regulatory system monitors financial firms, depending on ownership and organizational structure, not upon the services they provide.
Many overseers
To a consumer, a bank is a bank. But five separate federal agencies regulate banks -- the Fed, the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Trust Supervision, and the National Credit Union Administration. State-chartered banks are regulated by agencies in their home state.
And there are other companies selling mortgages that are unregulated or that fall under state regulation.
The federal agencies try to issue consistent rules, to make sure that one part of the industry doesn't end up with a regulatory advantage over another. An umbrella group of state regulators has promised to issue similar rules on exotic mortgages to cover companies not under federal supervision.
The regulators face conflicting goals. They want to ensure the safety of the banking system without intervening too much in decisions about what products and services to offer. Protecting consumers from unfair and deceptive lenders is another goal that may be at odds with yet another goal: Increasing homeownership in the United States.
Finally, regulators have to be wary of overregulation. "You heap disclosure upon disclosure, and at some point they have negative consequences," said Ned Gramlich, a former Fed governor who's now a senior fellow at the Urban Institute specializing in credit for low-income households.
Federal regulators say they don't want to stifle innovation in financial services, especially for new products that make the American dream of owning a home a reality for many families.
"We tell them to be careful, but we let them run their businesses," Gramlich said.
But the regulators also defend their turf with vengeance. When New York Attorney General Eliot Spitzer wanted to investigate national banks' lending practices in the African-American community, he was told to mind his own business.
While the Fed shares the responsibility for bank supervision with many other agencies, federal truth-in-lending laws give the Federal Reserve in particular the responsibility of ensuring that no lender of any kind engages in unfair or deceptive lending practices.
Gramlich said the Fed has used most of its authority under Regulation Z to rein in unscrupulous lenders, but Dean Baker of the Center for Economic and Policy Research charges that the Fed has hesitated to declare some of the current practices to be "unfair and deceptive."
By contrast, Baker says, the Fed wasn't shy about extending its authority into a new realm when needed to protect investors, such as the stock market crash of 1987 or the hedge-fund collapse in 1998.
Once upon a time, mortgage lending was as staid a business as you could find. Bankers offered 30-year fixed mortgages to borrowers who had a 20% down payment and sufficient income to make the monthly payments. They would reject any loan that required a payment more than 29% of a buyers' gross income or that would result in total debt service higher than 36% of gross income.
Those stringent standards kept a third of American families renting. Gradually, the industry began offering mortgages to families that didn't previously qualify. Adjustable-rate loans, balloon loans, second mortgages and other innovations allowed more people to buy. Today, a near-record 68.7% of U.S. homes are owner-occupied, up from 63% in the early 1960s.
Since 2000, the pace of change has intensified, contributing to an unprecedented housing boom. First, the growth of the secondary mortgage-backed securities market has meant that the risks of default or prepayment are being shunted away from the lender to others, such as pension funds or hedge funds, where potential losses are of no concern to federal banking supervisors.
Second, the subprime market has exploded, rising from under 9% of the market in 2003 to more than 20% today.
Third, competitive pressures have driven even the stodgiest and most conservative bankers into the embrace of exotic mortgages. The top lenders for interest-only loans include such old-line companies as Wells Fargo, Lehman Bros., Citigroup and Bank of America.
'Moral dilemma'
"At a time of a speculative boom in real estate, market participants find themselves in a moral dilemma: lenders cannot easily maintain their high lending standards and stay competitive when other lenders are weakening standards," said Robert Shiller, an economics professor at Yale who's become known as an expert on financial bubbles. "At this time, regulators of lending institutions have some of their most important work to do, and, at the same time, it is especially difficult for them to do it."
People who borrow large sums of money are expected to know what they are doing, just as they are expected to shop carefully for milk, gas and shoes. However, federal law recognizes that buying credit is fundamentally more complicated than noticing which gas station has the lowest prices. For most people, sums like $100,000 or $500,000 are so far out of the scope of daily transactions that they might as well be $1 trillion.
So home buyers rely on professionals to advise them, to tell them what products are best for their circumstances, what they can afford. "That creates an agency problem," said economist Dean Baker. The person you've hired to take care of your interests, Baker says, might have interests of his own that conflict with yours.
Such as a mortgage loan officer.
The mortgage broker has information and methods unavailable to the home buyer. The approval process is a black box, Baker said. The broker knows the credit score of the buyer, but the buyer doesn't. The broker knows how the ARM payment will reset over time, but the buyer doesn't.
And that's assuming good will. If the broker is trying to be deceptive, it's easy to mislead a buyer.
Increasingly, loans are sold, not on the basis of the final cost, but on the initial payment. The approval process in many cases begins by having the buyer state how much she can pay as an initial monthly payment.
Although the regulators have finally taken a tough stance against the most aggressive marketing of exotic loans, it may be the market that finally reins them in.
Such loans only make sense to most buyers if they think can build equity from rising house prices. But prices have flattened out and probably will decline in many areas. Few buyers will stretch their ability to pay for a home when they know they can just wait for lower prices.
"The mortgage market works, and the data demonstrate that fact," said Robert Broeksmit, a top official in the Mortgage Bankers Association, in recent testimony before lawmakers. "The market is serving more borrowers who are benefiting today from unparalleled choices and competition resulting in lower prices and greater opportunities than ever before to build the wealth and well-being that home ownership brings to our families and communities."

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The Business of Hospitality

Danny Meyer has learned a thing or two about business since he opened the Union Square Cafe in New York City in 1985. The downtown eatery has become the cornerstone of one of America's most successful restaurant organizations, a culinary empire that runs the gamut from white tablecloth to outdoor hamburger shack. The common theme, as he explains in his new memoir-cum-business manual, Setting the Table (HarperCollins), is something he calls "enlightened hospitality," an idea he will happily apply to any business endeavor. He serves up quite a bit of advice in his book. A sampling:


"We are in a very new business era" says Meyer. "I'm convinced that this is now a hospitality economy, no longer the service era. If you simply have a superior product or deliver on your promises, that's not enough to distinguish your business. There will always be someone else who can do it or make it as well as you. It's how you make your customers feel while using your products that distinguishes you." He points to companies like the Container Store, Timberland and Jet Blue, thriving enterprises that he claims share his philosophical approach to business. "Yes, they have an excellent product; yes, they know how to deliver, but that's not what bonds customers to them. It's the experience. Service is a monologue: we decide on standards for service. Hospitality is a dialogue: to listen to a customer's needs and meet them. It takes both great service and hospitality to be at the top."


Meyer's business model intentionally inverts classic capitalist priorities. He believes that to be successful you must first meet the needs of employees, then guests, followed by the community, suppliers and finally investors, in that order. "If you are devoted to your staff and can promise them much more than a paycheck, something to believe in," he says, "you will then get the best service for customers, which will in the long run provide the best return to your investors."


Meyer collects as much information, or dots, as he can about his guests. If a diner is eating at one of his restaurants for the first time, the staff is alerted. If it's a repeat customer, preferences (likes corner table, allergic to shellfish) and any past errors in service (overcooked salmon on 7/16) will have been entered in a database. "The more dots you collect, the more chances you have to make meaningful connections that make people feel good and give you a business edge."


"You can teach technical skills, but you can't train employees emotionally," says Meyer. "But you can teach managers how to hire for a specific emotional skill set." When selecting new hires, Meyer looks for candidates whose strengths are divided 51%-49% between emotional hospitality and technical excellence. "I like to call them hospitalitarians. People who are naturally kind, empathetic and curious, along with having a strong work ethic. They get fed through the process of providing hospitality."

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More Laptop Battery Recalls

Toshiba and Fujitsu are forced to join Dell in the recall for Sony battery packs, bringing the tally to about 7 million worldwide

TOKYO — The Japanese electronics makers Toshiba and Fujitsu are recalling batteries made by Sony for their laptop computers while personal computer maker Dell expanded its earlier recall of Sony battery packs. The batteries can short-circuit and have been blamed for causing some computers to catch fire. The latest announcements bring the tally of recalled Sony batteries to about 7 million worldwide, and are a major embarrassment for the Japanese electronics and entertainment powerhouse.

Toshiba Corp. said Friday that it is recalling 830,000 batteries made by Sony for its laptop computers. Hours later, Fujitsu Ltd. recalled an undisclosed number of Sony batteries that are used in 19 of its laptop models, according to Fujitsu spokesman Masao Sakamoto. The recalls comes as Sony Corp. is in the midst of a major overhaul of its operations, closing plants, shutting divisions and trimming jobs. Sony said earlier Friday it had asked manufacturers using its problem batteries to carry out a recall.

It has said the batteries could catch fire in rare cases when microscopic metal particles came into contact with other parts of the battery cell, leading to a short circuit. Typically a battery pack will shut off when there is a short circuit but on occasion the battery would catch fire instead. The Toshiba recall involves Dynabook, Qosmio, Satellite Portege and Tecra models, but regional breakdowns and dates of manufacturing weren't immediately available, said Toshiba spokesman Keisuke Omori. Omori said Toshiba's recall was in response to Sony's request, and Toshiba had not found any cases in which the laptops were at risk of catching fire. "But we wanted to assure and satisfy our customers," he said.

Dell Inc., the world's largest personal computer maker, said Friday that it is increasing the recall of Sony battery packs used in its systems to 4.2 million units from 4.1 million units. It already was the largest electronics-related recall in U.S. history. Based in Round Rock, Texas, Dell said that the increase in the recall was made due to additional information received about the battery packs containing cells manufactured by Sony. Dell and the Consumer Product Safety Commission announced the initial recall on Aug. 15, blaming Sony battery cells. Dell began shipping replacement batteries on Aug. 15. On Friday, Dell said customers should recheck their batteries if they have not ordered or received a replacement battery.

On Thursday, IBM Corp. and Lenovo Group, the world's third-largest computer maker, said they were seeking the recall of 526,000 rechargeable, lithium-ion Sony batteries purchased with ThinkPad computers after one of them caught fire at Los Angeles International Airport this month. In August, Apple Computer Inc. recalled 1.8 million batteries worldwide, warning they could catch fire. Last week, Toshiba said it was recalling 340,000 laptop batteries, also made by Sony, but that was for a problem that caused the laptops to run out of power.

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Before Taking a Job, Consider the Fit

Jim Citrin

Phil Kent, chairman and chief executive officer of Turner Broadcasting System -- the cable programming giant that owns such fabled networks as CNN, TNT, and Cartoon Network -- was in New York last week for the cable industry's annual gathering.

As we were catching up, Phil told me, "I need to thank you for the great advice you gave me a few years ago. I quote you often."

"I'm flattered," I replied, "but can you jog my memory with the pearls of wisdom I might have shared?"

He reminded me that when he was deciding whether to join Time Warner to lead its multibillion dollar Turner division or accept a potentially more lucrative offer as CEO of a global public company in the videogame business, I'd boiled the choice down to one deciding factor -- the people. "The who is more important than the what!" Phil said proudly.

Is the Job Right for You?

Phil's story illustrates just how highly complex making high-stakes career decisions can be. There are hosts of unknowns. Judgments need to be made with partial information; decisions typically are required under a lot of pressure.

There are many different variables to consider, both in your role as a candidate and in your position as a hiring manager.

When you're a candidate, the considerations include:

  • The job itself

    What is the nature of the role? How much will you learn and develop? How fundamentally interested are you in the business? How prestigious is the organization and the title? How great an impact can you have?

  • The money

    What is the current compensation? Is there a long-term incentive? Under what conditions can bonuses be earned? Is there an opportunity for wealth creation? Does the organization offer stock options or restricted stock? What's that likely to be worth in three to five years? What about a pension? Benefits?

  • The lifestyle

    How will the job fit into your life? Where is it based? What is the commute like? How much travel is involved? How much control will you have over your schedule? Will you need to work weekends? What are the deadlines and crunch times?

  • Tradeoffs

    Is the money worth the sacrifices you and your family would need to make? Or is securing the right lifestyle so important at this point that it's worth taking a step backward regarding compensation? Is the job so interesting and important that you're willing to throw away your weekend-warrior rituals or postpone the attempt to build financial security?

Hiring Considerations

Conversely, when you're a hiring manager evaluating candidates for an important position, the key factors to consider include:

  • Relevant skills and track record

    How does this individual line up with the key selection criteria agreed upon for this position? How exceptional is the candidate's expertise in the area most important for the job (e.g., marketing, finance, investing, general management, technology, etc.)? How sound is his or her performance track record? What role did the candidate really play in the results?

  • Cost

    How much will it cost to attract the candidate? How will the base salary and bonus requirements align with peers in the organization? Is a buyout provision necessary? What's the cost and risk of relocating the candidate? Is this individual that much better than others given the cost?

  • Timing

    Is this person ready to make a move now? How much transition time is required? Can you afford to wait on this candidate?

  • Culture

    How strong is the cultural fit between this candidate and the company? How will the organization respond to this individual? Will it embrace the person or reject him? What are the risks?

Looking for the Perfect Fit

When you cut through all of these issues, the most important consideration is the people equation: the fit. If you accept a job and misjudge the fit -- even if everything else is right --you will, in all likelihood, fail.

Similarly, if you hire an individual for a key position and people decide that he or she is a severe mismatch with the culture -- even if all the skills and experience line up beautifully -- all of your efforts will be for naught. The cost of getting it wrong is extreme from an out-of-pocket financial perspective and, more important, from a disruption and opportunity cost point of view.

On the other hand, other considerations, such as the money, lifestyle, even the job itself can be suboptimal, but if the fit is right, you'll generally be happy and successful. And, if you hire someone who doesn't quite have the full experience or required expertise, if the person is embraced by the organization and considered "one of us," he or she will get the support needed to get the job done well.

The Heart of the Matter

Making career decisions and hiring decisions are two sides of the same coin. Think of it this way: When a company hires a new professional, it's like an organ being transplanted into a body.

To the extent that the body is receptive to the organ and comfortable with the fit, the connective tissue grows and the organ becomes integral to the functioning of the body. In a company, this is when relationships take hold and internal people become champions for the person's success.

When the fit is bad, however, antibodies attack and the body rejects the organ. In business, this happens when off-handed comments like "he just doesn't get it" are thrown around, or the person is excluded from key meetings, or subordinates circumvent a new manager and go to the old one instead.

The polling organization Gallup has done millions of workplace interviews and surveys to come up with some fascinating insights that tie this all together. Gallup has found that an employee's job satisfaction is the key determinant of their happiness and their effectiveness inside the organization.

And job satisfaction itself can be boiled down to one question, according to Gallup's research: "Do you have a best friend at work?" The answer to this single question correlates to an individual's happiness with his or her job.

This is because the conditions that have to be in place for an affirmative answer to the question -- an environment of trust, a person or people with whom you enjoy spending time, feeling at home in the workplace, relationships that nourish you -- are the underlying causes of job satisfaction.

Three Key Questions

In thinking back to the advice I gave Phil Kent, I remember suggesting three questions that he consider to figure out the people equation:

  • "Do you like and respect the people with whom you would work on a day-to-day basis?"

  • "Is the environment and culture one in which you can truly be yourself?"

  • "When you consider the senior-most leadership of the organization, do you aspire to become like them one day?"

With "yes" answers to all three questions, Phil was good to go. This worked for him, and it will hopefully work for you, both in your next big career turning point and your next big hiring decision.

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Banks slash fees, hope for more profits

If you slash fees, they will come.

Bank deposits, that is. And that's a philosophy increasingly gripping the banking industry as more and more banks look to attract depositors by offering free checking accounts and no-fee ATM service to consumers.

Given the increasingly competitive landscape - with high-yield online bank accounts stealing market share - retail banks have to fight tooth-and-nail to draw traffic to their stores. And that means innovative, consumer-friendly products.

But even a good strategy has some pitfalls, at least in the short term.


Tags: tooth-and-nail | no-fee | high-yield | gripping | depositors | Traffic | stores | stealing | Slash | SERVICE | retail | profits | philosophy | online | offering | landscape | increasingly | Fees | DEPOSITS | competitive | checking | attract | accounts

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Banks slash fees, hope for more profits

Shaheen Pasha,
CNNMoney.com staff writer

If you slash fees, they will come.

Bank deposits, that is. And that's a philosophy increasingly gripping the banking industry as more and more banks look to attract depositors by offering free checking accounts and no-fee ATM service to consumers.

Given the increasingly competitive landscape - with high-yield online bank accounts stealing market share - retail banks have to fight tooth-and-nail to draw traffic to their stores. And that means innovative, consumer-friendly products.

But even a good strategy has some pitfalls, at least in the short term.

"To some degree, there is a revenue hit from these kind of initiatives," said Madhavi Mantha, senior analyst at independent research and consulting firm Celent LLC. "But the whole goal, especially from free checking, is to gain deposit customers and that is financially more important than any hit they have from waiving fees."

And to that end, some banks are already seeing success.

Washington Mutual, for instance, recently touted its free checking initiatives at its investor day in Seattle. The company's free-checking program, which also eliminates fees for using out-of-network ATMs and gives customers 3 cents back for debit card signature purchases, was launched in March and has already resulted in 400,000 new checking accounts, executives said.

WaMu is hoping to open 1.2 million new checking accounts by the end of the year, said James Corcoran, president of WaMu's retail banking at the event.

Near-term challenges

TD Banknorth, however, is facing some challenges in the near term. The company launched its "Bank Freely" campaign in June, which eliminated fees for out-of-network ATM usage and refunds consumers any fees that other banks may charge them for using a TDBanknorth cards.

For consumers, that's about $4 in savings each time they use an out-of-network ATM but can add up to some hefty losses in income for the company.

"It's not an insignificant cost to the company," said Thomas Dyck, executive vice president of corporate marketing and small business at TDBanknorth, although he didn't provide exact figures.

But he added that TDBanknorth is willing to take the short-term hit to profitability because the initiative has "dramatically increased traffic in our branches and we've opened new accounts."

Still TDBanknorth recently warned that its third-quarter earnings would fall well below analysts' expectations, due in part to the fiercely competitive and increasingly expensive deposit environment. The bank also warned that fee income, which has helped banks offset some of the earnings lost to the higher interest rates they must pay on deposits, are also falling.

Fee income is made up collectively of items such as investments, insurance, account fees and sales on loans. ATM fees generally make up a relatively small portion of total fee income, analysts said.

But service charges on deposit accounts - such as fees related to maintenance of bank deposit accounts and ATM fees - have steadily grown over the last year, according to statistics from the FDIC.

In the first half of the year, service charges on deposit accounts climbed to $17.6 billion from $16.4 billion in the first half of 2005. And those fees accounted for roughly 19 percent of total non-interest income for the banking industry - up from about 15 percent in in the first half of 2005, according to the FDIC.

TDBanknorth's Dyck said the company couldn't break out how large a part of the company's income was derived from the waived ATM fees.

"It's certainly eating somewhat into income, but our entire position is around acquiring new customers," he added. "We're taking a longer term view about the whole issue."

Patience is a virtue

It is a strategy that will require some patience for most players, said Gerard Cassidy, managing director of equity research at RBC Capital

Cassidy said banks are counting on the likelihood that when customers open a deposit account, they will be also be inclined to develop other banking relationships in the future that will prove more profitable.

"Customers that have multiple products with banks are less likely to leave those banks," he said. "But if customers only use the bank for those sale-priced products and don't purchase other products" that could impact profitability down the road.

And that's why banks are going to have to be strategic if they plan to cut fees in order to draw consumers.

"It's not appropriate for every company," said Jackie Reeves, managing director at Ryan Beck. "The industry is extremely revenue challenged and they are looking for specific niche products to add on customers."

Commerce Bancorp, which long touted its free ATM services, has modified that policy in recent days. As of of this month, customers get up to 10 free withdrawals per month from non-Commerce machines, a company spokeswoman said.

Those who maintain a minimum daily checking account balance of $2,500 never pay a fee and are reimbursed for ATM surcharges from other banks. The company's no-fee ATM service helped the NJ-based bank expand into new markets.

For TDBanknorth, which recently purchased Hudson United Bancorp, cutting fees was also a strategic way to grow in a new market, Reeves said.

And PNC Financial's strategy was to encourage its current account-holders to consolidate multiple accounts with one PNC checking account by offering no-fee ATM services to those depositors with a minimum of $2,500 in their account.

"In the grand scheme of things, is this the right strategy for banks?" Reeves said. "That remains to be seen."

None of the analysts interviewed for this story own shares of the companies mentioned.

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Revealed: My 3 Dirt-Cheap Money Stocks

Dirt Cheap Money Stock #1: First Data

If you own a credit card or debit card or have ever wired money to a family member or friend, you've probably done business with this industry giant.

First Data [NYSE: FDC] is everywhere. The company's about to spin off powerhouse subsidiary Western Union to its shareholders -- but that's only one of many of its superb divisions whose fingerprint is worldwide.

And that's absolutely critical because China and India will fuel the company's growth as this industry leader digests a series of blockbuster acquisitions. That's about as close as you need to come to a "macro" economic prediction for this one to be a HUGE winner!


Tags: subsidiary | powerhouse | Dirt-Cheap | wired | superb | spin | shareholders | member | FINGERPRINT | everywhere | DIVISIONS | debit | CREDIT | business | Western | union | stock | revealed | India | data | China

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The No. 1 Fatal Flaw With Stock Research

A Motley Fool Inside Value Special Report

Here it is: You don't learn to invest in "stock college." And you sure don't learn it in boiler rooms or the rotting caverns of Wall Street.

That, my friend, is the No. 1 fatal flaw with 99% of what passes for stock research... and with most independent advisory newsletters, too.

Think about it: How do you get a cushy job on Wall Street? You go from prep school to college to business school and directly on to Goldman-Morgan-Merrill. That's right, the vast majority of the chaps that turn out this dreck have never even worked for a Main Street company, much less run one.

Sure, these guys talk about turnarounds, but have they ever turned a company around? Fat chance! They go on and on about quality management and corporate DNA, but have they ever worked for, much less run a large-scale organization? Hardly.

Well, that night at sea, I made a decision: Before I would try my hand at picking stocks or advising others, I would try my hand at business! And that's precisely what I did.

I came ashore and went straight to work. Before I was through, I served as a senior executive at corporations all over the world... from Southampton, England to Jeddah, Saudi Arabia to Vancouver, Canada.

Over much of that 30-plus-year career, I specialized in leading startups and turnarounds. The lessons I learned during those years still directly influence the stocks I recommend to you today.

You see, unlike other advisors, I've been there... done that. That's one of the biggest reasons I feel comfortable giving you investment advice that can profoundly affect your future.

So, does that mean I can promise you a fortune overnight...

Sadly, no. Nobody can. But here's what I can do. I can do the research. I can run the numbers. I can apply 30-plus years of business experience to helping you build real wealth over time.

What it does mean is this: I can help you make money in stocks.

Twice today, I showed you proof in a fancy graph -- how value stocks outperform growth stocks and the broader market. That's on average. That's buying a "basket" of value stocks.

But imagine how much better you could do if you had a team of experienced analysts who would spend hundreds of hours each month picking over that huge universe to find just the very best values -- here at home and abroad.

Finding stealth values for Inside Value members like Gretchen...

"Seeing that the Admiral was in charge of this ship was all I needed to know. I cannot think of a better leader or of a ship with so much promise to carry the Foolish mission of educating and enriching investors."
-- Gretchen, IV member

Bargains like MCI, which I recommended to my subscribers in August 2004. That's right, poor, unloved, beaten-down MCI. You may have heard that telecom giant Verizon recently agreed to buy out MCI -- at a significant premium to what my subscribers paid.

Does it take guts to buy a deep value stock like MCI. Sure, but having the full support of my Inside Value team behind you makes it a whole lot less stressful. And the rewards are out of this world. Which brings us to Investing Blunder No. 3.

Investing Blunder #3 -- Riding the Bench

If you remember just one thing from our discussion today, please remember this: Except in extremely rare situations, you MUST be invested in U.S. stocks. Period.

The U.S. stock market is by far the most powerful machine for building and defending your personal wealth this Earth has ever seen. And over the years, the stocks of U.S. companies have vastly outperformed all other asset classes.

And, yes, that includes gold... and real estate... and collectibles... bonds... and all other financial securities. If you want to get wealthy or just to stay there, you simply must be "in" the stock market.

And this is critical: Over the past 10 years, the S&P has returned on average 12% per year. But if you'd been out of the market on just the best 30 days during those 10 years, you'd have actually LOST money.

And nobody can predict when those days will be. Nobody. If somebody tells you he can, by all means show him the door at once!

Staying out of the market can wreck your wealth in 2006. And you MUST not do it.

Here's a better idea: I'll do the work for you

What I perhaps haven't made clear is just how easy it is. As a member, you'll receive 12 newsletter issues per year (you can read them online or in print -- your choice). Plus, you receive my mid-issue updates and special email bulletins.

But Inside Value is much more than an investment newsletter. It's The Motley Fool. It's an active community of smart investors.

At Inside Value, you can join me -- and your fellow members -- online in spirited discussions day and night. We can talk about the market, your favorite value picks, and those on my current watch list.

Perhaps it would be easier to let one of my subscribers explain the Inside Value experience:

"To all those awed by the caliber of posters
[in the Inside Value community], don't be.
Be inspired. Each and every person has a particular point
of view of the market and of any single company."
-- Simon, Inside Value member

Or, if you're not a talker like Simon, you can simply wait for your monthly newsletter to arrive in your mailbox with my latest value picks, watch list, and monthly commentaries.

Remember, with Inside Value, it's all up to you. Here's everything you get when you join :

  • 12 monthly issues of Inside Value
  • My 2 top value recommendations each month with all the facts, projections and in-depth analysis so you can decide if the stock is the right investment for you
  • A Watch List of companies that have great potential
  • Between-issue updates and alerts on current holdings

You'll also get:

  • FREE -- Your questions answered: By me, my team, and by a growing community of smart value investors
  • FREE -- Members-only access to a dynamic online network of smart investors like you -- exchanging ideas, sharing strategies, dissecting the market, and breaking down my latest picks
  • FREE -- Great extras, including special reports, interviews, features, recommended reading, and more

Here's an even better idea

You don't have to make any decisions today. That's right, respond to this email promotion today, and you can try out the complete Inside Value service for 30 days on me.

This way, you can profit from all the benefits enjoyed by full-fledged Inside Value members, and you won't pay a cent. There is absolutely no obligation or pressure to subscribe.

Now, you'll agree the risk is entirely mine. In return, you get the peace of mind that comes from avoiding the costly blunders (and deadly blow-ups) that threaten investors today -- and from owning stocks that offer long-term profit potential and a margin of safety.

Make 2006 the year you clobber the market!

Believe it or not, 2006 is already upon us. My sense is that it's going to be a make-or-break year for many investors. And frankly, I'm downright suspicious of the latest run-up, especially in low quality growth and story stocks. Careless investors could be in for a rude awakening.

Not you, however. Just by reading this Special Report, you've taken a critical step toward making 2006 the year you CRUSH the market. You're mere seconds away from making that happen -- a richer, brighter, safer and more secure future.

And remember, the entire first 30 days of Inside Value is on me. If you are not 100% convinced that I am making you more money (and that you're resting easier, too), you will not pay a cent. You really owe it to yourself to take me up on this one-time offer today.

Simply click on the big button below right now to get started.

To many more years of great investing,

Sphere: Related Content

Revealed: My 3 Dirt-Cheap Money Stocks

A Motley Fool Inside Value Special Report

Dirt Cheap Money Stock #1: First Data

If you own a credit card or debit card or have ever wired money to a family member or friend, you've probably done business with this industry giant.

First Data [NYSE: FDC] is everywhere. The company's about to spin off powerhouse subsidiary Western Union to its shareholders -- but that's only one of many of its superb divisions whose fingerprint is worldwide.

And that's absolutely critical because China and India will fuel the company's growth as this industry leader digests a series of blockbuster acquisitions. That's about as close as you need to come to a "macro" economic prediction for this one to be a HUGE winner!

FDC -- The Vitals

Intrinsic Value $56
Buy Below $45
Recent Price $46
Market Cap $35B
P/E Ratio 22.6
Dividend Yield 0.50%

Millions of dollars, except per share data. Source: CapitalIQ as of 06/01/06

But here's the kicker: First Data is a HUGE value at today's prices. Short-sighted investors have given you a rare opportunity to snatch up this cash machine CHEAP.

Dirt Cheap Money Stock #2:
Federated Investors

Killer asset management firms turn "earnings" into free cash -- best case, cash flow actually exceeds net income. That's the case with my No. 2 Dirt Cheap Money Stock -- Federated Investors [NYSE: FII].

It's true -- the now infamous market-timing scandals cost Federated dearly. The company admitted to over 100 cases of market timing and set aside millions in fourth-quarter earnings.

But that's how bargains are born. And why you can get a proven winner that's growing, both by gobbling up smaller companies and the asset management portfolios of larger companies, at fire-sale prices.

FII-- The Vitals

Intrinsic Value $44
Buy Below $35
Recent Price $32
Market Cap $3.48B
P/E Ratio 17.4
Dividend Yield 2.20%

Millions of dollars, except per share data. Source: CapitalIQ as of 06/01/06

And here's the best part of all -- Federated's high-margin equity assets continue to expand, which is the No. 1 reason why investors should be snapping up on this bargain.

Dirt Cheap Money Stock #3:
Lloyds TSB

The U.K.'s Lloyds TSB [NYSE: LYG] is a textbook turnaround story. The company has its hand in everything -- from asset management, retail banking, mortgages, and insurance to credit cards and international banking.

But leveraging relationships with its customers is management's top priority and Lloyds' ace in the hole. As we speak, CEO Eric Daniels is leading the charge to cross-sell credit cards, insurance, and other products to its retail customefrs.

LYG -- The Vitals

Intrinsic Value $44
Buy Below $34
Recent Price $38
Market Cap $54B
P/E Ratio 11.77
Dividend Yield 6.2%

Millions of dollars, except per share data. Source: CapitalIQ as of 06/01/06

Astute investors will grab Lloyds, locking in an amazing 6% dividend yield and huge potential for share appreciation.

All three of my Money Stocks are active Inside Value recommendations. You can buy any one of these stocks, or all three, with great confidence today. Do so and I fully expect you will outperform the market in 2006 and beyond.

Of course, what you've just enjoyed is a sample of the detailed analysis you'll receive each month along with your two market-beating value picks when you become an Inside Value member. In fact, it's as easy as reading the morning paper or surfing the web.

Now, you can get research like that delivered to your door or inbox!

To judge by my buy-below prices, you might think my profit "projections" for these 3 Dirt Cheap Money Stocks are modest. Especially compared to the 39,000% returns or "10 stocks poised to double" promised by other "advisors."

But before you jump to conclusions, carefully consider these two points:

First, my estimates are conservative... and I always bake in a comfortable margin of safety. That's how you avoid the landmines that inevitably bring down growth investors and the only way to protect and safely grow your wealth over time.

Second, it's flat-out impossible to consistently and safely earn the ridiculous returns these chaps promise without true insider information, which is illegal to trade on for one thing. And these guys don't have it, for another.

Again, the only way to safely and consistently beat the market is to buy and hold specific stocks that meet the criteria set forth by Ben Graham in his 1934 book.

I hope I don't sound like a broken record, but that's the investing "secret" I've been telling you about... the tried-and-true methodology passed down through Warren Buffett to Walter Schloss... to Peter Lynch... and finally to lifelong students like you and me.

But it's no secret! Would you believe there's even a name for this special type of stocks?

These are the market-killers represented in that chart I showed you earlier. So, you think they'd be like "needles in a haystack." In fact, there's a name for this special type of stocks and the savvy investors who buy them -- and it's a name you already know and have heard countless times today.

That name is value.

But what exactly is value? Well, contrary to popular belief, it's not the opposite of growth. Yes, value stocks typically pay dividends, unlike most growth stocks. And, true, these companies tend to generate steady earnings and cash flows.

However, a value stock can represent a slow grower or fast one. And it might surprise you to hear these companies can operate in any industry, including technology and biotech. But there are certain characteristics you MUST always insist on...

  1. A stock selling below the fair value of the company's underlying business.
  2. A stock temporarily out of favor or misunderstood.
  3. A stock selling at historically low multiples to earnings, sales, or cash flow.

Value is all of this but much more besides. More than anything, value investing means buying a margin of safety. Remember that chart that showed you how one type of stocks methodically turned $1,000 into $8 million?

Turns $1000 into $8,000,000

And that's why I call my service Inside Value. Because when you're a member, I pass on everything I've learned about value investing to you. And together we apply these time-tested principles in your quest to build the kind of immutable wealth reflected in that chart... safely.

Is it worth the trouble? I'm sure you'll agree it is.

And I bet that sounds like a club you'd like to join

I sure hope it does. But I realize this remarkable style of investing isn't for everyone. Some investors actually like the thrill of rolling the dice with their lifesavings. Others don't have the temperament to invest in individual stocks.

At least the second group I can understand -- though I hope they understand that their apprehension is costing them, especially when there is a service like Inside Value to take the guesswork out of investing and offer them all the support they need.

As for the first group, why they continue to put their financial futures in great peril seems a complete mystery. Or at least it was until that fateful night revealed to me...

Sphere: Related Content

One of These Blunders Could Cost You a Fortune in 2006...

A Motley Fool Inside Value Special Report

In fact, any number of investing blunders can ruin your year in 2006. That's why I keep a running list of these potentially fatal landmines taped to my computer monitor at all times -- to make certain my Inside Value subscribers are advised.

At last count, there were 10 of these portfolio-busting landmines (in fact, you can get full details on all 10 today. I'll rush you full access for FREE. Full details just ahead). But three in particular are so pernicious you must know about them right now.

Each one could cost you a fortufne in 2006. Here's a HUGE one...

Investing Blunder No. 1 -- Chasing the Rush

Investing in growth and story stocks is like playing roulette with your future. It's that simple. But here's what I really don't get: Any 11th grader with a passing familiarity with statistics can show you roulette is a sucker's game.

Same with growth investing. So, why do investors keep gambling their retirements, their dreams for the future, and their families' fortunes on growth stocks? Two reasons.

First, as in roulette, "growth investors" occasionally do get lucky and strike it rich. Just enough of them, in fact, to convince us that we can do it, too.

But it's a mirage! In fact, over meaningful periods, growth stocks vastly underperform the broader market. And so do growth investors. Just take a look at this chart... you have to see it to believe it.

Turns $1000 into $8,000,000

Just so we are 100% clear, let's translate that back into plain English:

If you'd invested $1,000 exclusively in the growth stocks in the Ibbotson universe, you'd have $800,000 today. You might think that's pretty decent.

But compare that to the $1.8 million you'd have if you'd simply bought the S&P 500 instead. And I bet you're REALLY curious about that third "bar" in my chart.

If you'd invested in this particular kind of "mystery" stocks (you'll hear all about these special market-crushers in a moment -- and how to find them), you'd have more than $8 million today!

But can you really find these unstoppable market-crushers? Yes, you can!

You know as well as I do that the surest way to get rich in the market is to consistently buy better stocks at better prices. Period. And these are the very opportunities you'll discover when you accept a free trial to Inside Value.

That's why my Inside Value research team and I spend hundreds of hours each month to bring you and your fellow subscribers two new recommendations fitting the strict criteria of the stocks represented in that chart.

And why, along with each recommendation, you get...

  • My detailed risk rating
  • My specific buy-below price
  • My rigorous estimate of intrinsic value (more on this ahead)

You never need to guess. When you are an Inside Value member, I tell you when to buy... and at what price. Plus, you get my detailed forward estimates and precise calculation of fair value (here at Inside Value, we call it "intrinsic" value). I even tell you when to sell.

That's how my Inside Value subscribers scored 50% profits, 64% profits, and 100% profits in just a few months!

Of course, not every Inside Value recommendation has performed so well, so quickly. After all, one of our primary goals is to safely protect your wealth -- not take silly risks with your future.

But good things happen to good companies when they trade a great prices. And that's precisely why my Inside Value subscribers managed to earn...

  • 102% profits on Omnicare in 13 months
  • 42% profits on First American in 15 months
  • 50% profits on MCI in 6 months

Do those returns sound good to you? Especially when you consider that we subjected all three to a strict criteria that assures us a generous margin of safety.

Then you're going to love my 3 Dirt Cheap Money Stocks revealed just ahead. But before we move on, let's take a look at one more reason growth investors "chase the rush." Because they've been sold a bill of goods, that's why.

Because they've been shafted by crooked Wall Street investment banks... by brokers who churn their portfolios... and by a financial media that couldn't care less about your wealth and well-being.

Those are just some of the reasons why chasing growth is Investing Blunder No. 1 and can wreck your wealth in 2006.

Investing Blunder #2 -- Churning and burning

Earlier, you saw an amazing graph demonstrating the awesome wealth-building power of U.S. stocks. And you're right to wonder:

How on Earth can anybody ever lose money in stocks over the long-term?

Great question -- but a lot of folks do. And you're 100% on the money to wonder why. In fact, there are just three ways I know it can be done...

  • Rolling the dice on a small number of losers
  • Jumping into and out of individual stocks
  • Trying to time the market

And it's no wonder investors do all three. After all, that's what the so-called professionals on Wall Street do. It's also why roughly 85% of all mutual funds can't keep pace with the market, either!

Even worse, this is how "investment advice" is peddled. You probably hear from "advisors" and gurus all the time, touting the next 20-bagger, space-age proprietary computer model, or inside information.

I imagine you also know that 99% of it is bunk! But what you may not realize is that there is one proven way to make money with stocks -- and it's no secret. Remember, the entire strategy was laid out for us in a book written way back in 1934.

That book is called Security Analysis and you can get it at your local library (though it is 770 pages of small print). And yet its "secrets" can lead you straight to that special kind of stock represented in the "$8 million bar" in that chart I showed you.

Of course, you don't have to read a 770-page book. Who has the time? Fortunately, there's a better solution, and it's called Inside Value. With it, you can ride the coattails of the world's greatest investors... in just minutes per week.

Now, for some actionable advice you can profit from today...

By now, I hope you have a notion to take a hard look at your portfolio, especially if you had a decent year in 2005. After all, a year-end rally is a perfect opportunity to shore up a portfolio built on a slippery slope.

In a moment, I'll tell you how you can get instant access to literally dozens of market-thumping value stocks on my Inside Value buy list, entirely without risk or obligation. In fact, you won't pay a cent.

And, of course, you're eager to discover Investing Blunder No. 3... not to mention The No. 1 Fatal Flaw in Most Stock Research. But first, it's time I revealed my 3 Dirt-Cheap Money Stocks. Here they are...

Sphere: Related Content

Three Deadly Investing Blunders You MUST Avoid in 2006:

A Motley Fool Inside Value Special Report

Executive Summary

Three common investing blunders threaten your financial security, beginning in early 2006. Consider all three carefully.

Because any ONE of them can shatter your dreams of long-term wealth and dash your hopes for a worry-free, financially secure future -- unless you take specific evasive action at once.

In fact, you've already taken the most critical first step. In the pages of this Special Report, I'll reveal what further steps you must take today to secure your wealth in 2006... and beyond.

Here's a brief overview of what you're about to discover.

  • How a time-tested investment strategy methodically turned a $1,000 investment into more than $8 million.
  • How 3 costly blunders threaten your wealth in 2006 and beyond, and how you can easily avoid all three.
  • 3 Dirt Cheap Money Stocks with blockbuster potential (revealed inside so you can start profiting this afternoon).

I'll also reveal a little-known, but incredibly powerful, secret I uncovered years ago. I call it, The No. 1 Fatal Flaw with Stock Research (and most advisory newsletters, too). Just hearing it may change the way you invest for life.

Finally, once you're convinced that I have indeed discovered the secret to building rock-solid wealth in most any market, you'll have the opportunity to join me and my handpicked team of analysts at Motley Fool Inside Value.

You'll even have the special opportunity to sample my complete Inside Value service FREE for 30 days, with zero obligation and no pressure whatsoever to join. But first things first... enjoy the Special Report you requested.

Introduction: How Bullet-Proof is Your Portfolio?

I'll be blunt. I don't mess with "bull or bear" market predictions, and I don't think you should either. But this is not a prediction. It's a plain and simple fact:

Mid 2006, U.S. stocks offer prudent investors darn-near ZERO margin of safety.

And that spells heartache for overzealous and reckless investors. If that sounds alarmist, I apologize.

I'm not trying to scare you, but to offer you an iron-clad opportunity to build a rock-solid fortress around your wealth in 2006 and change the way you invest for life.

Yes, you can profit in 2006 and beyond --
no matter what the market does

How can I be so sure? Because I have news for you... You don't have to make these investing blunders.

In fact, once you see them for what they are, you can easily avoid all three (plus a fistful of others that threaten your wealth right now) and begin methodically stockpiling a portfolio of stocks you can brag about.

Best of all, you can do it... and build enduring long-term wealth in the process... following a simple technique spelled out for you in a book published years before most of today's Wall Street hotshots were even born.

Intrigued? I sure was when I first heard that!

In this Special Report, I'll reveal that remarkably profitable technique. Plus the names of 3 Dirt Cheap Money Stocks I uncovered for you myself using this time-tested strategy, including...

  • My No. 1 cash machine for new investment right now. It's a transactions powerhouse poised to exploit the MASSIVE economic growth in China and India.
  • A venerable institution you know and trust but your broker won't tell you about. It offers an immutable margin of safety, uncommon profit potential, and a staggering 6.2% dividend.
  • The BEST way to play Wall Street -- an investing dynamo that's gobbling up smaller companies and asset management portfolios at fire sale prices. (A once-in-a-century special situation gets you into this one CHEAP!)

Make no mistake, you can add all three of my Dirt Cheap Money Stocks you're about to see to your portfolio this afternoon with extreme confidence.

And you'll soon understand why. Plus, how you can find other cash-machines just like them to protect and grow your wealth in 2006 and beyond.

Best of all, you'll learn why you won't need any black box, wiz-bang voodoo to do it. But rather a failsafe, timeless, and amazingly profitable strategy for building your wealth that's...

  • Surprisingly simple
  • Battle-tested in all types of markets
  • Backed up by 70-plus years of hard data

It's a plain-and-simple fact. This decades-old strategy led shrewd investors directly to...

  • Phillip Morris [NYSE: MO] for 189% profits
  • McDonald's [NYSE: MCD] for 141% profits
  • ConocoPhillips [NYSE: COP] for 103% profits

And believe it or not, that was in one single year... 2003! And 2006 will be no different -- huge winners are out there, and they'll make absolute fortunes for savvy investors.

Sound impossible? I'll prove it

Beginning with an amazing bar chart I created for you using three generations of Ibbotson data -- the very best data available anywhere. I'll even go one giant step further.

By the time you finish reading this Special Report, you'll know in your heart this is the one way to invest. Once you do, you'll have an opportunity to join an exclusive club of investors who are cashing in on the very "secrets" that amassed fortunes for...

  • Benjamin Graham
  • Warren Buffett
  • Peter Lynch

All three of these investing legends made fantastic fortunes for themselves, their families, and their investors. What may surprise you is that they did it following the very same stock-picking method you're about to discover in this report.

Of course, you'd love to join these legendary investors on the one-way street to safe and immutable wealth? Well, you can, beginning in the next few minutes... with the Special Report you're about to read. And the three deadly investing blunders you must avoid in 2006...

Sphere: Related Content

Breaking the cycle of payday loan 'trap'

Sue Kirchhoff,

Tellers at the North Carolina State Employees' Credit Union noticed a troubling change several years ago: The first people in line on payday were high-cost lenders, waiting to cash checks from credit union members.

A glance at the records showed thousands of credit union customers were turning to payday outlets for small loans to be repaid with their next paychecks. Such products typically carry annual fees of 300% to 1,000%. Many strapped borrowers repeatedly roll over the loans, sinking deeply into debt.

To wean its members from payday providers, the State Employees' Credit Union (SECU) in 2001 introduced a short-term loan that has a 12% annual interest rate, a maximum limit of $500, requires borrowers to repay via direct deposit of their paychecks and put 5% of loan proceeds in savings accounts. Each month, more than 40,000 people use the product, which has a maximum 31-day term. Overall, members have accumulated $10 million in savings accounts.

"We wanted to find a way to get our members out of this trap," says Jim Blaine, SECU president. "We have a couple of our vice presidents using it, a vice chancellor of a university. ... It's not just a poor person's product."

The SECU is one of a growing number of credit unions now offering products specifically designed to combat payday, or cash advance, lending, which soared in the 1990s even as the nation experienced record economic growth.

Payday lending has become a $40 billion annual business (in loan volume) with more than 22,000 U.S. outlets, according to the Community Financial Services Association of America, the industry's trade group. By comparison, Starbucks has 8,624 U.S. locations and McDonald's about 14,000.

Mainstream lenders were initially slow to react, but more than 1,000 of the 9,000 U.S. credit unions now have products designed as alternatives to payday loans, says Dan Mica, president of the Credit Union National Association. That includes the Prospera Credit Union in Appleton, Wis., which started a program in a Goodwill Industries thrift store last year after Prospera CEO Ken Eiden noticed people going from the store to a payday lender across the way. Eiden says Prospera has already lent $1 million via the product.

Obstacles to alternative loans

Still, there are obstacles to alternative loans. Credit union officials fret about the stigma of being labeled a payday lender, albeit a lower-cost one. The SECU's Blaine says his short-term loans are his most profitable product, but Mica says given the poor credit quality of borrowers, many are break-even or community-service products.

Federal Deposit Insurance Corp. Chairman Sheila Bair, while she was a professor at University of Massachusetts in 2005, wrote a paper suggesting one reason banks and credit unions may have held back from short-term lending was to avoid undercutting highly profitable, bounced-check protection programs that have become de facto payday protection for some customers — with similarly high fees.

And Yolanda McGill of North Carolina's Center for Responsible Lending worries regulators could view credit union competition as a solution in itself, making them less likely to clamp down on payday lenders. She also says the ultimate goal must be to get people out of the short-term loan trap.

In Oregon, regulators say it's not either-or. A state law pushed by consumer advocates that takes effect in mid-2007 puts a 36% annual cap on payday loans. In the meantime, officials are working with such non-profits as Our Oregon and credit unions to promote alternative loans, including putting informational fliers in food bank boxes.

"If all we do as regulators is say, 'We're going to cut back on this, cut back on that,' (high-cost lending) will pop up someplace else," says Cory Streisinger, director of the Oregon Department of Consumer and Business Services. "We want to say, 'Here are some other options.' "

The effort has helped Ruby Stoker, 36, of Junction City, Ore. She and her husband, Ronald, got into trouble after taking out an $800 payday loan that, in a matter of months, morphed into four loans with an overall balance of $2,200. Stoker, who was carrying some loans with annual fees of 800%, now has a 13% credit union loan with a stretched-out repayment plan.

"They don't even do a credit check. They just use your paycheck. ... You're done in 10 or 15 minutes," Stoker says. "We're both graduates from college," adds Stoker. "It's not (that) you wake up in the morning and say, 'Let's go get ourselves into debt and bury ourselves to the point where we have to make a choice between paying the rent and eating.' "

The country has a long history of high-cost lending. There are a variety of theories for the recent growth, from banking deregulation to savvy marketing and consumers' desire for convenience. Mica expects there will soon be more than 40,000 payday outlets.

A typical payday product might be a two-week loan for $200 with a $30 fee, which translates into an effective annual percentage rate of 390%. Lenders provide immediate cash in return for a postdated check for the loan plus the fee, often with no background credit analysis.

Steven Schlein, spokesman for the Community Financial Services Association, says that borrowers often choose payday lenders to avoid high bounced-check or credit-card late fees from mainstream lenders, which can be as pricey as some of their products on an annual basis. He said the industry hasn't felt much impact from the credit union products.

"Only a few credit unions to our knowledge are offering two-week loans at low denominations," Schlein says. "We encourage them to. We're an entrepreneurial business who operates in a free market."

Research cited by Schlein's group and other analysts indicates many payday customers are repeat borrowers. For example, the Washington State Department of Financial Institutions, based on a voluntary survey of 66% of the state's payday lenders, found about half of borrowers took out six or more loans in 2004 and 25% took out a dozen or more.

States are cracking down on payday lenders, imposing fee caps and limits on the number of loans a borrower can have. The Department of Defense wants a 36% annual limit, given huge problems with payday lending near military bases.

Lenders, in response, are finding ways around the tougher rules. In Oregon, some payday firms have applied to switch to a different form of charter to circumvent the new law. State officials may also have to ask the Legislature for action to regulate Internet sales of payday loans.

Credit unions face challenges

The Filene Research Institute is working with credit unions in Ohio, Maryland and Wisconsin to design alternative loans and will expand into 10 more states next year. It is also encouraging credit unions to offer check cashing, international wire transfer and other services now offered by high-cost firms, along with credit counseling.

"Payday lenders stepped in and built a niche very nicely, but very expensively," says Lois Kitsch of the Filene Research Institute. "Credit unions have a very difficult time ... because they have a very real problem lending to get people from paycheck to paycheck."

JoAnn Johnson, chair of the National Credit Union Administration, says regulators support the efforts. Some consumer advocates, while applauding the moves, say credit unions have been slow to meet the needs of their borrowers, especially given their tax-exempt status.

"Their mission for being created was primarily ... to serve people of modest means. The larger ones have gotten off track," says John Taylor of the National Community Reinvestment Coalition, who argues credit unions should be subject to federal rules requiring banks to reach out to underserved areas.

Banks are making some moves into the area. James Ballentine, director of community and economic development at the American Bankers Association, says there may be more movement once several banks get going and build data on "whether you're really going to be chasing people down for $200."

SECU's Blaine dismisses talk that the products are financial losers.

"This is the most profitable loan product that we offer. That's the first myth that you'll hear other lenders offer," Blaine says.

Blaine has a PowerPoint presentation showing that at a 12% interest rate and 4% default rate, the SECU makes a healthy 2% on its cash advances. In reality, he says, the default rate is far less. "We don't put that in there because people don't believe it."

With 40,000 people using the program monthly, the SECU became the largest payday lender in the state. It modified the program in 2003 to require that 5% of loan proceeds go into savings. The idea is that after 18 months, borrowers will set aside enough to pay off the loan.

Ora Houston, 50, of Trotwood, Ohio, was in such bad financial shape several years ago she was even turned down by a payday lender. She tried the Wright-Patt Credit Union, which has a payday alternative, and got the $250 she needed. "I was about to lose everything, totally everything. I went to a lot of financial institutions, and they turned me away," she says.

Doug Fecher, CEO of Wright-Patt, says Houston got a loan requiring little in the way of a credit check and carrying a $35 annual fee. By reporting her payments, Wright-Patt helped Houston build a credit score and secure a $1,000, no-fee line of credit.

Counseling's not 'preachy'

In Appleton, Eiden's Goodwill product charges a $9.90 fee per $100, which translates into a more than 200% annual rate. After the third loan, borrowers get a voucher for free counseling and opportunities to consolidate and pay off previous loans. The program offers check cashing, money wire transfer and other services. Five dollars of the $9.90 fee covers defaults.

"You can't be preachy. After having established a rapport with (borrowers), we try to talk to them about how their financial futures could be different," Eiden says.

About half his borrowers should be able to get on a better footing, Eiden says. Others have chronic problems and may be surviving on Social Security or disability payments. He is working with area social service agencies. For example, some borrowers who were taking out payday loans for prescriptions are going to a free clinic.

Asked whether demand for his product will wane given North Carolina's crackdown on payday outlets, Blaine gives an emphatic "no."

"People are so embarrassed to talk about their finances, they think, 'I'm the only one that ever had a late payment,' " Blaine said. "It's not an exception. The normal thing is living payday to payday."

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