Top Finance Blog

People are selfish; let’s get that out of the way first. It’s a tough economic environment we’re dealing with these days. On the one hand unemployment is still sitting around 9.5% throughout the country. On the other, both state and federal governments are being accused of either spending too much money or looking to cut programs people like and don’t want touched.

Yesterday it was announced that the Pentagon was going to be closing one of their facilities in Virginia which was going to result in the loss of somewhere between 2,000 and 3,000 jobs. Their point was that they were trying to be more efficient in trying to help their budget by letting this particular project go. Within 24 hours politicians and local residents started to rail against the government saying that it wasn’t well thought out and that it would hurt the area as far as employment goes. In other words, what they believe is that the federal government should cut spending, just not in their area.

I live in New York State. Our government has had financial issues for the last couple of years because our states financial status is tied in with Wall Street. The governor of this state has come up with a lot of recommendations for both raising revenue and cutting expenses. As you can imagine, he has been vilified from both sides of the aisle and from both state and local politicians. What he hasn’t gotten are any other recommendations or proposals for how to handle many of these things. There have been a lot of groups which have come up with commercials against the governor or this or that, but not a single one offering a solution. It’s always easy to be a naysayer, but when someone needs real solutions people would rather keep their mouths shut and blame someone else.

California is another state that’s been in major financial distress. The governor of that state has been fighting with the state legislature for all types of changes with the idea of addressing some of the financial issues. It’s not a matter of who’s right and who’s wrong, but it is a matter that says someone has to do something to try to help the state. Raising tuition 55% at the same time that insurance companies want to raise their insurance rates as much as 90% doesn’t help anybody. California also wants to cut a lot of jobs, but of course nobody wants those jobs to be cut because everybody wants to use government assistance as much as possible.

Unfortunately, you can’t always have it both ways. There are things I wish that the government would address and either eliminate or add to. But I know that everything costs money, which means you either have to get rid of something else, add something else, or just stick with the status quo. Doing nothing is actually doing something, and it allows everybody to be mad. Governments walk a fine line when they allow this type of thing to happen, and I’m of the opinion that when you decided to run for an office so that you could become a leader for the people, you need to take that responsibility and do something that is going to affect positive change even if it going to hurt for the short term.

I’m not saying we don’t have the right to criticize the government, because I criticize it all the time. What I am saying is that constructive criticism is what’s needed, not knee-jerk reactions to things you want to protect at any cost.

It’s about time. In new legislation geared towards protection for people with credit card debt, the Federal Trade Commission (FTC) also added some protections for people from debt consolidation agencies.

The most sweeping part of the legislation is that debt consolidation companies can no longer collect money up front before they start helping you. Here’s a direct quote:

“At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars,” Chairman Jon Leibowitz said. “This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.”

Here’s how it’s always worked. Debt consolidation companies get you in, figure out you’re in trouble, and tell you they’re going to work it out for you. For a fee, they will “contact” all your creditors and get them to work with you on payment plans. You pay them a monthly fee, which helps build up the pool of money and they help you pay your bills.

What 99.7% (my calculation) do instead is collect your money and make nary a phone call. You start getting collection notices, phone calls, and threats of being sued. They’ll wait as long as 18 months before doing something. Then they call all of your creditors and work out a deal where they may pay 50% or less of your balance that’s owed to close the account. You end up getting a notice saying it was taken care of, but that the account was “closed by grantor”, which is a negative that sits on your credit report for 7 years. They end up saving you money long term, with your credit trashed, and they get a percentage of the savings, which they’ve been squirreling away. So, you’re out of debt, but you have no credit, and you got hit with a bill by the company on the front and back.

This legislation kicks in on October 27th; not sure why they picked such a strange date, but it’s better than never. There are some provisions that kick in on September 27th as well; once again, strange date. Actually, this information is all from their site, so it’s possible that one of these days is a typo. No matter, since we know it’s coming. Here are some specific rules they’ve indicated:

* require debt relief companies to make specific disclosures to consumers;

* prohibit them from making misrepresentations;

* extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising

* the debt relief service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts;

* there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it;

* the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider;

* the dedicated account is maintained at an insured financial institution;

* the consumer owns the funds (including any interest accrued);

* the consumer can withdraw the funds at any time without penalty;

* the provider does not own or control or have any affiliation with the company administering the account;

* the provider does not exchange any referral fees with the company administering the account.

Talk about an interesting dilemma. Everyone knows about the California housing industry, which of course also ties in with unemployment and the rest of the problems California is having with their finances. A big part of the housing industry’s problem is the high foreclosure rates that are still occurring, even as a portion of their housing market is starting to recover.

It turns out the foreclosure rate could be much higher than it is. Many people have stopped paying their mortgage because they just can’t afford the payments, or because the worth of their homes at this juncture doesn’t seem to make it worthwhile. By all rights, banks could foreclose upon those homes.

But a funny thing is happening. Banks aren’t foreclosing on all the homes that are out there. Some people haven’t made payments in more than 2 years, but haven’t heard much beyond the normal mailing of the bill. What’s going on?

Could be a number of things. One, the rate of foreclosures is so high that banks can’t keep up with them all. Two, banks are worried that by foreclosing on so many homes the values of those homes will tank like they did in Florida. Three, many banks are so far behind on loan modification processes that they don’t know what to do about people who had stopped paying yet were waiting to hear whether they qualified for those modifications. Four, the state has been working on legislation that may have already passed limiting foreclosures in some fashion. And five, the state just received $700 million from the federal government, which is mainly to help homeowners who haven’t been able to make their mortgage payments, and if banks foreclose on those people they lose out on any money that the homeowners they bounced might have received.

All of this makes for a very interesting mix, one that seems like it’s going to take at least another 2 years just to get back to even, whatever that turns out to be. California is a mess; let’s hope for their sake that housing pulls out of it before something else happens.

A recent story on CNN Money mentioned that states could face a $12 billion shortfall if Congress doesn’t pass a bill to help them out. Four states in particular will see shortfalls in money of more than $1 billion each.

While this is a scary figure, especially with the way the economy is working, it seems no one has attempted to explain why there’s such problems with Medicaid. I’m going to answer that question for you, or at least give you an idea of what states are up against, and I’m going to base it on New York, the state where I live.

First off, the problem certainly isn’t how medical entities are paid. To use the easiest term most people will understand, Medicaid pays on a fee schedule. This means they pay a certain amount for procedures and services. That’s pretty much how most insurance companies pay claims, just so you know. In Medicaid’s case, many payment amounts haven’t changed in more than 30 years. However, if you’re a hospital in New York, you must accept both Medicare and Medicaid patients, so hospitals end up losing a lot of money because of Medicaid.

About 15 years ago or more the state added a new feature where they threw in co-pay amounts that patients “had” to pay. That money was taken from the payments medical facilities received, since now they were supposed to get it from the patients. However, that came with a caveat; if a patient told you they couldn’t pay, you had to write it off and you couldn’t bill the patient for the balance. And you were supposed to ask them while they were in the hospital, or any other medical facility. The co-pay amount for the most part is only $3, but multiply that times a couple of million people who probably go for services more than once a year and it all adds up. Anyway, this part is just to show that states aren’t losing money because they’re paying out too much to hospitals or physicians.

What’s the problem then? The problem is in administering the program. It’s unwieldy and unmanageable, both because of the way the state runs it and because of the people who are on Medicaid, though for the second, probably not for the reasons you might expect.

In New York, every county has its own Medicaid program. The way Medicare is run is that the federal government contracts with different companies throughout the country to administer the program in certain states. Medicare is considered a federal program, whereas Medicaid is considered a state program. So, every county has to have people to staff those offices. And sometimes, there are multiple offices handling different aspects of each program. So, there’s a lot of duplication of bodies, which means money gets eaten up fairly quickly.

What the state has allowed are Medicaid HMOs, which seems like a good idea except for a problem I’m going to mention now, and a problem I’ll mention later. The “now” issue is that those insurance companies running Medicaid HMOs must have at least one competing insurance company in the state. Otherwise, subscribers don’t have to select a HMO at all, which almost renders them useless in some counties. The reason there aren’t many HMOs is because the money they’re given to try to handle claims is pretty low, and the best a HMO can hope for is that there’s a significant number of people they’re paid for that decide not to use any services. That doesn’t happen often, however.

Medicaid also funds programs through the Department of Social Services whenever they see a need for something extra special. For instance, in Wayne County, there’s a special program for migrant workers that travel into the area to help pick crops, yet don’t speak English. In Westchester County, there are special programs that pay for specific types of things such as psych services or chemotherapy, especially if you’re an undocumented worker. Payments still aren’t great, but it all takes a drain on the money available.

Now, let’s talk briefly about the subscribers. Something not generally known is that probably half of Medicaid subscribers are fairly transient; they move around all the time for whatever reason. And they don’t tell the DSS that they’ve moved, which is problematic in the first place, and then gets worse when they move to another county, because there’s no true state system where someone can just go in and update one system and have everything working great. Subscribers are told they need to go to the local office and do it all over again; that’s an ugly way to do things.

Subscribers are encouraged to sign up for Medicaid HMOs in those counties that have multiples, but they’re also told that they can drop it at any time and sign up with another one. That’s an ugly process as well, as it takes a lot of manpower hours switching people all the time. And when it comes to authorizing services, it can get uglier still.

There’s more detail I could get into, but I’ll stop here. This should be enough information to have a basic understanding of why Medicaid programs might be in trouble. What could states do? I’ll offer only this one bit of advice; standardize the process and have fewer outside offices, which will reduce the number of people needed to do everything, and potentially reduce the amount of paperwork. States have to be willing to move Medicaid services into the 21st century.

Last December I wrote on Intel being sued by the Federal Trade Commission based on the sweetheart deal Dell was getting for using their chips in Dell computers. The suit against Intel is about to commence, but it seems Dell did a proactive move and decided to settle with the Securities and Exchange Commission to the tune of $100 million in fines. The reason for this is because they reported all that extra money coming from Intel as revenue, which of course helped improve their bottom line for investors, and that’s a major no-no. How any of this affects Intel long term no one can say, but this is the kind of corporate ugliness that makes us not trust large companies.

In April, I wrote about black farmers finally getting a deal with the government to pay them for long standing abuses that pretty much wrecked their lives. The last remaining piece of legislation was to pass the bill to pay for it. In May, I wrote a follow up to that, saying that they still hadn’t been paid, and that if Congress didn’t get a move on that the deal would expire and open the government back up to multiple individual lawsuits.

It seems that the government missed another opportunity to provide funding for this lawsuit when the house passed a war supplemental bill last week. The provision was in there, but it was scrapped to get the bill passed. I hate calling anyone out, but it seems one party in particular, in the Senate, is really against paying any money to black farmers; they sometimes go by the moniker “party of no”. The Senate minority leader is saying all the right things, yet it remains locked up and the bill will probably die without ever being voted on. I thank Tim for bringing me up to speed on the issue, since it didn’t make the headlines.

Many states are trying to work their way out of what’s been deemed a housing industry crisis. To say that things have been bad across the country would be an understatement. In 2009, the top housing markets were those that weren’t in a freefall, including my home area of Syracuse, which was flat yet considered as the 2nd best in the country.

Whether or not you believe unemployment has improved (it hasn’t), things have definitely stabilized in a fashion. And in some states there are plenty of houses that are available for purchase. And yet, not including places like Chicago, which has rebounded fairly well, those homes aren’t being purchased, and home ownership isn’t growing, or at least not growing enough to overcome the bad times.

What’s the problem? In my opinion, it’s all in the hands of the banking industry. True, I blame the banking industry for causing the problem in the first place, and now I’m blaming them for keeping it down. There are many reasons I’m blaming them; let’s take a look.

1. Not giving up the loans. I understand that banks have had a hard go of it, but many of them have gone too far in the other direction and are looking to loan people money who don’t really need it. When rich people with credit scores over 800 can’t get home loans, you know that banks have become skittish on who they want to loan money to.

2. Bank closings. So far, 102 banks have been closed in 2010; this is about 45 more banks than were closed at this point last year. Many more banks are projected to be closed this year. Many of the banks that have been closed are in states that are still having major problems with housing. As other banks are taking over, they’re being a lot more judgmental in who they’re going to give loans to.

3. Banks holding on to foreclosed homes. In some states that have had high foreclosure rates, banks are artificially trying to keep home prices up by keeping some homes off the market. Picking and choosing which homes they want to put on the market means there are many homes that someone might want that they can’t buy. Florida has many homes at low prices, and many of those homes are starting to be snapped up. It’s better for everyone if they can buy whatever home they want, even if the prices are lower, because it helps stimulate the entire industry. Banks, let up on the foreclosed properties.

4. Not processing loans quicker. The reason the federal government had to extend the time for people to finish qualifying for loan modifications is because banks could care less whether people qualify for it or not. They got called out for not processing more of these loans in a timely matter, but the truth is that it didn’t work in their favor, or at least they didn’t perceive that it did, so they didn’t have any reason to try.

That’s enough for the moment. To be somewhat fair, banks do have to change up their criteria a little bit. Some people who purchased homes before weren’t really qualified to buy those homes at the prices they got them for. Low interest rates don’t protect banks from people with risky credit, and that’s understood as well. However, as long as banks in areas with depressed housing markets won’t work with brokers and consumers to try to get them into homes, those markets will continue to suffer, which means the entire country will suffer along with them.

There was an interesting news story on CNN last week. Actually, it wasn’t quite news, more of a feature. It was called Confessions of Former Debt Collectors, and at least half of them stated that they knew that they were breaking the law with some of their collection practices. Yet they knew that they had to break those laws to keep up with the quotas set by the company’s they worked for to not only keep their jobs, but to earn monthly bonuses.

I had two takes on the story. One was “duh”, because I know how collection agencies work. I used to hire collection agencies for some of the hospitals I worked for in the past, and all of them would say that they would follow all the rules and never put the hospital in a bad light. Then we would have someone calling the CEO complaining about something someone said to them on the phone, and of course the CEO would call me and I’d have to figure out a way to deal with it.

Over the years, here and there I’ve had to deal with a collection call as well. Lucky for me, I know the rules of the Fair Debt Collection Practices Act, and would always make sure they knew I knew the rules up front so that they wouldn’t dare try any of that stuff on me. Of course, it also helps to ask them to hold, wait for about a minute, then tell them that you’re recording the conversation you’re having with them, whether you are or not. One, it’s a great tactic, and two, in some states if you were recording someone you have to tell them that (who remembers Linda Tripp?).

The other side of some of what these people had to say are the threats that they ended up getting from people who said they’d track them down and kill them. While I don’t ever condone that type of thing, it seems like these people wanted to violate what I call the rule of consequence; don’t do it if you’re not ready to deal with the consequences of your action.

Here’s the thing. Collection agencies are needed to help companies recover money from debtors who have refused to pay. However, most companies will write off that debt and collect insurance on it, so don’t feel totally sorry for them. Not only that, but they then sell the debt to someone else, which means they’re not getting any more money from it. Now, you can be sued, and it’s always best to try to set up some kind of payment arrangement because it looks better on your credit report. But no one has the right to be intimidated, lied to, or threatened to collect money that the original owner has already written off the books.

If you’re ever threatened, call your state’s attorney general and complain. You might even end up getting money from the collection agencies, but better yet, you help change the culture of the industry and force them to follow the rules set by the federal government… just like everyone else.