Research continues to dribble in that financial education does not help people make better financial decisions.

Lauren Willis in Against Financial Literacy Education puts it this way:

“The gulf between the literacy levels of most Americans and that required to assess the plethora of credit, insurance, and investment products sold today—and new products as they are invented tomorrow—cannot realistically be bridged. Educators would need to impart a sophisticated understanding of finance because rules of thumb are not useful for decisions about complex products in a volatile market. Further, high financial literacy can be necessary for good financial decision making, but is not sufficient; heuristics, biases, and emotional coping mechanisms that interfere with welfare-enhancing personal finance behaviors are unlikely to be eradicated through education, particularly in a dynamic market. To the contrary, the advantage in resources with which to reach consumers that financial services firms enjoy puts firms in a better pos ition to capitalize on decision making biases than educators who seek to train consumers out of them.”

In other words, there is an arms race between financial complexity and financial education with financial education always trailing.  And even when financial education is sufficient our cognitive biases get in the way.  Financial education enshrines a myth about consumer self-reliance that then allows those same consumers to be blamed for their incompetence and greed when everything goes wrong.

Willis observes:

“That [the financial] industry supports financial literacy education is, while indirect, perhaps the strongest evidence that this education is not effective in improving consumer financial decisions”

If this research continues to hold up a radical restructuring of how financial products are distributed is needed.  One solution that comes to mind is the drug model.  Basic vanilla products that are easy to understand could be sold directly to the public (think over the counter drugs)..  However, more complicated products could only be bought after getting a prescription from a financial planner who has a fiduciary duty towards the client.  The educational standards for these planners would need to be raised to the equivalent level of an MD to give them a chance of seeing through the smoke screens financial product manufacturers would inevitably create.

Other Sources:

• Van Rooij, Lusardi and Alessie (2007)
• Mandel (2009)
• Bernheim, Garrett and Maki

Refinancing

If you have a loan that is owned by Fannie Mae or Freddie Mac and your mortgage is for more than 80% and less than 105% of the current home value, you will be allowed to refinance as if it was a conforming loan (i.e., 20% down).  This will be very helpful if mortgage rates are significantly below your existing mortgage’s rate.

Loan Modification

You may qualify for a mortgage modification if all below are true

• You occupy your house as your primary residence
• Your monthly mortgage payment is greater than 31% and less than 43% of your monthly gross income
• Your loan does not exceed current Fannie Mae and Freddie Mac loan limits ($417K in most areas).

Final eligibility will be determined by your mortgage lender based on your financial situation.  To me this means it is likely that if the bank thinks you can pay without the modification, they probably will not offer it.

If you qualify the mortgage payment will be reduced to 31% of your monthly gross income for five years and for each year you stay current on your payments (for the first five years), the government will pay an additional $1,000 of principal on the loan.

Complete eligibility details on both programs will be announced on March 4th when the programs starts.

Job losses haven’t gotten as bad as the early eighties yet, but it looks like we will make a go of it in a few months.

In the following graph the dotted lines are maximum and minimum historical production values during recessions post world war II.

Housing still has more to fall.

1. Avoid guest list bloat.
2. Ask for wedding help instead of wedding gifts.
3. Have the ceremony at home, or outdoors.
4. Do the catering yourself, or hire a family-owned restaurant.
5. Go minimal with the flowers.
6. Choose very personal books for groomsmen/bridesmaid gifts.
7. Make your own invitations.
8. Use a good home stereo system for the reception music.
9. Have “vendor cards” in exchange for reduced rates.
10. Contact the local university for musical accompaniment needs.
11. Patiently shop for any decoration needs.
12. If you’re getting married in the church you’re a member of, ask the ladies’ auxiliary for help.
13. Buy dresses together when a sale is on.
14. Rent tuxedos as a group.
15. Make a simple honeymoon, not an ostentatious one.
16. Involve your closest friends and family in the preparation.
17. Plan, plan, plan.
18. Don’t stress.