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Load Up the Pantry

Wall Street Journal by Brett Arends Wednesday, April 23, 2008

I don’t want to alarm anybody, but maybe it’s time for Americans to start stockpiling food.

No, this is not a drill.

You’ve seen the TV footage of food riots in parts of the developing world. Yes, they’re a long way away from the U.S. But most foodstuffs operate in a global market. When the cost of wheat soars in Asia, it will do the same here.

Reality: Food prices are already rising here much faster than the returns you are likely to get from keeping your money in a bank or money-market fund. And there are very good reasons to believe prices on the shelves are about to start rising a lot faster.

“Load up the pantry,” says Manu Daftary, one of Wall Street’s top investors and the manager of the Quaker Strategic Growth mutual fund. “I think prices are going higher. People are too complacent. They think it isn’t going to happen here. But I don’t know how the food companies can absorb higher costs.” (Full disclosure: I am an investor in Quaker Strategic)

Stocking up on food may not replace your long-term investments, but it may make a sensible home for some of your shorter-term cash. Do the math. If you keep your standby cash in a money-market fund you’ll be lucky to get a 2.5% interest rate. Even the best one-year certificate of deposit you can find is only going to pay you about 4.1%, according to Bankrate.com. And those yields are before tax.

Meanwhile the most recent government data shows food inflation for the average American household is now running at 4.5% a year.

And some prices are rising even more quickly. The latest data show cereal prices rising by more than 8% a year. Both flour and rice are up more than 13%. Milk, cheese, bananas and even peanut butter: They’re all up by more than 10%. Eggs have rocketed up 30% in a year. Ground beef prices are up 4.8% and chicken by 5.4%.

These are trends that have been in place for some time.

And if you are hoping they will pass, here’s the bad news: They may actually accelerate.

The reason? The prices of many underlying raw materials have risen much more quickly still. Wheat prices, for example, have roughly tripled in the past three years.

Sooner or later, the food companies are going to have to pass those costs on. Kraft saw its raw material costs soar by about $1.25 billion last year, squeezing profit margins. The company recently warned that higher prices are here to stay. Last month the chief executive of General Mills, Kendall Powell, made a similar point.

The main reason for rising prices, of course, is the surge in demand from China and India. Hundreds of millions of people are joining the middle class each year, and that means they want to eat more and better food.

A secondary reason has been the growing demand for ethanol as a fuel additive. That’s soaking up some of the corn supply.

You can’t easily stock up on perishables like eggs or milk. But other products will keep. Among them: Dried pasta, rice, cereals, and cans of everything from tuna fish to fruit and vegetables. The kicker: You should also save money by buying them in bulk.

If this seems a stretch, ponder this: The emerging bull market in agricultural products is following in the footsteps of oil. A few years ago, many Americans hoped $2 gas was a temporary spike. Now it’s the rosy memory of a bygone age.

The good news is that it’s easier to store Cap’n Crunch or cans of Starkist in your home than it is to store lots of gasoline. Safer, too.

Write to Brett Arends at brett.arends@wsj.com. Copyrighted, Dow Jones & Company, Inc. All rights reserved.

Did you ever click on a banner ad advertising low mortgage rates? Did you ever submit an online mortgage inquiry?

[Tuesday, April 22 on MSNBC.COM] – LendingTree has told its customers that former employees helped unauthorized mortgage lenders hack into its systems and steal customer information from 2006 to 2008.

The incident reveals just how aggressive the mortgage loan business was during the height of the housing boom, and also raises fears for consumers who share their information with companies that help them shop around for the best deal. And it highlights what experts say is an often overlooked source of data theft — the inside job.

According to a letter sent to customers recently, former LendingTree LLC employees shared “confidential passwords” with lenders, who in turn used the login information to “access LendingTree’s customer loan request forms.”

The forms contained critical personal data, including names, addresses, Social Security numbers, income and employment information. The company said the lenders did not use the information to commit identity theft or fraud, but simply to “market their own mortgage loans to … customers.”

In connection with the incident, LendingTree, based in Charlotte, N.C., has filed lawsuits against three small California-based home loan companies.

A LendingTree spokeswoman said the company was not granting interviews to discuss the data theft. She would not say how many customers were affected nor how much data was stolen, but instead supplied a copy of the customer letter sent by the firm.

While LendingTree says in the letter it has no reason to suspect its consumers are at heightened risk for identity theft, it did suggest consumers obtain a free credit report and file a fraud alert with the nation’s credit bureaus.

Upon learning of the security breach, LendingTree says, it “promptly enhanced the security of our system.”

Given that data was accessed from 2006 to early 2008, it can be inferred that passwords used by former employees remained operational for months or even years after their employment was terminated, generally considered poor security practice, said identity theft expert Rob Douglas, editor of InsideIDTheft.info.

“This plays into everybody’s fear that this happens all the time,” Douglas said. “When consumers share their information with companies, they assume it ends up in other companies’ hands.”

One victim who received the LendingTree letter — but who requested anonymity — was annoyed that LendingTree offered no compensation for the trouble.

“Rather than offer a free credit report they suggest that I use my annual free credit report,” the consumer said, referring to the once-per-year free peek that consumers get at their report by visiting AnnualCreditReport.com.

In its letter, LendingTree includes a pamphlet called “Guide to Protecting Your Credit and Identity.” Consumers who obtain their credit report and see anything suspicious are told to “contact the credit bureau.”

Consumers who visit LendingTree expect their personal information to be shared with other companies. They are hoping LendingTree will help them find a mortgage firm with the best rate, and expect several companies to “bid” for the right to supply their home loan.

But in this incident, loan applications were viewed by unauthorized lenders, who used the information to market their own loan products, LendingTree said.

“We suggest that you remain vigilant by reviewing account statements and monitoring your credit reports for the next 24 months,” the letter says.

Freddie Mac Announces Foreclosure-Linked Grants

April 21, 2008 – Freddie Mac has announced $10.5 million in grants to 12 nonprofit housing counseling organizations for outreach, education, and foreclosure prevention efforts. The groups were selected for their abilities to educate and advise borrowers (especially subprime borrowers) about foreclosure options or help them obtain workouts from mortgage servicers, the government-sponsored enterprise said. The largest share of the funds will be administered through the Hope Now Alliance in grants totaling more than $6 million, of which approximately two-thirds is allocated for Hope Now’s counseling, operations, and outreach. Other organizations receiving grants of $500,000 or more from Freddie are: Center for Responsible Lending, $1 million; Neighborhood Assistance Corporation of America, $500,000; and Don’t Borrow Trouble, $500,000. Freddie said the grants are the result of the November settlement between the Office of Federal Housing Enterprise Oversight and former Freddie Mac chief executive Leland Brendsel. The GSE can be found online at http://www.freddiemac.com.

Fannie warns homeowners who walk away

Kenneth Harney – April 13, 2008 04:00 PDT Washington — The country’s two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing “walkaway” trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are “documented extenuating circumstances.” In those cases, the mortgage prohibition is for three years.

Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680.

Freddie Mac, Fannie’s rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers “to preserve our deficiency rights” where permitted under state law.

The walkaway trend is particularly noteworthy in former housing boom markets – including California, Florida and Nevada – where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments – even if they can afford to – may be throwing good money after bad.

A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage. One company promises that clients “will be able to live in (the) home for up to eight months with no mortgage payments,” after paying $895 for a customized plan. The same site says it will provide clients with “legal credit repair” to “improve your FICO scores.”

Another Web site claims that “your credit can be repaired and (you will) be able to purchase a house in as few as two years” – after paying a $495 fee. Still another company says walkaways can expect “up to one year living payment free” as the lender goes about filing for foreclosure. That company charges $995 for its how-to-do-it kit.

Fair Isaac Corp. of Minneapolis, developer of the FICO scores used in most mortgage transactions, is unhappy at any suggestion that a foreclosure could be minimized or wiped away in a short period of time. It’s scoring model counts foreclosure as a long-standing and severe event, nearly comparable with bankruptcy, with negative consequences for all forms of credit that walkaways might seek to obtain. That includes credit card applications, auto loans, student loans – and even insurance and employment.

FICO spokesman Craig Watts said that the impact of a foreclosure on an individual’s score depends heavily on the payment history, length and number of credit trade lines in a consumer’s file, but “it is always significant.”

Robin Stout Migala, consumer outreach manager for Freddie Mac, said in an interview that “there are so many bad reasons for walking away” from a home loan. Not only are borrowers’ credit standings wrecked – forcing them into excessively high interest rates on any credit they can manage to obtain. But they also face other potential problems, including federal income tax liabilities.

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala.

Many borrowers facing foreclosure today have endured serious financial crises, said Migala – loss of employment, loss of an income-earning spouse, medical issues, predatory loan terms – that led to their inability to make their mortgage payments.

When they apply for a loan from either Freddie Mac or Fannie Mae, she said, the standard application form asks whether they have ever experienced a foreclosure or handed over their deed in lieu of foreclosure.

If applicants check “yes,” the loan is immediately shifted to manual underwriting. Every piece of information is scrutinized by underwriters, who probe for the facts surrounding the loss of the house.

For borrowers who faced genuine financial hardships leading to foreclosure, underwriters are likely to be more sympathetic a few years down the road. But if you walk away, here’s the deal: Don’t expect to get a new home loan – certainly not one with favorable terms – for five to seven years.

That’s no matter what some promoter promised you online.