Fed Makes Last Interest Rate Cut in Series to Stimulate Economy

After seven months of interest rate cuts in a campaign to boost the sagging U.S. economy, the Federal Reserve cut a key interest rate yesterday and signaled this would be the last.

The Fed lowered the federal funds rate, the interest rate banks use when lending to each other, to 2 percent. The goal with this cut is to create lower borrowing costs for adjustable-rate mortgages, credit cards, or business loans, and to offer one more means to prevent the current economic downturn from extending.

In a statement issued with the cut, the Fed indicated this was potentially the last cut in the foreseeable future, but left open the possibility of further cuts if the economy continues to deteriorate. The cut comes at the same time that a new report indicated the economy grew at a small, but better than expected rate in the first quarter. The 0.6 percent annual rate growth, along with fiscal stimulus checks mailing this month, is influencing the Fed's restraint for the time being.

The risks from continued and prolonged interest rate cuts are significant, and important to weigh against the burgeoning economic problems. High inflation, caused by higher prices for food and energy, could raise expectations for future inflation, creating a self-fulfilling prophecy. Continuing to cut the interest rate could weaken the dollar further, and worsen inflation. Plus, continued lowering of rates could undermine the Fed's credibility as an authoritative source for fighting inflation and economic troubles.

Details about the higher prices for food and energy surfaced Thursday. The Commerce Department reported that consumer spending is up 0.4 percent, higher than forecasts. But inflation is responsible for much of this increased spending: without inflation, spending increased by 0.1 percent. The figure for consumer spending is important, as two-thirds of economic activity comes from consumers. Too big of a slowdown could push the country into a recession.

The interest rate cut is another bulwark against deepening economic worries, including the 1.1 percent drop in construction spending in March, a decrease lasting 23 straight months. Unemployment claims rose by 35,000 to 380,000 last week, almost double what economists expected. Unemployment and job losses are also expected to rise in April figures.

Washington Post Articles:

Fed Cuts and Signals Halt

Soaring prices for food, gas push consumer spending higher

Fed Releases Regional Economic Stats

(from April 22, 2008)

The so called Beige Book report of regional economic statistics was released by the Fed to reflect the overall economic health of the 12 Districts of the Federal Reserve, seemingly taking the "economic temperature" of the nation since the month of February. The news appears to support a weakening economy in 75% of the districts as housing starts have fallen to a 17-year low and foreclosure filings climbed 57%. The news on property values is also bleak as prices have fallen in many areas of the country and could be down by as much as 10% in some locations as the supply of homes for sale continues to outpace demand. Tightened lending guidelines, coupled with the declining credit quality of many loan applicants, means the pool of qualified buyers will continue to shrink dramatically. Overall consumer spending, the linchpin of economic activity in the U.S., has declined in response to the housing crisis as retailers nationwide have begun reporting slow to declining sales, in areas beyond that of the automotive industry, in over 80% of the districts.

The unemployment rate is 5.1% while the consumer price index (CPI) rose 4.00% with the core rate, which excludes food and energy, rising 2.4%. However anemic growth had been reported by the end of 2007, as overall growth had slowed from the brisk pace in the 3^rd quarter of 4.9% down to 0.6% by the 4^th quarter as both consumption as well as business spending had slowed decidedly. In response, the Fed has exercised a policy of monetary easing as they have brought the Fed Funds rate down to 2.25% from 4.25% and will be expected to cut another .25% from the rate at the next FOMC meeting on April 29^th-30^th.

Existing Home Sales Decline Again

Existing home sales dropped in March, yet another sign of a housing market spiraling downward and dragging the greater economy with it.

The 2 percent drop was the seventh decrease in eight months, according to the National Association of Realtors. The median price of a home also decreased to $200,700, a 7.7 percent drop from last year and the seventh consecutive year-over-year price drop.

In addition, the National Association of Realtors revealed a survey showing 18 percent of homes up for sale in March had negative equity. These homes, where the mortgage was larger than the value of the home, are either in foreclosure or in "short sale." In comparison, from 2002-2006 this amount of negative equity stayed around 3 percent.

Sales are falling as a result of increasing loan restrictions on the one hand, and the prospect of further price declines on the other. Defaults on subprime mortgage loans have led banks to tighten credit and borrowing rules, resulting in less people able to get mortgage loans. For those borrowers who can obtain loans, home values continue to decrease and savvy buyers are waiting until prices hit bottom.

The inventory of homes on the market keeps rising, causing prices to continue to drop. Unsold homes increased 1 percent in March to 4.06 million homes, representing a 9.9-month supply at the current sales pace. Rising foreclosures are pushing more homes on the market.

Existing-home sales make up around 85 percent of the U.S. housing market, and new-home sales make up the rest. Figures from the Commerce Department are expected later this week on sales of new homes, and a 13-year low is predicted. Decreasing overall sales are encouraging builders to stop construction and/or reduce prices. The amount of new homes initiated in March, 947,000, was the lowest in 17 years.

Different areas of the country are experiencing the drop in home sales differently. For March, sales were down 6.5 percent in the Midwest and 3.5 percent in the South, but they increased by 2.2 percent in both the Northeast and the West.

Washington Post Article: Existing home sales fall in March

Economic Reports Profile Sputtering Economy

Reports released today confirm much of the bad news we've been hearing about the economy.

According to the "beige book," a combination of anecdotal reports prepared by the Federal Reserve that chronicle business conditions from around the U.S., the economy is slowing, the homebuilding sector is tanking, and prices are rising to painful levels.

The residential real estate and construction industry are "anemic," according to the book. The Commerce Department provided more specifics this week on this sector of the economy, nothing that builders started 11.9 percent fewer units of housing in March than in February, a huge decline. Permits for single-family homes are down 63 percent from the 2006 peak. Both numbers together indicate a picture of significantly reduced building activity. But this could actually be a good thing. The backlog of houses available for sale, an astounding surplus nationwide, combined with less construction, could actually help reset the balance of supply and demand, and prod the economy back in shape.

Consumer spending is softening, said the beige book. Plus, prices are rising. Consumer prices were up 0.3 percent in March, according to the Labor Department. Rising prices are due to increases across the board, but are driven particularly by natural gas and heating oil. Food prices are also increasing. In March, food prices rose 1.2 percent from big price jumps in vegetables and beef and the biggest increase in rice prices in more than five years.

Producer prices are also spiking, but so far businesses have kept the majority of price increases away from the consumers. The producer price index rose 1.1 percent last month, the largest increase since November (which experienced the highest one-month increase in 33 years) Over the last year, producer prices for finished goods are up 6.9 percent, the biggest year-over-year increase in nearly two years.

With the cost of living going up consider finding your lowest mortgage rates at ERATE

Since increased producer prices are not affecting the majority of consumer products yet, core inflation (price increases of goods other than food and energy) is still at manageable levels for the Federal Reserve. But the forecast for the immediate future is uncertain.

Washington Post Article:

Fed: Economy Worse Off Than Believed

Producer Prices Rise 1.1% in March; Food Up More Than Expected

World's Central Bankers Address Credit Crisis at G-7 Meeting

Heads of Finance from Canada, France, Germany, Italy, Japan, the United Kingdom and the Unites States all met this week in Washington. The meeting came a day after Europe's Central Bank President issued a warning that the crisis in the financial markets may develop into a broader economic dilemma. But the so called G-7 finance ministers found little common ground upon which they could agree in dealing with the crisis as each country maintains differing viewpoints on the level of responsiveness required to combat the problem. Discussions involving strengthening the regulatory environment in which the financial industry operates failed to address the pressing need to mitigate the current market crisis. While implementing more stringent regulations would certainly help prevent the recurrence of a similar crisis again in the future, agreement must be reached now to minimize the damage from the existing crisis before re-focusing on the future.

Unfortunately a joint, coordinated level of cooperation appears unlikely as each of the G-7 nations is facing different economic problems and a one size fits all approach will not work. In the United States, the economy is slowing rapidly and the threat of recession is looming, while in Europe inflation seems to be the overriding concern as they are facing the worst rate of inflation in over 15 years. Given this backdrop, it is unlikely that coordinated monetary and fiscal policies could be effectively applied. However looking toward the future, agreement could be reached on issues of improving the level of multi-national cooperation in both monitoring and regulating the financial markets. Agreement may also be reached in implementing new levels of financial transparency along with the disclosure of losses and raising the over all capital requirements. Steps which could be taken jointly now by the central banks, include lending to foreign banks as well as following the path of the U.S. Fed in lending shorter term government securities and acquiring mortgage-backed assets. ERATE is an excellent source to find the lowest mortgage rates in your state for nearly all loan programs.

Expansion of FHASecure Program Proposed

With over 8.5 million homeowners having virtually little to no equity in their homes, fears of mounting foreclosures continue to grow. In response to the problem, the White House has proposed expanding a program which has been in place since August of 2007 to help stem the tide. This existing Federal Housing Administration (FHA) program makes it possible for many low to moderate income borrowers to refinance into government-insured mortgages, resulting in more manageable monthly payments and helping almost 100,000 homeowners by expanding the role of FHA in dealing with the nationwide credit and housing crisis. FHA loans are insured by the federal government in cases of default though the mortgages themselves are made by private mortgage lenders such commercial banks and mortgage bankers, then after the loans have funded, they are bundled, packaged and sold as mortgage-backed securities known as Ginnie Mae's.

The program, called FHASecure, was established last year to help homeowners in distress who had some equity remaining in their home and had been able to make their mortgage payment but would face a substantial rate increase in the process of refinancing into a government insured fixed rate mortgage. Therefore the program was geared to help borrowers who were stuck in adjustable rate loans (ARMs) and were able to meet their payment obligation up until the point that their interest rate reset higher. About 150,000 homeowners have been able to refinance under FHASecure and the program is projected to reach an additional 400,000 by year's end. Under the new expanded rules proposed, a borrower would be eligible for a refinanced FHA loan even if they were delinquent in making several mortgage payments. With home prices on the decline now in many areas of the country, concessions would be required by both lenders and investors of mortgage-backed securities, because without a reduction in the principal balance owed on the mortgage, a borrower would be left in the position of having to come up with 3% equity in order to refinance. Naturally for an already financially stressed and cash strapped borrower this is not feasible and refinancing is not possible with out agreement by all parties on a reduction of the principal balance. It appears to be the judgment of the Bush Administration that it is the lender and the investor who should bear the responsibility for doing this rather than asking the U.S. taxpayer to assume the burden. Excellent source to find your lowest mortgage rates.

Senate Passes Contentious Housing Package; Bush Offers Own Plan

A bipartisan package offering assistance to businesses and homeowners hurt by the housing crisis passed the Senate today with an impressive 84-12 vote.

The plan includes large tax breaks for homebuilders, a $7,000 tax credit for buyers of foreclosed properties, and $4 billion in grants to buy and improve abandoned homes. The bill also includes $150 billion in pre-foreclosure counseling and stronger loan disclosure requirements. Finally, it includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans.

Despite the show of support, the bill has many detractors including the House and the Bush Administration. Opponents claim the package is biased in favor of businesses instead of homeowners and bails out lenders with taxpayer money. They contend the tax credit for the purchase of foreclosed homes will unfairly reward purchases happening anyway, give banks an incentive for foreclosure, and depress home values. The House will likely reject key points in the package.

Another key sticking point seems to be the $25 billion tax break offered to homebuilders and other businesses experiencing heavy losses. The tax break was dropped from an earlier bill after criticism, but was added to this package after increasing worries among the public and policymakers about the housing crisis.
The Bush administration offered its own proposal on Wednesday. This narrower plan aims to rescue 100,000 homeowners at risk of foreclosure with relaxed government-backed loans standards and increased loan forgiveness.

Subprime borrowers who have missed two or three mortgage payments will be eligible for assistance from the Federal Housing Administration. More specifically, borrowers who have missed two payments and have at least 3 percent equity, and those who have missed three payments with 10 percent equity, would be eligible. Lenders will be encouraged to forgive portions of some loans and enable refinancing.

The plan drew immediate criticism from consumer groups, who said the small measures would do little to help homeowners with no equity and the millions of homeowners facing resetting loans and foreclosure.

Washington Post Article:
Scant Support for Senate Housing Bill

White House Presents Plan To Aid Subprime Borrowers

Bernanke Talks Recession; Groups Oppose Treasury Plan

Confirming what many in the industry and throughout the country already believe, Federal Reserve Chairman Ben Bernanke suggested this week that the U.S. might be in a recession.

In comments to the congressional Joint Economic Committee, Bernanke projected the economy could shrink and contract during the first half of this year. He couched his first use of the term "recession" with optimism, saying he expects growth in the second half of the year, and thinks 2009 will be solid on the basis of the recent interest rate cuts and the fiscal stimulus package.

Bernanke outlined the issues that contribute to his assessment of recession, including a stagnant unemployment rate, decelerating consumer spending, tighter credit, and reduction in business prospects and spending.

Analysts believed the Fed Chair's comments explained some of the unprecedented actions in recent weeks, including continuing interest rate cuts and an intervention to save Bear Stearns from bankruptcy. Bernanke claimed the move to help the Wall Street company is a direct motion to preserve credit and financial solvency for the country.

Bernanke's comments came as opposition grows to the Treasury plan to overhaul the nation's financial regulatory structure in attempts to streamline government response to such crises in the future.

The plan, released this week by Treasury Secretary Henry M. Paulson Jr., offers up a wholly revamped system of regulation in the coming decade, correcting the oversight mistakes that led to today's current crisis. The Treasury hopes to create three more powerful agencies to monitor and oversee banking, market stability, and consumer and investor protection in mortgage lending and other activities. Another goal is to ease the approval process from the Securities and Exchange Commission for mortgage-backed bonds, so oversight is more complete. Eventually the SEC would merge with the Commodity Futures Trading Commission. Finally, the plan also grows the role of the Treasury into chief regulator of financial markets.

The mounting opposition (from lobbyists and members of the Bush administration) contends the plan is too widespread, shutting down longtime financial institutions. Banks could have less choice among regulators and credit unions could be placed under new, business-killing regulations. The SEC and CFTC are crying foul about their major overhauls. Finally, many opponents are questioning the wisdom of centralizing regulation into the Treasury, and the benefits of it for the greater economy.

Washington Post Article:
It Might Be a Recession, Fed Chief Tells Congress?
Opposition To Treasury's Blueprint Gains Steam

Insurance Losses Due to Sub-prime Top Those of Natural Disasters

Insurers are now faced with the prospect of having to hold onto mortgage-backed securities in a market where buyers for such investments have all but disappeared. Without buyers it is difficult if not impossible to establish value and on that basis a ripple effect throughout the entire organization occurs without hope of a turnaround. There is much doubt as to whether significant portions of mortgage-backed debt will ever reach maturity unscathed. The continually unfolding developments resulting from the mortgage meltdown are forecast by many within the industry to ultimately produce a bigger hit to insurers than any of the previous natural disasters. Losses resulting from mortgage-backed securities continue to be revised upward from all initial estimates with no end in sight. And for the first time since the late 1990's the book value of 24 companies within the KBW Insurance Index actually declined.

Total industry losses currently exceed $38 billion and that is not where things will likely end. As auditors continue to process the financial standings of the insurers, many are found to have underestimated their losses and incorrectly valued their holdings. Many portfolio managers are now being advised to carefully weigh the credit quality of all that is purchased to insure each acquisition can safely be held to maturity. Markdowns on many of the now defunct mortgage-backed assets will continue to occur as the assets supporting them, namely home values, continue to decline. It is difficult to project when a bottom will be reached and the course reversed as many insurers may continue with write downs resulting in losses spanning the next five years.

Consumer Confidence Lowest Since 2003

A slumping housing market and skyrocketing gas prices have pushed consumer confidence to a five-year low.

The Conference Board, a business-backed research group, reported Tuesday a Consumer Confidence Index score of 64.5 for March, a drop from the score of 76.4 in February. The March score is far below the 73.0 expected by analysts, and is the worst since March 2003, prior to the U.S. invasion of Iraq. The score then was 61.4.

The Consumer Confidence Index has shown a pattern of decline since July of 2007. The Conference Board and industry analysts predict sagging consumer confidence will continue, deriving from a depressed job market, uncertain business conditions, and the credit crunch.

Weakened consumer confidence is an important factor in determining the overall strength of the economy, and the outlook for the future. Lower confidence usually translates to reduced consumer spending. Less money pumping in from consumers will further damage the sputtering economy.

The Conference Board also reported steep declines in companion indexes. The present situation index dropped to 89.2 in March, a slump from 104.0 in February. The expectations index dropped to 47.9, the lowest score in 35 years. Contributing to this index score is a growing number of consumers who are pessimistic about business conditions, expecting them to worsen in the next six months. Consumers also expect fewer jobs to be created during this time.

These reports also came with new data on the freefall in home prices. Standard & Poor's/Case-Shiller home price index reported the biggest drop in U.S. home prices in over 20 years. Prices fell 11.4 percent in January, the largest decline since 1987, when the index was first collected.

Taken with the prices from the last 19 months, the recent drop shows a pattern of over a year and a half of declining or slowly growing home prices.

Figures like these are encouraging some analysts to announce the existence of a recession. Many policymakers, government members and economists have been reluctant to suggest a recession is here, but others contend it's already arrived.

Washington Post Article

Is the Fed Rate Cut What the Housing Doctor Ordered?

Source: Informa Research Services

Today, the U.S. Federal Reserve slashed the discount rate by 75 basis points down to 2.25%. But how does the Fed rate cut affect you and your search for a new home? Is the Fed rate cut the miracle elixir to cure the housing market pain?

When the Fed makes a rate cut, it actually doesn't affect consumers directly since the Fed funds rate is the rate that financial institutions are charged for overnight loans to fulfill reserve funding requirements. However, this does affect consumers indirectly by allowing financial institutions to offer more financing options, possibly at lower rates.

The Fed cut should not directly affect fixed rate mortgages, but it can have a more immediate impact on short term loans, such as adjustable rate mortgages (ARMs). Check online rate comparison tables to stay up to date with rates in this volatile market.

This should be good news for responsible borrowers looking to purchase a home. If home prices either continue to drop or stay put, and more financing options become available, the market may look like a buyers market soon enough.

But if you already own a home, don't fret! The Fed rate cut could mean an opportunity to refinance an existing mortgage at a lower rate or use your equity to fund home improvement projects. However, be aware that some lenders will have set floor rates. These floor rates may be set slightly higher than how the rate is typically calculated, which is prime rate plus a margin. To be sure you are getting a good rate, check convenient home loan equity rate tables.

Fed Working Overtime This Weekend

In order to head off the global market repercussions that a collapse at Bear Stearns would surely have, the Fed worked through the weekend to help facilitate an acquisition deal between Bear Stearns and JPMorgan Chase. Just last Friday the Fed, in conjunction with JPMorgan Chase, worked quickly to save Bear Stearns from the brink of insolvency and over the weekend the Fed made further strides by offering special financing to JPMorgan Chase so it can proceed with an acquisition of Bear Stearns. Many details have yet to be disclosed but it appears that the Fed will fund up to $30 billion of Bear Stearns illiquid mortgage-backed assets and that JPMorgan Chase will acquire the battered 85 year old institution for approximately $236 million. Then as added insurance, the Fed moved to cut the discount rate, that is the interest rate which banks are charged on loans received through their regional Federal Reserve Bank's discount window, from 3.50% to 3.25%. It is hoped this move will help prevent the deepening crisis from spreading even further as financial markets re-open on Monday. The Fed is also expected to cut the fed funds rate, that is the interest rate which banks charge each other for overnight loans, when it holds its scheduled FOMC meeting this coming Tuesday and Wednesday.
To find some of the Lowest Mortgage Rates click the map on our homepage.

Fed Pulls Out Depression Era Stops in an Effort to Save Bear Stearns

The hits just keep coming for the Fed as things continue to go from bad to worse as they are forced to utilize provisions not employed since the Great Depression in order to rescue beleaguered Bear Stearns from insolvency. The nation's fifth largest investment bank has been struggling on life support as a result of problems related to wide-spread losses incurred by mortgage-backed securities. Bear Stearns was amongst the first to disclose mortgage related problems in the summer of 2007 when several of its hedge funds collapsed; it has amassed up to $2.75 billion in write-downs to date. The situation snowballed as rumors of insolvency circulated and what amounted to a bank run on the investment banker occurred as nearly $6 billion (half the institution's value) was abruptly wiped out as customers, lenders and investors began to pull their accounts. Bear Stearns has nearly 14,000 employees globally. The Fed was then forced to act quickly, applying a depression era provision, by essentially using JPMorgan Chase as a conduit to lend funds to Bear Stearns for a 28 day period. The size of the loan was predicated on the amount of collateral that the besieged institution could put up but it is the Fed who will assume the default risk rather than JPMorgan Chase. However JPMorgan Chase is considered to have one of the healthier balance sheets on Wall Street today and as a result was seen as a good candidate to help in this situation. The loan's 28 day time frame is expected to allow sufficient time for a potential buyer of Bear Stearns to evaluate the extent of their mortgage related losses and come up with an acquisition proposal. Naturally JPMorgan Chase is tops on the list of potential suitors. Speculation grows about what may lie ahead in the coming weeks and what other financial land mines have yet to be unearthed.

Plans in Place to Help Distressed Homeowners and Their Lenders

It appears that the full extent of the damage has yet to be revealed when it comes to the fall out from the mortgage crisis which began unraveling back in August of 2007. Since the disaster first unfolded a number of programs have been introduced to stem the growing tide of mortgage delinquencies and foreclosures. Lenders, servicers and investors are running scared as foreclosure numbers are expected to hit the million mark, almost four times the level which occurred in 2007, with the number of serious mortgage loan delinquencies now exceeding a million. It is estimated that 30% of home buyers of the past several years may currently be upside down on their loans, meaning the value of the home is less than what they owe on the mortgage. Another apparent problem with the so-called workout plans being promoted is that a high percentage of borrowers who take advantage of them may end up going into foreclosure anyway, that number is estimated to be as high as 40%. Many industry experts believe this is due to declining real estate values which encourage many borrowers to simply walk away from the home rather than renegotiate the mortgage terms. It has been proposed that a re-negotiated, reduced principal loan balance, based on current market values, would be a more realistic approach to the problem and would certainly make sense when one considers that IRS guidelines technically do not permit homeowners to even deduct the interest on a mortgage that exceeds the value of the property further compounding the problems of already distressed homeowners. Here is an overview of the some plans available to assist eligible homeowners:


Hope Now Alliance - this plan was initiated by the Treasury Department and the Department of Housing and Urban Development (HUD). The objective of the alliance is to help those adjustable rate borrowers who have been able to make their mortgage payments at the start or initial teaser rate but would be unable to do so once the rate is re-set at the first loan adjustment. The suggested goal is to freeze an ARMs initial start rate for a period of 5 years and would apply only to those borrowers having less than 3% equity in their homes and having provided full income documentation on an owner-occupied residence (investment properties do not qualify). This plan is proposed for loans originated from Jan. 1, 2005 to July 30, 2007 which are due to re-set between Jan. 1, 2008 and July 31, 2010. The plan is voluntary for both lenders and borrowers as mortgage lenders and servicers are not required to comply.


Project Lifeline - this plan was initiated by the six major lenders comprising 50% of the mortgage market in hopes of stemming the swelling numbers of REOs hitting their books. The goal of this plan is to extend help to all borrowers in distress, not just those in the sub-prime and adjustable loan categories, whether they are delinquent on their payment or not. It would give borrowers a 30 day window to work out an alternative to foreclosure, essentially offering a 30 day "pause" in the foreclosure process. This plan is available to owner-occupants only and does have some restrictions on eligibility and excludes: those who are bankrupt, borrowers who are more than 3 months behind on their mortgage payments and have a foreclosure date scheduled within 30 days. Those who are eligible for the plan are to receive an unsolicited letter advising them so, sent directly from their lender instructing them how to take advantage of this option. Find some of the lowest mortgage rates in your state.


Operation Protect Your Home - this state sponsored plan was initiated in New York by both the New York Senate Democratic Conference and the New York State Banking Dept. The goal of this plan is to address the sub-prime crisis, particularly in the area surrounding the loan modification effort, in a more coordinated way to benefit all effected parties. With the primary goal of assisting those having difficulty making their payments or having already fallen into default. Letters are sent to at risk borrowers by their respective Democratic State Senator inviting them to participate in a local lending forum. Those borrowers whose mortgages are on tap to re-set or those who are already delinquent in their payments will receive priority, however the meetings are free and are open to the public. Check your state government website to see what resources are available in the state you live in.

Fannie Mae and Freddie Mac Tighten Appraisal Standards

In yet another regulatory rule sparked by the housing market decline, Fannie Mae and Freddie Mac have announced an agreement to stricter appraisal standards for home mortgages.

The agreement is with New York Attorney General Andrew Cuomo, who has been probing fraud in the mortgage industry for the past year. The agreement is intended to discourage inflated appraisals, one of several major problems behind the subprime collapse and general housing slump.

Fannie Mae and Freddie Mac are the government-sponsored entities that provide mortgage market liquidity and funding for mortgage loans. The two companies buy about 60% of all home loans originated in the country. With this agreement, Fannie Mae and Freddie Mac will buy only those loans from banks that meet strict standards of independent, reliable appraisals. The code of conduct will take effect in January of 2009, and will set a standard for the industry.

The agreement includes several key components:

> Lenders and their representatives will be barred from interfering with appraisals. Pressure from these sources cause appraisers to supply inflated estimates of property values. Appraisers are encouraged to succumb to such pressure: without appraisal values that allow loans to be extended, the appraisers risk losing business.

> Bank employees will not be allowed to choose appraisers.

> Lenders will be prevented from using employee or affiliate appraisals as a basis for making loans.
Lenders will not be allowed to use appraisals ordered by mortgage brokers.

> An independent monitoring organization will be created to ensure compliance with the new regulations.

Appraisals are usually required by lenders before home loans are extended. The purpose of an appraisal is to provide a reliable estimate of the property's value. Inflated appraisals can encourage bigger loans than necessary. This can hurt the borrower in their monthly payments and when home prices fall; it can also expose the lenders to losses. Some experts contend that appraisals nationwide are inflated at least 10 percent.

Related WSJ Article

Legislators Scramble to Save Battered Economy

The housing market woes seeped into the greater economy over the last year. But in the last week, fears of a full-blown recession have caused panic and drastic action by regulators and lawmakers.

On the heels of the surprise interest rate cut earlier this week, a dramatic 0.75 percent cut to the overnight bank lending loan that affects credit card, home equity, auto and other interest rates, the White House and congressional leaders proposed an economic stimulus package. The plan is intended to act quickly and prevent further panic on Wall Street and around the globe.

Thus far it has bipartisan involvement and support, but the communal spirit is quickly deteriorating. Both parties are attempting to remain unified with President Bush, but business as usual in a gridlocked Congress is wearing down the goodwill. Lawmakers are attempting to hurry the package along, both to influence the economy as soon as possible but also to prevent the plan from falling apart.

Treasury Secretary Paulson and House Speaker Nancy Pelosi are guiding the economic package development, totaling $145 billion. The stimulus package includes:

• Tax rebates for individuals to spur consumer spending

• Business tax breaks to prompt new investment

• Extension of social welfare benefits such as unemployment aid and food stamps. This option may be exchanged for a progressive rebate plan that sends checks to all workers who make less than $75,000 a year or married couples who make less than $150,000.

Other potential components directly focusing on the housing market include:

• Expansion of the Federal Housing Administration's ability to insure higher-priced mortgages.

• Temporarily increasing the size of jumbo mortgages available from Fannie Mae and Freddie Mac, from $417,000 to as high as $729,750.

• Enhanced powers for the FHA to help homeowners threatened by foreclosure to renegotiate their loans, without sharp increases in their payments.


Even if an agreement is reached and passed by next month, taxpayers might not see their rebate checks until June. Meanwhile, Democrats and Republicans are now arguing over additional components to the package.

Washington Post Article about this subject

Down Payment Options: What's My Best Bet?

Source: Informa Research Services

Everyone knows that the standard is to put 20% down on home purchases. But is this my best bet? In making this choice, do the math and ask yourself the following 3 questions:

1. How long do I plan on living in the home?
Depending on how long you intend on living in the house, you may or may not choose to make a substantial down payment. If you plan on staying in the home for a longer period of time, you may want to look into making a larger down payment if possible. However, because you don't get your down payment back, you may want to think about putting less money down if your plans are still up in the air.

Also, figuring out whether you plan on staying in your home for 3 years or 30 years will help you decide what kind of loan you should get. For instance, if you plan on staying in your home for a shorter period of time, you may consider looking for an adjustable rate or interest only mortgage loan.

2. How much can I afford to spend on my monthly mortgage payments?
Because your down payment affects the amount you are borrowing, it affects the size of your monthly payments as well. Typically, when a larger down payment is made (and as a result, a smaller amount is borrowed), monthly payments are smaller. However, if this is not one of your options, then be sure that your monthly payments fit into your budget. Think about what kind of loans are available because your monthly payment will be determined by the type of loan you have. For instance, if you choose a 30-year fixed mortgage over an adjustable rate mortgage (ARM), your payments will stay the same for the life of the loan where as the payments on an ARM may change after the initial term of the loan.

Remember, if you do not put 20% down, you may need to pay private mortgage insurance (PMI), which will be added to your monthly payment. Unlike the interest paid on most mortgages, PMI is not tax-deductible. The alternative to paying PMI is to get a "piggy back" loan, or taking out a second loan to help finance the 20% down payment.

3. What options does my credit score provide me?
It is important to see what options are available to you depending on your credit score. Good credit can save you money by qualifying you for better interest rates on your mortgage loan. For instance, let's take a person with a credit score under 620 versus a person with a credit score of 720 or higher (assuming a standard 30-year fixed, $300,000 mortgage loan). The person with the lower credit score would qualify for an annual percentage rate (APR) of 9.715% while the person with a higher credit score would qualify for an APR of 6.080%. In this example, having a better credit score could save you approximately $756 a month, or $9,072 a year (Source: MyFico.com).

Credit Score APR Monthly Payment
Less than 620 9.715% $2,570
700 and higher 6.080% $1,814
Total Savings 3.635% $756/month
(or $9,072/year)

This applies not only to first mortgages, but second ones as well. For those with impressive credit, getting a "piggy back" loan can be less costly than paying private mortgage insurance. The rates available depend on your credit score, so be sure to use available resources to research rates.

Cleveland Sues Countrywide, Wells Fargo.... Over Subprime Mess

Some of the cities hit hardest by the subprime mess may have a new option available if they follow the example of Cleveland.

The city, the home to over 7,000 foreclosures in 2007, announced on Thursday it is suing 21 major banks and mortgage companies for their part in the subprime mortgage crisis. The suit says these companies created a "public nuisance" in violation of state law by pushing subprime mortgages in the city.

Cleveland hopes to recover lost property tax revenue that numbers in the hundreds of millions. Homes left abandoned have been demolished, and neighborhoods hit hard by thousands of foreclosures have seen drastic increases in crime and have needed extra policing efforts. Overall, the city's tax base has been depleted, and entire neighborhoods are in ruin.

The lawsuit alleges that the subprime model used in the city was completely inappropriate for the residents, and the lenders didn't care. Companies sued include Deutsche Bank Trust, Ameriquest Mortgage, Bank of America, Bear Stearns, Citigroup, Countrywide Financial, Credit Suisse (USA), Fremont General, GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, Indymac Bancorp, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Novastar Financial, Option One Mortgage, Washington Mutual and Wells Fargo Bank.

Cleveland Mayor Frank Jackson said the activities by these investment banks and lenders amounted to a legal form of organized crime. He likens the end result of organized crime and drugs on neighborhoods and individuals as siphoning the equity and quality away. The same could be said for the subprime activities conducted by the lenders named in the suit.

Cleveland is the first city to launch a lawsuit on this scale. Earlier this week, the city of Baltimore sued Wells Fargo, alleging they intentionally sold high-interest mortgages to African-American borrowers more than white borrowers, in violation of federal law.

The suit launched by Cleveland is unique in its scope, and its targets: the investment side of the industry that feeds off the secondary mortgage market and encourages continued subprime lending. The suit states that although Cleveland had flat housing prices, along with widespread poverty and struggling manufacturing, investment bankers continued their activities at the expense of borrowers.

More on this subject at Washington Post

Credit Freeze: A New Weapon for Putting the "Freeze" on ID Theft

On November 1, 2007 your tool box for fighting identity theft got a little bigger, freezing your credit may be the best possible defense in protecting yourself against ID theft. A credit freeze involves blocking (or locking out) potential credit and ID thieves from gaining access to your credit information, including both your personal credit history and credit scores. By initiating a credit freeze you are requesting that the credit bureaus stop sharing information on your report without your express permission. This will effectively make it impossible for anyone to hijack your credit by applying for a loan in your name. Freezing your credit does require some effort on your part however it may be far less of a hassle than correcting the damage done by an ID thief or having to continually employ a credit monitoring service. In order to put the freeze on your credit into effect you are required to request it in writing by certified letter and to send it to all three bureaus, in addition proof of your ID will be needed.

There are 39 states which have laws allowing for the freezing of credit and of the 11 remaining states which do not, you may still freeze your credit but the bureaus may require a fee from you to do so. The fee requested by each of the bureaus is generally about $10 to initiate the freezing and $10 to temporarily unfreeze it or to remove the freeze permanently so $30 total ($10 x 3 bureaus). If you have had the misfortune of being a victim of ID theft already, then the freezing service should be available to you at no charge. It is important to note that by freezing your credit profile from ID thieves you may also be freezing out yourself or at least creating some obstacles in getting access to your own credit when you need it. A freeze effectively locks out everyone (including you) and in order to remove the freeze you will need to contact each of the bureaus to have them take your credit out of deep freeze while you are going through a credit application process or applying for a loan, this will take time and will likely cost you $30. However you will only be required to go through the unfreezing process if you are working with a new creditor as those creditors you already work with or have an authorized relationship with will continue to have access to your credit information.

For those consumers who do not anticipate the need to work with new creditors in the foreseeable future or believe they will not need to call upon their credit at all, this could be an extremely beneficial precaution to take. Even after considering the cost of freezing and unfreezing a credit profile with all three bureaus, this may end up being more cost effective in the long run than using a credit monitoring service. However if you don't want to spend the time or bear the expense involved that freezing your credit would require, you can still implement some credit protection for yourself by placing a 90 day fraud alert on your credit report with each of the three bureaus. An alert is not as much of a safeguard as freezing your credit but it does provide an added layer of protection in that the bureaus are required to take additional measures in verifying the accuracy of anyone applying for credit in your name. Key to using the credit alert vs. a credit freeze is that with the alert you must re-apply for it every 90 days in order to maintain it or risk it expiring on you.


Please contact the 3 credit bureaus for more information on freezing your credit:


Experian Security Freeze
P.O. Box 9554
Allen, TX 75013
888-397-3742
www.experian.com

Equifax Security Freeze
P.O. Box 105788
Atlanta, GA 30348
800-685-1111
www.equifax.com

TransUnion Security Freeze
P.O. Box 6790
Fullerton, CA 92834
888-909-8872
www.tuc.com

'Twas the Time for Great Rates

Source: Informa Research Services


'Twas the night before Christmas and all through the house,
People like you were finding the best rates online with a mouse.
The stockings were hung by the chimney with care
And smart investors were online because best rates are found there.
We exchanged presents wrapped in green and red
While visions of great returns danced in our heads.
From home equity and mortgages to checking and CDs
I, too, looked online to find the best rates for me.

As a gift to my parents, I helped them refinance their mortgage loan
I found them a low 30-year fixed, so their payments won't grow.
They're able to make the monthly payments with ease
And they say it makes owning a home feel like a breeze.

For those who already own their home at this time,
Perhaps the gift of choice should be a home equity line.
With the Fed cutting the rate again and again,
Rates are the lowest they've ever been. (Well almost)
If you want to tap into your equity, now may be the time,
To pay off your credit card debt so it doesn't continue to climb.

By using rate tables, I filled my wallet with cheer
And ensured that gift-giving will be a little easier next year.
Finding ideal rates online has become such a cinch
Never again will I need to be a Scrooge or Grinch.
Bring out the holly, garland, and yule log,
Offer everyone some sugar cookies and eggnog.
Use tables to check rates and make your finances soar,
Happy rate shopping to all, from my home to yours!

Fed Proposes Crackdown on Lenders and Lending Practices

The Federal Reserve continued its flurry of activity this month by announcing on Tuesday a proposal for restrictive rules for mortgage lenders. The restrictions are aimed at limiting unfair and deceptive home-lending practices that contributed to this year's subprime meltdown.

Generally, the rules take aim at unscrupulous lenders that target subprime borrowers and others, those borrowers being persuaded that they can afford loans that should be out of reach.

"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," the Fed's chairman, Bend Bernanke, said in a statement. "We want consumers to make decisions about home mortgage options confidently, with assurances that unscrupulous home mortgage practices will not be tolerated."

The Fed's proposals, which would mean changes to Regulation Z (Truth in Lending) under the Home Ownership and Equity Protection Act, would affect subprime lenders and borrowers:

> Prohibit giving borrowers unaffordable loans. Some lenders use introductory interest rates on subprime adjustable-rate mortgages to determine a borrower's ability to repay the loan. However, this does not take into account the inevitable resetting to a higher interest rate, the bane of many subprime borrowers' current or future reality and the reason for spiking foreclosure rates. The Fed proposed that lenders base the determination of affordability on a borrower's ability to repay the loan at the reset rate.

> Restrict use of loans without income verification. Some lenders make loans without verifying the income of potential borrowers. Homebuyers then end up with homes they can't and could never afford. These are called "liar loans" or "stated income loans," and the Fed wants to eliminate them by requiring verification of income and assets.

> Prohibit or limit prepayment penalties. Many times prepayment penalties, like those incurred when homeowners want to refinance into more affordable loans, are overly punitive, adding up to six months of mortgage payments. The Fed wants to require lenders to waive prepayment penalties for 60 days prior to loan rate resetting.

> Encourage (or require) escrow for taxes and insurance. Some lenders do not disclose the entire cost of the home, including insurance and property taxes. The Fed wants lenders to collect taxes and insurance along with the mortgage payment and hold them in escrow for the borrower until they come due.

In addition to subprime loans and lenders, the Fed also made several proposals to improve all mortgage lending:

> Make broker incentives restricted and/or transparent. Some lenders will pay brokers to lock-in borrowers to higher rate loans than they would normally qualify for. This is called the "yield spread premium." The Fed wants to outlaw these payments unless they are clearly disclosed to borrowers.

> Prohibit appraiser coercion. Appraisers have often been pressured to overvalue homes by lenders. The Fed would end this practice.

> Prohibit unfair loan-servicing practices. The Fed wants to eliminate late fees that are charged more than once ("pyramided.") They would require that servicers credit consumer accounts on the day of receipt and provide records of payments.

> Require better disclosure overall. The proposed rules here include requiring complete and clear disclosure by lenders in ads and in person. This means all applicable rates advertised along with the "teaser" rates.

The Fed is inviting comment on these restrictions for 90 days.

Fed Acts to Boost Economy and Prevent Additional Subprime Fallout

The Federal Reserve made major moves this week to thwart a recession and improve economic growth.

On Tuesday, the Fed cut the interest rate again, the third cut in the last few months. The group cut the federal funds rate, an overnight bank lending rate that affects interest on credit cards, auto loans and home equity loans. The rate now stands at 4.25 percent.

The Fed also cut the discount rate, governing the interest banks pay to borrow directly from the central bank, to 4.75 percent.

On Wednesday, the Fed acted again, announcing a plan to pump billions into the financial system to ease the burgeoning credit crunch.

The plan involves auctioning off the rights to borrow money directly from the Fed. This means banks would be able to access funds without the usual interest, based on the discount rate. From December 17 until January 28, four auctions will be held, with the first two auctions offering rights at up to $20 billion each.

Around the world, other central banks will offer similar auctions. Additionally, the Fed has established foreign exchange swaps, enabling the European Central Bank and Swiss National Bank to make loans in dollars. The goal of this step is to hopefully alleviate interest rates abroad.

Analysts and economist say the auction plan could potentially help banks hurt deeply by the subprime mortgage meltdown. According to estimates, banks across the industry have already reported about $100 billion in losses associated with subprime mortgages.

The Fed has made its interest rate cuts in efforts to stem the bleeding from the housing market turmoil, and prevent major economic fallout. With their announcement this week they acknowledged that "economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending." The Fed added that "some inflation risks remain" and the Fed "will continue to monitor inflation developments carefully."