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."

The Bush-Paulson Plan to Freeze Rates: It's Only a Start

As usual the government is behind the curve on this one. It would have been far better to dissuade Wall Street from exploiting the misguided lending practices that got us into this mess is the first place however at least the now proposed plan is an attempt to bail out the poor homeowner and not the corporations. Wall Street made billions off of sub-prime debt and rather than questioning the sanity of what was happening they were generating so much money in the way of service fees that they were able to rationalize all the obvious risk away. The banking and financial industry felt compelled to sign off on the Bush-Paulson plan for fear of what congress would come up with if they did not. Up until now Treasury Secretary Paulson had maintained that the sub-prime crisis should be dealt with on a case-by-case basis, a position which would have tended to support a bill currently in the U.S. Senate granting bankruptcy judges the right to change the terms of a mortgage loan if a judge deemed it necessary in the course of a Chapter 13 proceeding. The authority extended to the bankruptcy judges under the proposed bill is to be permitted without any input from either the lenders or investors involved. The banks have already received some corporate relief as Paulson has put together a toxic debt superfund of some $100 billion to purchase the garbage short-term debt of the so-called structured investment vehicles (SIVs) which the banks themselves had set up to keep their poor quality mortgage-backed securities in off balance sheet entities (Enron deja vu).

Who is the plan going to help?

The government's goal is to help those borrowers who have been able to make their mortgage payments up until now but will struggle once their interest rate is re-set. The plan would effectively freeze these borrower's rates for a five year period. Targeted borrowers are those who obtained owner-occupied adjustable rate mortgages from January 1, 2005 to July 30, 2007 which are due to re-set between the period of January 1, 2008 and July 31, 2010. Borrowers with credit scores below 660 will receive much initial attention under the plan as these homeowners are the most likely to have been given adjustable loans with low teaser rates which are due to spike up to 7% to 9% in the coming months. These rate increases could translate into a hike in the monthly payment of those affected by as much as 30% in some cases.

Are there any additional requirements of the borrowers targeted under the plan in order to qualify for the relief?

All mortgage payments under the initial teaser or start rate must be current and paid up to the previous two months and borrowers must have provided income documentation to qualify for the loan. Additionally only those borrowers having less than 3% equity in their home will be eligible under the program. And as stated above, only those who are owner occupants of the affected properties will be eligible.


Why are only the borrowers within that specific 2.5 year time frame being targeted for relief under the plan?

Because it is those borrowers who purchased their homes at the tail end of the real estate boom who are likely to lose or have already lost equity in their homes and in some cases may now be upside down on their loans (essentially their home is worth less than the mortgage balance on it). These borrowers will have the most difficult time refinancing even if rates were to come down because they lack both equity and decent credit in this new lending climate. Foreclosure may be most likely for these homeowners because they stand nothing to lose by simply walking away from their home as they have little or no equity stake in it.


Why does the government feel it necessary to get involved at this point?

Because over two million sub-prime borrowers have loans on tap to re-set to substantially higher rates over the next two years. Housing prices are already declining in many areas and if foreclosures were to accelerate it is believed that every 70,000 foreclosures could translate into a 1% drop in home values. The hope is that the plan will forestall severe and on-going damage to the housing market nationwide which could potentially throw the country into an unprecedented recession as housing has become the linchpin of the economy and the underlying engine of both consumer confidence and spending.

What are some of the obstacles to the plan?

First and foremost the plan is a voluntary one, it does not require mortgage lenders to comply. The plan will stop the bleeding for the targeted borrowers but at whose cost and are those who are going to incur the loss going to take in lying down? The finger pointing has already begun and the potential lawsuits should have attorneys working overtime. As part of the plan a so-called "safe harbor" preventing lawsuits has been proposed but we will see if it is viable as it will likely be tested. Also of significance is what impact the governments interference in a private contract matter (from the standpoint of the investor) will have on the securitization of debt in the future as well as the over all confidence of investors, both domestic and foreign, in the integrity of the U.S. financial markets as it appears that supposedly binding legal contracts can be altered. Seems like a classic catch-22 situation for all involved.

The Fed's Impact on the Economy

The Fed meets regularly every six weeks of the year to assess the state of the economy and after their two day Federal Open Market Committee (FOMC) meeting adjourns, the markets eagerly wait for any indication of their outlook on the economy or hints on the direction of interest rates. The irony is that the Fed, which is seemingly omnipotent in the eyes of the average American, really has no direct control over long term interest rates which determine what homeowners pay for a mortgage nor do they directly impact long term economic growth. What the Fed actually does is regulate monetary policy by setting short-term interest rates and controlling the supply of money in the short run. They do so through the use and control of the following tools:

• The Discount Rate - this is the interest rate which the Fed charges to loan short-term funds from a Federal Reserve Bank directly to a member bank.

• The Fed Funds Rate - this is the rate which banks charge one another for overnight loans. This is the key short term rate which directly influences changes in the prime lending rate which is charged to consumers and businesses.

• Open Market Operations - this involves the buying and selling of government securities by the Fed whereby they can both inject (by buying) and drain (by selling) funds from the money supply.

Through the use and control of the above outlined tools, the Fed can wield a lot of influence in the areas of both consumer and business spending thereby guiding economic growth. However what the Fed cannot do is control the cyclical nature of the economy and prevent its pattern of highs and lows. When the Fed decides to cut short term interest rates the news is normally well received by the financial markets and the bond market will rally unless it is perceived as overly aggressive and may possibly lead to a higher rate of inflation. If a Fed move is seen as too conservative, or not aggressive enough, bond investors will likewise reveal their disapproval by summarily selling bonds and the yield will go up as yield and price move in opposite directions.

So if the Fed controls only short term interest rates, what influences rates in the long run? The answer is bond investors and they do so through the act of both buying and selling treasury bonds and notes. It is the bond investor's reading on the economy, influenced in part by the actions of the Fed and their resulting perception of Fed actions by bond investors which determines whether they will become either buyers or sellers of bonds. However other factors determine the behavior of the bond investor as well such as their future expectation of economic growth and the overall rate of inflation. Longer term economic growth is influenced by the government's control of fiscal policy which influences government spending as well as tax policies creating incentives for both consumers and businesses to save and invest.

Sub-prime Mortgage Mayhem: Could it Effect You

Your credit rating is so far from sub-prime it's practically super-prime, so you've never come even close to having personal experience with the notorious sub-prime lending universe, in fact it's another planet altogether. Listening to the updates on the news regarding the latest sub-prime casualty or reading about it is seemingly the only exposure you've had to the disaster or is it? It might take some investigating on your part but chances are you have been impacted by the problem more than you think. The financial aftermath of the subprime meltdown has touched the far corners of the financial world as stocks have been hard hit and rare would be the bond fund that did not own any mortgage-backed securities. It would be difficult to avoid having some exposure to the problem if you are invested any mutual funds which contain the terms "high-income" or "high-yield" in their fund name. And if you own a financial services sector mutual fund, you can count on having taken a hit, in fact it is important to note that the financial services area now accounts for an almost 20% weighting within the S&P 500. Services related to the real estate industry have become such a substantial part of the U.S. economy and it's over all performance that it would be next to impossible to escape being touched by the problem in some way. Real estate values and consumer confidence have now become flip sides of the same coin. As real estate has surged in recent years it has become the linchpin of economic activity, so it may now be a far greater component of your investment portfolio than you even realize.

What can you do to protect yourself from the risk of the sub-prime industry's woes?

• The first step would be to check your asset allocation to determine if your investment's exposure to real estate and its related industries has ballooned into too large a percentage of your over all portfolio. If this is the case then it may be time to make some investment changes, shifting your positions into other investment categories.

• Consider taking a cash position in the market. Don't hesitate to increase your cash holdings and ride out the market gyrations and volatility from the sidelines. You can resume executing your investment plan, as well as adjusting your asset allocation, once things have settled down and the market has its bearings again.

• As the economy wavers on recession, now may be the time to move into investment sectors which perform well during times of a sluggish economy. You may want to adopt a defensive strategy when picking stocks moving forward.

• Take the opportunity to purchase blue chip companies that may be dipping in relative sympathy to their market sector. During times of uncertainty the baby is occasionally thrown out with the bathwater so to speak, be on the lookout for just such opportunities and bargains.

Always consult with your tax or financial advisor regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

Bush Announces Limited Subprime Interest Rate Freeze

After negotiations between federal regulators and U.S. lenders, the Bush Administration announced today a five-year interest rate freeze on subprime mortgages for certain borrowers at risk for foreclosure.

The move, announced by President Bush and Treasury Secretary Henry Paulson, is designed to stem the rising numbers of foreclosures, and protect the borrowers whose adjustable-rate mortgages (ARMs) will reset to painful levels over the next year. The White House said the plan could help 1.2 million homeowners.

With this plan, borrowers of adjustable-rate mortgages whose interest rates will reset in 2008, and who are current with their monthly payments, will have a five-year interest rate freeze.

The freeze is limited, however. Anyone who is judged capable of making mortgage payments as they reset is exempt. Also, anyone more than 30 days late, or borrowers who have been more than 60 days late in the previous 12 months, will be excluded.

According to the New York Times, the investment bank Barclays Capital estimates only 240,000 borrowers will be covered by the freeze, out of the 2 million subprime ARMs expected to reset in 2008 or 2009.

In addition to the rate freeze, the plan will work to speed up other forms of help. The goal is to streamline the refinancing/mortgage modification process, allowing borrowers to move into a new mortgage or a Federal Housing Administration (FHA)-backed loan. Lenders will work quicker to examine loan criteria, credit scores, and payment history to make a determination on next steps.

The plan comes about as the housing situation grows grimmer. According to Credit Suisse Group, more than 30 percent of borrowers with subprime adjustable-rate mortgages are behind on their payments, and face their loans resetting higher. An estimated 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years.

This housing slump is affecting the greater economy, and this new plan and other recent legislation to reform mortgage management are attempts to end the drain on economic growth.

The president, during his announcement about the subprime plan, also urged Congress to act quickly on pending mortgage relief legislation, which has been stuck in the Senate for some time. The legislation includes the FHA Modernization bill and other bills enhancing the mortgage refinancing process.

Is the Time Right for Bonds? Bond Market Investing

This ERATE Blog Post has been featured by WSJ.com


Now that the stock market has hit shaky ground, investors are looking for a safer haven to park their money. In July of 2007, the market briefly closed above 14,000 only to slide back down 1,000 point within a month. In the flight to quality that normally follows a downturn in the market, investors have begun turning to more secure holdings such as bonds. With the Federal Reserve having initiated the process of moving short-term rates lower in response to a slowing economy that was pushed in that direction by the fallout resulting from the sub-prime loan debacle, bonds are once again in the spotlight. Even if a recession is some how averted, the economy is likely to continue trending lower in both 2008 and 2009. As the housing market unravels, letting more air out of the tires, consumers will feel less confident in their spending ability. The disposable and discretionary spending of consumers is on course to experience a considerable pull back, thus dragging the overall economy down with it.

The bond market is where debt issued by federal, state and local governments, as well as large corporations, is traded. The prevailing climate for interest rates is typically the key indicator for the bond market. When interest rates move higher, the value and therefore the price of bonds already issued at lower interest rates drops and conversely as interest rates move lower, those bonds previously issued on the market increase in value and therefore in price. Interest rates influence the demand for bonds and on the supply side the number of new bond issues coming onto the market has the defining impact as the market attempts to digest these new issues and supply and demand work to establish price.

An advantage of bonds is that they tend to move in a direction opposite that of stocks and are therefore a good way to balance and manage the risk of maintaining equity holdings. Bonds also pay out a stream of income over time and are a relatively safe and reliable investment which produces a steady return. Currently the five and ten year issues may offer the best over all return, however a good way to invest in bonds is through bonds mutual funds. Consider a highly rated muni-bond fund which is typically a five to ten year general obligation bond issued by a municipality to finance a targeted project. Muni-bonds are insured as a requirement to support the bond and to back its safety and most are rated by the general rating agencies such as Moody's or S&P in an effort to reflect the solvency of the municipality having issued them. The critical selling point of muni-bonds is that their gain is generally tax-free which adds significantly to their yield.

An exciting new development in the world of muni-bonds, they are now tracked by exchange traded funds (ETFs) making them an even more attractive investment as bare-bones expense ratios are the hallmark of ETFs. The national average for an expense ratio on a tax free bond fund is about 1.02%. Compare that to the 0.25% expense ratio of some the muni-bond ETFs and you will reap the benefits of investing in the lower expense ratio fund, increasing your overall return. The tax free element of muni-bonds works to increase the tax equivalent yield by 1%-2% if you are in the 28% tax bracket as an example. This combination of lower expense ratios, along with their tax-free status, make muni-bonds an investment worth taking a serious look at.

Note that a key case regarding municipal bonds is currently being decided by the U.S. Supreme Court. The case originated in the state of Kentucky and will likely determine whether municipal bonds purchased by an investor who resides in a state other than the state where the municipal bonds were issued are indeed tax free. However the municipal bonds issued by and purchased within your state of legal residence are not at issue.

Always consult with your tax or financial and legal advisor regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.