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.

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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.

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