Bankruptcy & Foreclosures

I’m not a big fan of politics but still found the President’s recent comments claiming that the economy isn’t really in that bad of shape interesting. Especially considering that today (2/29- the leap day) two separate Federal Reserve officials announced that the ugly housing market could actually damage the economy even more severely than it has already if measures are not taken to correct it. Both officials agreed that they believe this slump will be more pronounced than other historical downturns. They went on to say that financial institutions have been quite unwilling to expose themselves to the mortgage market. This means lenders are hesitant to lend to risky borrowers in a declining house price market. Simplified, this is the double whammy we’ve been discussing of late. Lenders are making it harder to secure a loan while the equity available in homes across the nation are simultaneously drying up.

Now that Freddie Mac is releasing the numbers, it appears as though January was a month full of refinance activity (thanks to the Fed rate cuts) but February is shaping up to be much more lackluster thanks to creeping rates.

This comes despite the fact that the Fed has been cutting interest rates steadily since September but have left the fed funds rate at 3%. As a key bank-lending rate, stock traders expect the bank to cut rates by another half-percentage point later this spring. Fed chairman Ben Bernanke said Thursday that rising inflation will make further rate cuts more difficult, as the central bankers not only seek to maintain economic growth, but aim to keep prices in check as well.

In the mean time stocks continued to dip today (leap-day) thanks to a combination of weak readings on manufacturing and consumer spending, record-high oil prices and the slumping dollar. I was surprised to hear that initial reports had concluded that spending by individuals rose 0.4% in the month of January despite all of the gloomy news. Unfortunately, the truth of the matter is that more currency changed hands on account of inflation (and a sinking dollar value)- in actuality spending was unchanged.

Experts claim that consumer spending has in fact been leaning more toward the conservative side of things as worries of this instability has individuals using discretion in purchasing decisions. I don’t need to reiterate the benefits of keeping that budget close, as least until the economy stabilizes.

Boy just as the economy starts to show signs of strengthening oil prices reach a record high as the US dollar plummets against global currency (particularly against the euro). While I would like to offer some explanation to these unfortunate trends, the truth of the matter is that even our government struggles to isolate the economic woes themselves. About the only positive spin to the ever-rising oil price situation comes in the form of new tax legislation, which would collect some $18 billion in new taxes on the world’s largest oil companies. These proceeds would then provide tax breaks for wind, solar and other alternative energy source research and for energy conservation. While the new tax would zap a healthy $1.8 billion annually from the top five oil companies, keep in mind that they earned $123 billion last year alone.

Interestingly, the bill would roll back two lucrative tax breaks for the five largest U.S. oil companies, which save the companies close to an estimated $20 billion over a ten-year period. Critics of the bill claim not only that it unfairly targets the oil industry but also additional taxes will only cause increases of the price per gallon we pay at the pumps.

Sadly, analysts are already predicting costs as high as $3.50 per gallon for most of the nation this spring with some areas hitting prices as ridiculous as $4.00/ gallon! Not only does this hurt each of us as we fill up our cars, trucks, and SUVs, it also pushes up the cost of food thanks to increases in transportation cost. The squeeze to the individual consumer is coming in from multiple angles. Aside from the costs mentioned, housing prices are tumbling (meaning less available equity for many) and banks are tightening up their lending practices. The icing on the cake is the diminishing value of the US dollar. All in all, efforts to stimulate the economy through interest rate cuts and tax rebates are viewed by many as band-aid fixes to deep-running wounds.

I really don’t enjoy posting bad economic news but feel like American consumers can benefit by realizing the severity of these tough times. My goal with this blog is to provide advice in the categories of debt management/ budgeting but often times the best advice is to simply step away in the hopes that the economy will rebound. In the mean time, about all we can do is keep these bleak forecasts on the backburner with our spending habits in daily life. We often discuss plans and strategies for a rainy day and this could very well be the start of the downpour.

In my last post I had mentioned the reality that due to many no-money-down mortgage programs, fewer and fewer borrowers have any available equity in their homes to tap into in case of a rainy day. Believe it or not, compounding the situation is the latest trend in which even mortgage holders with equity in their homes are suddenly being denied.

Lenders are reporting that hundreds of thousands of home-equity lines of credit have been frozen while still others are being forced to significantly lower credit limits. Why the sudden fear from lenders to issue these second mortgages? The answer is all around us: Slipping home values and rising default rates in recent months are doing a great job in reminding lenders that the risk involved in laying out the cash may be far greater than the profit margin on the interest alone.

I’ve already been flooded with questions from readers (and clients alike) wondering what choice this grim situation leaves them to work with. The reality is that homeowners who were ready, willing, and able to tap into their home’s equity through a line of credit are now going to have to consider refinancing their first mortgage (as opposed to taking on a second one).

The good news is that refinance customers just may be the biggest beneficiaries of the recent Federal Reserve’s rate cuts. This is especially pertinent to individuals with Adjustable Rate Mortgages (ARMs) about to endure the rate reset (increase).

Back to the recent home equity crunch, some lenders are actually looking into areas where home values have depreciated significantly and are actually contacting their customers in the region to let them know that their ability to access existing lines of credit is going to dip due to the decline in neighboring property values. While other major lenders are taking a slightly different approach whereby rather than freeze entire regions, they are simply drastically lowering the percentage of the home’s value that can be tapped into (in some cases from 95% on down to 65%).

The bottom line is that the subprime mess is far from behind us yet and while the Federal Reserve is trying to contain the problem with rate cuts, the lenders are finding themselves in quite a dilemma that simply slashing their profits (the interest rates) isn’t going to solve.