The next shoe to drop in housing
Rising foreclosures and big losses at Fannie Mae and Freddie Mac are making it harder for people with good credit backgrounds to get a traditional mortgage.
By Tami Luhby, CNNMoney.com staff writer
Last Updated: March 13, 2008: 8:48 AM EDT
NEW YORK (CNNMoney.com) -- The credit crunch has finally hit the traditional mortgage market.
Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.
Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan.
"Even if you have good credit, you don't know if they are going to give you a loan or not," said Joseph Mason, a senior fellow at the Wharton School of the University of Pennsylvania.
And for those who can still get a loan, the tremors in the mortgage-backed securities market has made loans more expensive for borrowers. As the prices of mortgage-backed securities have fallen, their yields have risen, leading to higher mortgage rates.
The national average rate on a 30-year fixed-rate mortgage was 5.96% Thursday, after jumping to 6.08% earlier this week, according to Bankrate.com. Rates on a 30-year fixed mortgage were about 5.90% a week ago. A borrower looking for a 5-year adjustable-rate mortgage would pay 5.71% today, up from around 5.03% a week ago.
"The cost of mortgage financing has increased dramatically and it couldn't come at a worse time," said Tom LaMalfa, managing director of Wholesale Access, a mortgage research firm. "We're going to see a further diminishment of available mortgage money."
Not just a subprime problem anymore
Rising defaults and delinquencies effectively shut down the subprime and jumbo mortgage markets last summer, but borrowers with good credit could still get conventional loans that met the agencies' criteria. That's because investors continued to buy securities - backed by Fannie (FNM) and Freddie (FRE, Fortune 500) - seen as safe since they carry an implicit federal government guarantee.
But the landscape changed in late February. Investors were spooked after Fannie and Freddie reported a combined $6 billion in losses for the fourth quarter as defaults rose.
A new round of fear washed over Wall Street last week when financial fund Carlyle Capital announced its lenders wanted more money to make up for the depressed value of the agency mortgage-backed securities Carlyle had put up as collateral for loans. An announcement by the Mortgage Bankers Association last Thursday that defaults had reached record levels didn't help soothe concerns.
This bad news comes as Congress, in an effort to stimulate lending in higher-cost areas, temporarily raised the size of the mortgages Fannie and Freddie can guarantee to as much as $729,750.
The situation has grown so worrisome that the Federal Reserve took several steps this week to inject liquidity into the agency mortgage-backed security market by allowing banks to trade these securities in as collateral for loans.
On top of that, to shore up their finances and regain investors' trust, Fannie and Freddie have been instituting new fees and stricter underwriting guidelines, making it costlier and harder to qualify for traditional mortgages.
In an investor conference Wednesday, Freddie officials sought to calm jitters by saying the agency has "significantly" increased prices, introducing new fees based on risk levels.
Prepare to pay more for a mortgage
Wholesale Access has estimated that all these changes mean 30% to 40% of borrowers who could have qualified for a conventional mortgage a year ago can no longer do so.
Fannie and Freddie are demanding higher credit scores and charging higher rates for those who don't have them. Until recently, a borrower with a 620 score might pay the same as one with a 680 score, said Victoria Bingham, chief executive with Pacific Rim Mortgage in Tigard, Ore.
But now that person might have to pay a half percentage point more. With today's rates, that translates into 6.75% for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client base.
Borrowers must also put more money down, especially if they don't have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.
Experts said they don't think traditional mortgages will disappear. But if they are harder to get, it will take longer for the housing market to recover as a glut of unsold houses could lead to even more declines in real estate values.
"Fewer buyers who can come into the market mean more homes on the market," LaMalfa said. "The absence of an increase in demand will put further pressure on prices."
Have you lost your job, your business or your home? Are you raiding retirement accounts to pay the bills? We want to hear from you. Tell us how you're being affected by the weakening economy and you could be profiled in an upcoming story. Send emails to realstories@cnnmoney.com.
First Published: March 13, 2008: 3:45 AM EDT
Thursday, March 13, 2008
Friday, February 8, 2008
Refinancing: Only for the privileged few
Sure, now is a great time to refinance - that is, if you can still qualify. Here is what lenders are looking for.
By Les Christie, CNNMoney.com staff writer
February 8 2008: 8:03 AM EST
NEW YORK (CNNMoney.com) -- The good news: mortgage rates are down and applications for refinancings are up. The bad news: it's much harder to qualify for a refinanced loan these days.
What's more, the borrowers who need to refinance the most - because their adjustable rate mortgages (ARMs) are resetting to higher interest rates - are among those having the most trouble winning approvals.
"I'm turning away about 60% to 75% of the clients who come to me for a refi," said Bob Moulton, president of Americana Mortgage Group on Long Island, N.Y. "Some don't have enough equity and others have bad credit scores."
During the boom years, lenders approved most anyone with a pulse. Not so today. Mortgage brokers recognize this and are now being very selective about the clients whose applications they choose to submit to the likes of Wells Fargo or Bank of America.
If an applicant has poor credit, or a home whose value is rapidly deteriorating, they're just not going to bother.
"If the person is Sweet Polly Purebread -- good income, good assets, high credit score -- there's money out there," said Moulton. "But if not, then it's harder."
Interest rates are way down - 5.67% is the going rate for a a 30-year fixed loan this week, according to Freddie Mac - which in turn has generated a spike in refinancing applications.
Total mortgage applications were up 73% last week compared with the same period 12 months ago, according to the Mortgage Bankers Association (MBA), and 69%of those applications were from borrowers seeking to refinance. Last February, when interest rates were about 6.3%, about 46% of applications were for refis.
The make-or-break metric for anyone looking to refinance right now is home equity - the difference between what is owed on a house and what the house is worth. But with home prices down, many homeowners have little of that precious commodity left.
"If you have an 80% loan, with a 10% home equity loan, you may not be able to refinance," said Peter Grabel, a mortgage broker in Connecticut - especially in down markets.
Consider a homeowner who bought in Miami a year ago with 20% down. Home prices have fallen 15% there in the past year, wiping out three-quarters of the equity. Lenders, want collateral that's worth more than the value of the loan, are wary about having so little cushion. If they have to repossess and resell the house, they're on the hook for a big loss.
If there's no home equity, borrowers may have to come up with substantial cash and pay down the mortgage to make refinancing possible. Otherwise they're out of luck.
"No lender would take that deal," said Marc Savitt, president of the National Association of Mortgage Brokers. "It's a lot different from two years ago."
The bar has also been raised for credit scores when it comes to refinancing, according to Grabel. And sometimes, it's not a matter of whether someone can get refinancing but at what price.
"Those with high credit scores are getting very good rates, but the lenders have heightened the requirements to qualify," said Grabel. Instead of a score of 680 for the best rate, a borrower might need 700 now.
For example, he has a client who wants a cash-out deal. The client has lots of equity in his house but a dismal credit score - 552.
"I used to have 20 lenders I could send him to; now there's maybe one," said Grabel. "The rate, though, will be high, higher than what he's paying now. Lenders may do a loan, but it may not make financial sense for the borrower."
The only reason that this client will take the deal is because he's going through a divorce and needs to buy out his wife. He doesn't have time to rebuild his credit rating, but he's lucky that at least his house appraises well.
Indeed, appraisals are another tool that lenders are using to eliminate unqualified applicants..
"It used to be a formality," said Grabel. "Now it's, 'Lets do the appraisal first and see what value comes in." Lenders are scrutinizing them to a degree unheard of during the boom. They don't want to lend $160,000 on an appraised value of $200,000 unless they're sure the house is truly worth that.
Ted Grose, a past president of the California Association of Mortgage Brokers, said lenders now often conduct what he called "bench reviews" of appraisals. "They have an experienced, independent third-party go over the appraisal to make sure the numbers are accurate," he said.
Grose called many of the applicants he sees "very challenging, mostly because of high loan-to-value ratios."
Many of these people took exotic loans to get into high-priced properties. They used hybrid ARMs that are resetting to higher rates, or interest only loans.
Particularly deadly are option ARMs, which act as negative amortization loans; the payments don't even cover the interest and the balance grows over time. Combine that with falling home prices, and the loan balance may be more than the home's market value.
Under those circumstances, said Grose, few borrowers can be helped.
By Les Christie, CNNMoney.com staff writer
February 8 2008: 8:03 AM EST
NEW YORK (CNNMoney.com) -- The good news: mortgage rates are down and applications for refinancings are up. The bad news: it's much harder to qualify for a refinanced loan these days.
What's more, the borrowers who need to refinance the most - because their adjustable rate mortgages (ARMs) are resetting to higher interest rates - are among those having the most trouble winning approvals.
"I'm turning away about 60% to 75% of the clients who come to me for a refi," said Bob Moulton, president of Americana Mortgage Group on Long Island, N.Y. "Some don't have enough equity and others have bad credit scores."
During the boom years, lenders approved most anyone with a pulse. Not so today. Mortgage brokers recognize this and are now being very selective about the clients whose applications they choose to submit to the likes of Wells Fargo or Bank of America.
If an applicant has poor credit, or a home whose value is rapidly deteriorating, they're just not going to bother.
"If the person is Sweet Polly Purebread -- good income, good assets, high credit score -- there's money out there," said Moulton. "But if not, then it's harder."
Interest rates are way down - 5.67% is the going rate for a a 30-year fixed loan this week, according to Freddie Mac - which in turn has generated a spike in refinancing applications.
Total mortgage applications were up 73% last week compared with the same period 12 months ago, according to the Mortgage Bankers Association (MBA), and 69%of those applications were from borrowers seeking to refinance. Last February, when interest rates were about 6.3%, about 46% of applications were for refis.
The make-or-break metric for anyone looking to refinance right now is home equity - the difference between what is owed on a house and what the house is worth. But with home prices down, many homeowners have little of that precious commodity left.
"If you have an 80% loan, with a 10% home equity loan, you may not be able to refinance," said Peter Grabel, a mortgage broker in Connecticut - especially in down markets.
Consider a homeowner who bought in Miami a year ago with 20% down. Home prices have fallen 15% there in the past year, wiping out three-quarters of the equity. Lenders, want collateral that's worth more than the value of the loan, are wary about having so little cushion. If they have to repossess and resell the house, they're on the hook for a big loss.
If there's no home equity, borrowers may have to come up with substantial cash and pay down the mortgage to make refinancing possible. Otherwise they're out of luck.
"No lender would take that deal," said Marc Savitt, president of the National Association of Mortgage Brokers. "It's a lot different from two years ago."
The bar has also been raised for credit scores when it comes to refinancing, according to Grabel. And sometimes, it's not a matter of whether someone can get refinancing but at what price.
"Those with high credit scores are getting very good rates, but the lenders have heightened the requirements to qualify," said Grabel. Instead of a score of 680 for the best rate, a borrower might need 700 now.
For example, he has a client who wants a cash-out deal. The client has lots of equity in his house but a dismal credit score - 552.
"I used to have 20 lenders I could send him to; now there's maybe one," said Grabel. "The rate, though, will be high, higher than what he's paying now. Lenders may do a loan, but it may not make financial sense for the borrower."
The only reason that this client will take the deal is because he's going through a divorce and needs to buy out his wife. He doesn't have time to rebuild his credit rating, but he's lucky that at least his house appraises well.
Indeed, appraisals are another tool that lenders are using to eliminate unqualified applicants..
"It used to be a formality," said Grabel. "Now it's, 'Lets do the appraisal first and see what value comes in." Lenders are scrutinizing them to a degree unheard of during the boom. They don't want to lend $160,000 on an appraised value of $200,000 unless they're sure the house is truly worth that.
Ted Grose, a past president of the California Association of Mortgage Brokers, said lenders now often conduct what he called "bench reviews" of appraisals. "They have an experienced, independent third-party go over the appraisal to make sure the numbers are accurate," he said.
Grose called many of the applicants he sees "very challenging, mostly because of high loan-to-value ratios."
Many of these people took exotic loans to get into high-priced properties. They used hybrid ARMs that are resetting to higher rates, or interest only loans.
Particularly deadly are option ARMs, which act as negative amortization loans; the payments don't even cover the interest and the balance grows over time. Combine that with falling home prices, and the loan balance may be more than the home's market value.
Under those circumstances, said Grose, few borrowers can be helped.
Friday, February 1, 2008
Foreclosure:
What It Means, How It Works Foreclosure is the process through which a lender can sell or repossess (take ownership of) a property in order to recover the amount owed on a defaulted loan secured by the property. Anyone worried about missing their home payments--or those thinking about purchasing a foreclosure property--should understand how foreclosures work.State laws govern the foreclosure process, and they vary from state to state. You'll want to check with your own state to learn the details, including whether a judicial procedure is required (see box below).Following is a broad-brush summary of the three stages of foreclosure, assuming the homeowner fails to satisfy the repayment obligation along the way.
Pre-foreclosure. This stage begins when the homeowner falls behind on home-loan payments (or sometimes other terms of the loan). Lenders may wait for a second, third or even fourth missed payment before sending the homeowner a "default" notice--which becomes public record. The homeowner then has a given period of time to respond to the notice and/or come up with the outstanding payments and fees--often by selling the home. (If a judicial procedure is required, it occurs after the default notice is given.)
Foreclosure. At this stage, the former homeowner may or may not have been evicted (depending on state law) when the lender puts the home up for public auction (after a judgment of foreclosure in those states requiring judicial procedure). If the home sells at auction, money from the sale is used to pay off the costs of the foreclosure, tax and other prior liens, service charges and advances, interest and principal on the mortgage, late charges or fees, and liens recorded after the first mortgage. Any amount left over is paid to the borrower (former homeowner). Often, however, proceeds of the sale are less than the various amounts owed, in which case the lender may be able to hold the borrower responsible for the difference.
"Real Estate Owned." A foreclosed property that does not sell at auction--either because no one bid on it or bids were too low to cover the outstanding loan--becomes the property of the lender (or government agency that guaranteed the loan--HUD, VA, etc.). Most lenders prefer to list their "real estate owned (REO)" homes for sale through real estate brokers, rather than keeping them or managing the sale of REOs themselves.
HOMEOWNER BEWARE
Avoid Getting Hooked By A Foreclosure-Related ScamThere are lots of people out there willing to victimize people in financial difficulty--especially when their troubles become part of public record. Beware of offers involving signing over your deed to someone else who promises to sell your home for you--whether they do or not, you'll still be responsible for the mortgage.Also, investigate people who offer to buy your property so you can avoid foreclosure. They may be legitimate but, to be on the safe side, check them out by contacting your state Attorney General, the state Real Estate Commission, or the local District Attorney's consumer fraud unit.Finally, consider carefully any "counseling agencies" that offer foreclosure-mitigation services for a fee. In many cases, they offer services you can perform yourself, such as negotiating a workout plan with your lender.If you decide to conduct a pre-foreclosure sale, give us a call. We'll work with you to make sure your interests are protected in the transaction.Keep in mind that if you have a loan ensured by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD) offers a toll-free number you can call to find a HUD-approved housing counseling agency: (800) 569-4287. For more information about foreclosures provided by HUD, go online to: www.HUD.gov/offices/hsg/sfh/econ/econ.cfm.Foreclosure FactThe type of foreclosure procedure followed in a state depends on whether real property is purchased there using mortgages or deeds of trust. (Some states use both.) In general, states that use mortgages require a judicial procedure through which the lender must get court approval to initiate foreclosure. Where a deed of trust containing a "power of sale" clause is used to purchase property, the lender can initiate a foreclosure sale without going to court.
What It Means, How It Works Foreclosure is the process through which a lender can sell or repossess (take ownership of) a property in order to recover the amount owed on a defaulted loan secured by the property. Anyone worried about missing their home payments--or those thinking about purchasing a foreclosure property--should understand how foreclosures work.State laws govern the foreclosure process, and they vary from state to state. You'll want to check with your own state to learn the details, including whether a judicial procedure is required (see box below).Following is a broad-brush summary of the three stages of foreclosure, assuming the homeowner fails to satisfy the repayment obligation along the way.
Pre-foreclosure. This stage begins when the homeowner falls behind on home-loan payments (or sometimes other terms of the loan). Lenders may wait for a second, third or even fourth missed payment before sending the homeowner a "default" notice--which becomes public record. The homeowner then has a given period of time to respond to the notice and/or come up with the outstanding payments and fees--often by selling the home. (If a judicial procedure is required, it occurs after the default notice is given.)
Foreclosure. At this stage, the former homeowner may or may not have been evicted (depending on state law) when the lender puts the home up for public auction (after a judgment of foreclosure in those states requiring judicial procedure). If the home sells at auction, money from the sale is used to pay off the costs of the foreclosure, tax and other prior liens, service charges and advances, interest and principal on the mortgage, late charges or fees, and liens recorded after the first mortgage. Any amount left over is paid to the borrower (former homeowner). Often, however, proceeds of the sale are less than the various amounts owed, in which case the lender may be able to hold the borrower responsible for the difference.
"Real Estate Owned." A foreclosed property that does not sell at auction--either because no one bid on it or bids were too low to cover the outstanding loan--becomes the property of the lender (or government agency that guaranteed the loan--HUD, VA, etc.). Most lenders prefer to list their "real estate owned (REO)" homes for sale through real estate brokers, rather than keeping them or managing the sale of REOs themselves.
HOMEOWNER BEWARE
Avoid Getting Hooked By A Foreclosure-Related ScamThere are lots of people out there willing to victimize people in financial difficulty--especially when their troubles become part of public record. Beware of offers involving signing over your deed to someone else who promises to sell your home for you--whether they do or not, you'll still be responsible for the mortgage.Also, investigate people who offer to buy your property so you can avoid foreclosure. They may be legitimate but, to be on the safe side, check them out by contacting your state Attorney General, the state Real Estate Commission, or the local District Attorney's consumer fraud unit.Finally, consider carefully any "counseling agencies" that offer foreclosure-mitigation services for a fee. In many cases, they offer services you can perform yourself, such as negotiating a workout plan with your lender.If you decide to conduct a pre-foreclosure sale, give us a call. We'll work with you to make sure your interests are protected in the transaction.Keep in mind that if you have a loan ensured by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD) offers a toll-free number you can call to find a HUD-approved housing counseling agency: (800) 569-4287. For more information about foreclosures provided by HUD, go online to: www.HUD.gov/offices/hsg/sfh/econ/econ.cfm.Foreclosure FactThe type of foreclosure procedure followed in a state depends on whether real property is purchased there using mortgages or deeds of trust. (Some states use both.) In general, states that use mortgages require a judicial procedure through which the lender must get court approval to initiate foreclosure. Where a deed of trust containing a "power of sale" clause is used to purchase property, the lender can initiate a foreclosure sale without going to court.
Wednesday, January 23, 2008
An Article of Interest
6 Money Dilemmas (Part 1 of 3)
As you invest your money, shop for a home or tackle any one of the many financial decisions you have to make over your lifetime, do you sometimes wish you'd paid more attention in math class? Do you find yourself having to "run the numbers" and wondering how? To help, we've taken six common financial quandaries and done the math for you. As you'll see, the solution isn't always black and white, and the "right" answer may depend on things that you can never know for sure, like your tax bracket in 2020 or how your investments will grow.
Emotional considerations may tip the balance. Even if the math favors buying stocks over prepaying your mortgage, say, you may simply sleep better being out of debt. So this guide will walk you through the caveats as well as the calculations. Come up with your best call.
Pay off a credit card or fund your 401(k)? You should do both. If you can't, pay off the plastic first. In an ideal world, you'd wipe out your costly debts and save for retirement. But in the real world, you may not have enough cash to do both at the same time. Of course, you must pay at least the minimum on your credit card every month. So the question is: Do you put the rest of your available cash in your 401(k) or devote it all to your credit card?
By paying off credit-card debt, you get a guaranteed rate of return equal to your interest rate (the average is 14 percent today). But if your employer matches your 401(k) contributions, that's a 50 percent return (assuming the typical 50¢-to-the-dollar match on the first 6 percent of your salary). Hard to beat. Or is it? The 50 percent match is a one-time gift; the 14 percent interest will compound every year. At some point the cost of that interest will overtake 50 percent. So if you have a big credit-card balance, attack that first.
Let’s say you're deciding what to do with $250 a month. With a $5,000 credit-card balance at a 14 percent rate, your minimum payment is $125 a month. Suppose you put the rest in your 401(k). Because you don't pay taxes on that contribution, you can actually invest $174 a month (assuming a 28 percent tax rate). Keep paying $125 a month on your credit-card balance, and you'll need 55 months to wipe it out. But, if you earn 8 percent annual returns and get the standard 50 percent match, you'll amass $17,271 in your 401(k).
If you plow your entire $250 toward the credit card, you'll pay it off in just 23 months. Then you could devote all your spare cash to your 401(k). By the end of the original 55 months, you'd have $18,515 in your plan. The one-at-a-time approach beats splitting your money because 55 months of paying 14 percent interest outweighs the 50 percent match.
If your credit-card debt isn't that big, and you can pay it off in just a couple of years even if you split your cash, go ahead and fund both goals. You'll get the benefit of the 50 percent match. The bottom line: If you have a big credit-card balance, wipe it out before you open a 401(k).
Save in a Roth 401(k) or a regular 401(k)? Wish you could shelter your retirement savings from taxes, but you make too much to contribute to a Roth IRA? With the recent arrival of the Roth 401(k), you may have, or may soon be getting, a second chance at tax-free income. Grab it. With a traditional 401(k) you invest pretax dollars and pay taxes when you withdraw money; with the Roth you pay taxes on what you put in but nothing on your withdrawals. About a quarter of employers have rolled out this option, and a majority of plans will likely offer it by 2009. Unlike a Roth IRA, a Roth 401(k) has no income caps.
Let's say that you contribute the maximum of $15,500 to your 401(k) and you're in the 28 percent tax bracket. Assuming an 8 percent annual return, you'll end up with $72,245 tax-free in 20 years with a Roth. If you go with the traditional 401(k) instead, you'll also end up with $72,245 in 20 years, but you'll pay taxes on the withdrawals. At the same 28 percent tax rate, you'd be left with $52,016 you could actually spend. When you fund the traditional 401(k), however, you shelter $15,500 from taxes. But even if you invest that $4,340 tax savings outside your plan, you'd have to earn well in excess of 8 percent a year to equal your Roth total after taxes.
By: Janice Revell, www.money.cnn.com
6 Money Dilemmas (Part 1 of 3)
As you invest your money, shop for a home or tackle any one of the many financial decisions you have to make over your lifetime, do you sometimes wish you'd paid more attention in math class? Do you find yourself having to "run the numbers" and wondering how? To help, we've taken six common financial quandaries and done the math for you. As you'll see, the solution isn't always black and white, and the "right" answer may depend on things that you can never know for sure, like your tax bracket in 2020 or how your investments will grow.
Emotional considerations may tip the balance. Even if the math favors buying stocks over prepaying your mortgage, say, you may simply sleep better being out of debt. So this guide will walk you through the caveats as well as the calculations. Come up with your best call.
Pay off a credit card or fund your 401(k)? You should do both. If you can't, pay off the plastic first. In an ideal world, you'd wipe out your costly debts and save for retirement. But in the real world, you may not have enough cash to do both at the same time. Of course, you must pay at least the minimum on your credit card every month. So the question is: Do you put the rest of your available cash in your 401(k) or devote it all to your credit card?
By paying off credit-card debt, you get a guaranteed rate of return equal to your interest rate (the average is 14 percent today). But if your employer matches your 401(k) contributions, that's a 50 percent return (assuming the typical 50¢-to-the-dollar match on the first 6 percent of your salary). Hard to beat. Or is it? The 50 percent match is a one-time gift; the 14 percent interest will compound every year. At some point the cost of that interest will overtake 50 percent. So if you have a big credit-card balance, attack that first.
Let’s say you're deciding what to do with $250 a month. With a $5,000 credit-card balance at a 14 percent rate, your minimum payment is $125 a month. Suppose you put the rest in your 401(k). Because you don't pay taxes on that contribution, you can actually invest $174 a month (assuming a 28 percent tax rate). Keep paying $125 a month on your credit-card balance, and you'll need 55 months to wipe it out. But, if you earn 8 percent annual returns and get the standard 50 percent match, you'll amass $17,271 in your 401(k).
If you plow your entire $250 toward the credit card, you'll pay it off in just 23 months. Then you could devote all your spare cash to your 401(k). By the end of the original 55 months, you'd have $18,515 in your plan. The one-at-a-time approach beats splitting your money because 55 months of paying 14 percent interest outweighs the 50 percent match.
If your credit-card debt isn't that big, and you can pay it off in just a couple of years even if you split your cash, go ahead and fund both goals. You'll get the benefit of the 50 percent match. The bottom line: If you have a big credit-card balance, wipe it out before you open a 401(k).
Save in a Roth 401(k) or a regular 401(k)? Wish you could shelter your retirement savings from taxes, but you make too much to contribute to a Roth IRA? With the recent arrival of the Roth 401(k), you may have, or may soon be getting, a second chance at tax-free income. Grab it. With a traditional 401(k) you invest pretax dollars and pay taxes when you withdraw money; with the Roth you pay taxes on what you put in but nothing on your withdrawals. About a quarter of employers have rolled out this option, and a majority of plans will likely offer it by 2009. Unlike a Roth IRA, a Roth 401(k) has no income caps.
Let's say that you contribute the maximum of $15,500 to your 401(k) and you're in the 28 percent tax bracket. Assuming an 8 percent annual return, you'll end up with $72,245 tax-free in 20 years with a Roth. If you go with the traditional 401(k) instead, you'll also end up with $72,245 in 20 years, but you'll pay taxes on the withdrawals. At the same 28 percent tax rate, you'd be left with $52,016 you could actually spend. When you fund the traditional 401(k), however, you shelter $15,500 from taxes. But even if you invest that $4,340 tax savings outside your plan, you'd have to earn well in excess of 8 percent a year to equal your Roth total after taxes.
By: Janice Revell, www.money.cnn.com
Friday, January 4, 2008
Pressure Mounting for Big Rate Cut
An uptick in the unemployment rate has Wall Street calling for the Fed to lower rates by a half-point.
By Paul R. La Monica, CNNMoney.com editor at large
January 4 2008: 12:27 PM EST
NEW YORK (CNNMoney.com) -- With unemployment rising to 5 percent in December and jobs growth coming in well below forecasts, economists said the Federal Reserve may be forced to slash interest rates when it meets later this month in order to stave off a recession.
In another step to combat the slowing economy, the Fed also announced Friday that it was going to lend up to $60 billion more to banks in two auctions later this month and that it would decide by February 1 if it will conduct more auctions. The auctions are part of a plan the Fed announced in December to to try and restore order to the distressed financial markets.
The government reported December employment figures on Friday. Only 18,000 jobs were added to the nation's payrolls while economists were predicting job growth of 70,000. What's more, the unemployment rate was expected to come in at 4.8 percent, up from 4.7 percent in November.
As a result of these gloomy numbers, expectations for a half-point rate cut grew Friday morning. According to futures listed on the Chicago Board of Trade, investors are pricing in a 78 percent chance that the Fed will lower the federal funds rates by 50 basis points, to 3.75 percent, at the conclusion of its two-day meeting on January 30. There are 100 basis points in a full percentage point.
"The jobs numbers make a half point cut plausible," said Keith Hembre, chief economist with First American Funds in Minneapolis. "The unemployment rate has moved up to 5 percent from 4.4 percent last March and we've usually not had an upward movement of that magnitude outside of a recession."
Prior to the jobs report, investors were pricing in a 67 percent chance of a half-point cut as recession fears have grown in recent days. A report released Wednesday indicated that manufacturing activity is softening while oil prices, which hit $100 this week, have raised concerns that consumers may pull back on spending as a result of higher energy prices.
The Fed last cut the federal funds rate, a key overnight bank lending rate that affects rates for credit card debt, home equity lines of credit and auto loans, by a quarter-point to 4.25 percent on Dec. 11.
In the minutes from that meeting, released on Wednesday, the Fed hinted that more "substantial" rate cuts might be needed if the economy continued to show signs of weakness in the face of the credit crunch caused by last year's subprime mortgage meltdown.
John Lynch, chief market analyst for Evergreen Investments in Charlotte said that he thinks the Fed will now lower rates to at least 3.5 percent by mid-year. He said that despite the spike in oil and other commodities such as gold, the Fed would probably be more comfortable with inflation picking up a bit if it meant that the economy did not go into recession.
With the economy showing so many signs of sluggishness, it's going to be tough for the Fed to argue that inflation is the bigger bugaboo.
"There is no debate with the latest round of numbers. Everything points to a significantly slower economy," said Joe Balestrino, fixed income market strategist with Federated Investors in Pittsburgh.
Still, more rate cuts have the potential to lift oil and other commodity prices further since lower rates likely would further weaken the dollar. With that in mind, there are concerns that the Fed may not be as aggressive as Wall Street wants it to be.
"$100 oil is an unusual factor," Hembre said. "While it doesn't completely change inflation expectations it does complicate things a bit."
Nonetheless, investors are also worried that more rate cuts from the Fed may be too late to save the economy from dipping into a recession.
"A 50 point cut might not make that much difference in stopping a free fall if that is happening," said Oscar Gonzalez, economist with John Hancock Financial Services in Boston.
Gonzalez cautions that he thinks it's still too soon to say that the "sky is falling." But he would be worried if the jobs numbers for January are as bad as they were for December.
"If employment continues to weaken, we could be in for a very rough patch of economic news for at least the next few quarters," Gonzalez said.
Despite the weak numbers, economists said they did not think the Fed would hold an emergency meeting before Jan. 30 to talk about cutting rates.
Hembre said that it would take a "calamity" such as much weaker than expected retail sales figures for December or a lot more volatility in the stock and bond markets to justify an intermeeting move.
Stocks did not react well to the jobs news, with the Dow falling more than 140 points, or 1.1 percent in early afternoon trading and the S&P 500 off by about 1.4 percent .The Nasdaq plunged more than 2.3 percent.
Bonds continued to rally, sending the yield on the benchmark 10-Year U.S. Treasury down to 3.85 percent. Bond prices and yields move in opposite directions and lower yields are typical during a sluggish economic environment.
But Gonzalez suggested that a rate cut before Jan. 30 might actually cause stocks and bond yields to fall further since it could be construed as a sign of desperation by the Fed.
"An intermeeting move would be a cause for alarm," he said.
Instead, Gonzalez thinks the Fed is more likely to use creative ways to try to restore confidence in the markets and economy, such as the Term Auction Facility it announced last month in conjunction with central banks in Canada and Europe.
The Fed devised this proposal in order to encourage banks that need cash to ask for money without having to borrow directly from the Fed at the discount rate, which is higher than the federal funds rate.
The central bank has already loaned a combined $40 billion to financial institutions during two auctions last month. There was strong demand for these auctions and in both cases, the rates for the loans were below the discount rate of 4.75 percent.
The Fed said Friday it would hold its next auction, of up to $30 billion, on January 14 and that another auction of up to $30 billion would take place on January 28.
Balestrino is cautiously optimistic that a half-point cut, combined with the Fed's three rate cuts in 2007, could keep the economy from heading into a recession.
He adds that if the economy continues to slow in the next few months, the Fed could lower rates by a half-point at its March 18 meeting, or even at an unscheduled meeting in February.
Fed lends $20 billion to banks in first auctionBernanke's tightrope actFed cuts rates by quarter-point
An uptick in the unemployment rate has Wall Street calling for the Fed to lower rates by a half-point.
By Paul R. La Monica, CNNMoney.com editor at large
January 4 2008: 12:27 PM EST
NEW YORK (CNNMoney.com) -- With unemployment rising to 5 percent in December and jobs growth coming in well below forecasts, economists said the Federal Reserve may be forced to slash interest rates when it meets later this month in order to stave off a recession.
In another step to combat the slowing economy, the Fed also announced Friday that it was going to lend up to $60 billion more to banks in two auctions later this month and that it would decide by February 1 if it will conduct more auctions. The auctions are part of a plan the Fed announced in December to to try and restore order to the distressed financial markets.
The government reported December employment figures on Friday. Only 18,000 jobs were added to the nation's payrolls while economists were predicting job growth of 70,000. What's more, the unemployment rate was expected to come in at 4.8 percent, up from 4.7 percent in November.
As a result of these gloomy numbers, expectations for a half-point rate cut grew Friday morning. According to futures listed on the Chicago Board of Trade, investors are pricing in a 78 percent chance that the Fed will lower the federal funds rates by 50 basis points, to 3.75 percent, at the conclusion of its two-day meeting on January 30. There are 100 basis points in a full percentage point.
"The jobs numbers make a half point cut plausible," said Keith Hembre, chief economist with First American Funds in Minneapolis. "The unemployment rate has moved up to 5 percent from 4.4 percent last March and we've usually not had an upward movement of that magnitude outside of a recession."
Prior to the jobs report, investors were pricing in a 67 percent chance of a half-point cut as recession fears have grown in recent days. A report released Wednesday indicated that manufacturing activity is softening while oil prices, which hit $100 this week, have raised concerns that consumers may pull back on spending as a result of higher energy prices.
The Fed last cut the federal funds rate, a key overnight bank lending rate that affects rates for credit card debt, home equity lines of credit and auto loans, by a quarter-point to 4.25 percent on Dec. 11.
In the minutes from that meeting, released on Wednesday, the Fed hinted that more "substantial" rate cuts might be needed if the economy continued to show signs of weakness in the face of the credit crunch caused by last year's subprime mortgage meltdown.
John Lynch, chief market analyst for Evergreen Investments in Charlotte said that he thinks the Fed will now lower rates to at least 3.5 percent by mid-year. He said that despite the spike in oil and other commodities such as gold, the Fed would probably be more comfortable with inflation picking up a bit if it meant that the economy did not go into recession.
With the economy showing so many signs of sluggishness, it's going to be tough for the Fed to argue that inflation is the bigger bugaboo.
"There is no debate with the latest round of numbers. Everything points to a significantly slower economy," said Joe Balestrino, fixed income market strategist with Federated Investors in Pittsburgh.
Still, more rate cuts have the potential to lift oil and other commodity prices further since lower rates likely would further weaken the dollar. With that in mind, there are concerns that the Fed may not be as aggressive as Wall Street wants it to be.
"$100 oil is an unusual factor," Hembre said. "While it doesn't completely change inflation expectations it does complicate things a bit."
Nonetheless, investors are also worried that more rate cuts from the Fed may be too late to save the economy from dipping into a recession.
"A 50 point cut might not make that much difference in stopping a free fall if that is happening," said Oscar Gonzalez, economist with John Hancock Financial Services in Boston.
Gonzalez cautions that he thinks it's still too soon to say that the "sky is falling." But he would be worried if the jobs numbers for January are as bad as they were for December.
"If employment continues to weaken, we could be in for a very rough patch of economic news for at least the next few quarters," Gonzalez said.
Despite the weak numbers, economists said they did not think the Fed would hold an emergency meeting before Jan. 30 to talk about cutting rates.
Hembre said that it would take a "calamity" such as much weaker than expected retail sales figures for December or a lot more volatility in the stock and bond markets to justify an intermeeting move.
Stocks did not react well to the jobs news, with the Dow falling more than 140 points, or 1.1 percent in early afternoon trading and the S&P 500 off by about 1.4 percent .The Nasdaq plunged more than 2.3 percent.
Bonds continued to rally, sending the yield on the benchmark 10-Year U.S. Treasury down to 3.85 percent. Bond prices and yields move in opposite directions and lower yields are typical during a sluggish economic environment.
But Gonzalez suggested that a rate cut before Jan. 30 might actually cause stocks and bond yields to fall further since it could be construed as a sign of desperation by the Fed.
"An intermeeting move would be a cause for alarm," he said.
Instead, Gonzalez thinks the Fed is more likely to use creative ways to try to restore confidence in the markets and economy, such as the Term Auction Facility it announced last month in conjunction with central banks in Canada and Europe.
The Fed devised this proposal in order to encourage banks that need cash to ask for money without having to borrow directly from the Fed at the discount rate, which is higher than the federal funds rate.
The central bank has already loaned a combined $40 billion to financial institutions during two auctions last month. There was strong demand for these auctions and in both cases, the rates for the loans were below the discount rate of 4.75 percent.
The Fed said Friday it would hold its next auction, of up to $30 billion, on January 14 and that another auction of up to $30 billion would take place on January 28.
Balestrino is cautiously optimistic that a half-point cut, combined with the Fed's three rate cuts in 2007, could keep the economy from heading into a recession.
He adds that if the economy continues to slow in the next few months, the Fed could lower rates by a half-point at its March 18 meeting, or even at an unscheduled meeting in February.
Fed lends $20 billion to banks in first auctionBernanke's tightrope actFed cuts rates by quarter-point
Thursday, December 20, 2007
Tuesday, December 18, 2007
Fed to tighten up lending rules
The central bank is expected to propose regulations that would offer greater protections for home buyers and curtail abusive lending.
By Jeanne Sahadi, CNNMoney.com senior writer
December 17 2007: 2:51 PM EST
NEW YORK (CNNMoney.com) -- The Federal Reserve on Tuesday will propose a much stricter set of rules for mortgage lenders as part of the central bank's effort to avert abusive lending.
The proposed rules are expected to crack down on lax practices in a number of ways. Among them, the rules are likely to:
Prohibit giving people unaffordable loans. One reason for the spike in foreclosures among those with subprime adjustable-rate mortgages (ARMs) was that lenders measured borrowers' ability to repay the loan based on the low introductory loan rate, but not on the higher rate that the loan would reset to. The Fed may propose that lenders base affordability on a borrowers' ability to repay a loan at the reset rate.
Restrict use of 'liar' loans. The Fed is also expected to restrict the use of so-called "liar loans" or "stated income loans." When lenders make such a loan, they don't verify the income of the potential borrower. The end result: home buyers end up with homes they never could afford in the first place, let alone when their rate resets.
Prohibit or limit prepayment penalties. Homeowners who want to refinance into a more affordable loan are often prevented from doing so because of a punitive prepayment penalty - which can amount to the equivalent of six months of mortgage payments.
If the Fed doesn't ban them outright, it may at least require that lenders waive any prepayment penalties for 60 days prior to a loan rate resetting.
Curb or better disclose broker incentives. To encourage brokers to bring in more business, lenders can pay a broker to lock-in customers at higher rates than they'd otherwise qualify for.
For example, a lender might pay brokers 1 percent of the loan amount for every half point of interest added to what's known as the "par rate" - the rate the borrower would qualify for based on their credit score and other standards. This incentive is known as the "yield spread premium."
And lenders would impose prepayment penalties on the borrower as one way to ensure the lender made back the yield spread premium they paid. (How yield-spread premiums can bite you)
The Fed on Tuesday is expected to address this issue, although it is not clear how restrictive they may make the practice or if they'll just insist on clearer disclosure to the borrower of the incentives being paid.
Require or encourage escrowing of taxes and insurance. Subprime lenders often did not disclose the true cost of a home. They might have excluded home insurance and property taxes, for example. Nor did they collect taxes and insurance along with the mortgage payment and hold them in escrow for the borrower until they came due.
The Fed is likely at the very least to require all lenders to disclose the cost of insurance and taxes, if not also the collection of them with each mortgage payment for certain types of loans, according to reports in "American Banker."
Require better disclosure overall. In a letter last week to Rep. Brad Miller (D-NC), Bernanke indicated that the Fed would propose rules to address incomplete or misleading mortgage ads and to require earlier and clearer disclosures by mortgage lenders so that "consumers avoid loans that are not in their interest."
Congress has been considering its own crackdown on mortgage lenders with two bills the cover some of the same territory that the Fed is expected to cover but also go further.
While consumer advocates and lawmakers are eager to hear what the Fed is proposing and welcome the central bank taking action, they have been critical that the Fed didn't act sooner to avert the present-day mortgage mess. The Fed was given the power to issue rules to clamp down on abusive mortgage lending in 1994 under the Home Ownership and Equity Protection Act (HOEPA).
"HOEPA authorized and directed the Fed to issue rules to address unfair mortgage practices. For 13 years, that authority sat on the shelf unused," said Miller (D-NC), who co-wrote the mortgage lending abuse bill that passed in the House in November.
Still, Miller said, "it would be a huge help if the Fed proposed rules that got at the real abuses."
Where the provisions in the Senate and House bills overlap with what the Fed calls for, Miller said, it's possible they would be removed from the bills under consideration. "The number of fronts would be reduced dramatically. ... maybe we wouldn't fight the same battle where we've had substantial victory."
The rules the Fed proposes on Tuesday will not be made final until the Fed receives public comments on the proposals for some period of time, after which the Fed could make amendments before issuing its final rules.
The central bank is expected to propose regulations that would offer greater protections for home buyers and curtail abusive lending.
By Jeanne Sahadi, CNNMoney.com senior writer
December 17 2007: 2:51 PM EST
NEW YORK (CNNMoney.com) -- The Federal Reserve on Tuesday will propose a much stricter set of rules for mortgage lenders as part of the central bank's effort to avert abusive lending.
The proposed rules are expected to crack down on lax practices in a number of ways. Among them, the rules are likely to:
Prohibit giving people unaffordable loans. One reason for the spike in foreclosures among those with subprime adjustable-rate mortgages (ARMs) was that lenders measured borrowers' ability to repay the loan based on the low introductory loan rate, but not on the higher rate that the loan would reset to. The Fed may propose that lenders base affordability on a borrowers' ability to repay a loan at the reset rate.
Restrict use of 'liar' loans. The Fed is also expected to restrict the use of so-called "liar loans" or "stated income loans." When lenders make such a loan, they don't verify the income of the potential borrower. The end result: home buyers end up with homes they never could afford in the first place, let alone when their rate resets.
Prohibit or limit prepayment penalties. Homeowners who want to refinance into a more affordable loan are often prevented from doing so because of a punitive prepayment penalty - which can amount to the equivalent of six months of mortgage payments.
If the Fed doesn't ban them outright, it may at least require that lenders waive any prepayment penalties for 60 days prior to a loan rate resetting.
Curb or better disclose broker incentives. To encourage brokers to bring in more business, lenders can pay a broker to lock-in customers at higher rates than they'd otherwise qualify for.
For example, a lender might pay brokers 1 percent of the loan amount for every half point of interest added to what's known as the "par rate" - the rate the borrower would qualify for based on their credit score and other standards. This incentive is known as the "yield spread premium."
And lenders would impose prepayment penalties on the borrower as one way to ensure the lender made back the yield spread premium they paid. (How yield-spread premiums can bite you)
The Fed on Tuesday is expected to address this issue, although it is not clear how restrictive they may make the practice or if they'll just insist on clearer disclosure to the borrower of the incentives being paid.
Require or encourage escrowing of taxes and insurance. Subprime lenders often did not disclose the true cost of a home. They might have excluded home insurance and property taxes, for example. Nor did they collect taxes and insurance along with the mortgage payment and hold them in escrow for the borrower until they came due.
The Fed is likely at the very least to require all lenders to disclose the cost of insurance and taxes, if not also the collection of them with each mortgage payment for certain types of loans, according to reports in "American Banker."
Require better disclosure overall. In a letter last week to Rep. Brad Miller (D-NC), Bernanke indicated that the Fed would propose rules to address incomplete or misleading mortgage ads and to require earlier and clearer disclosures by mortgage lenders so that "consumers avoid loans that are not in their interest."
Congress has been considering its own crackdown on mortgage lenders with two bills the cover some of the same territory that the Fed is expected to cover but also go further.
While consumer advocates and lawmakers are eager to hear what the Fed is proposing and welcome the central bank taking action, they have been critical that the Fed didn't act sooner to avert the present-day mortgage mess. The Fed was given the power to issue rules to clamp down on abusive mortgage lending in 1994 under the Home Ownership and Equity Protection Act (HOEPA).
"HOEPA authorized and directed the Fed to issue rules to address unfair mortgage practices. For 13 years, that authority sat on the shelf unused," said Miller (D-NC), who co-wrote the mortgage lending abuse bill that passed in the House in November.
Still, Miller said, "it would be a huge help if the Fed proposed rules that got at the real abuses."
Where the provisions in the Senate and House bills overlap with what the Fed calls for, Miller said, it's possible they would be removed from the bills under consideration. "The number of fronts would be reduced dramatically. ... maybe we wouldn't fight the same battle where we've had substantial victory."
The rules the Fed proposes on Tuesday will not be made final until the Fed receives public comments on the proposals for some period of time, after which the Fed could make amendments before issuing its final rules.
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