Bankruptcy & Foreclosures

Faced with increased talk of economic recession, the Fed made its second interest-rate cut this week today by slashing short-term rates by a half-percentage point.

This slash affects the federal funds rate – which is responsible for determining interest that consumers pay on their credit cards, home equity, and auto loans. This most recent rate cut pulled the rate down to 3.0% from 3.5%.

To date the Fed has never lowered the federal funds rate below 1 percent although word from many analysts is that a series of half-percentage point rate cuts (like the one that occurred today) would get rates down to such a low level in a matter of months.

This is good news to you and I as the federal funds rate slash will show up in the interest we pay on just about every loan, however, this trend puts a lot of pressure on the Federal Reserve. At 3.5% the rate is now less than inflation over the past year, meaning that the interest rate is in actuality a negative.

Despite these cuts, the White House continues to deny that the situation is as serious as it appears claiming that a report on fourth-quarter gross domestic product released earlier today does not affect its outlook.

The Department of Commerce tells a slightly different tale in their report showing the economy grew at an annual rate of a mere 0.6% from October to December (opposed to a annual growth rate of 4.9% over the three months prior).

Meanwhile the economic stimulus plan marches on amidst tax season. These are days where consumers benefit by tax rebates and rate cuts but must keep in mind that these incentives are being implemented in effort to boost spending- the only surefire measure to counteract a recession (whether the White House wants to admit it or not).

Just when you thought the economic stimulus package couldn’t possibly be sweetened any further, the Senate has proposed an additional perk to individuals living off Social Security. While ineligible under the House’s earlier proposed plan, the Senate’s package would reduce the size of the rebate to $500 for individuals and $1,000 for couples (rather than $600-$1,200 as the original plan had aimed) so as to include social security recipients.

Even if the rebate amount is lowered for working individuals, couples, and businesses, the plan comes in at a whopping $156 billion spread across the original 117 million families included in the House’s plan plus an additional 20 million senior citizens.

The Senate is truly on a mission with their plans, going on to propose extensions of unemployment benefits (13 weeks/ 26-weeks in states with high unemployment rates), additions and extensions to unemployment benefits, putting emphasis on home heating subsidies and grants, increasing food stamp benefits and approving funds for additional public works projects.

So we’ve been discussing tax rebates of late as a means of economic stimulation but believe it or not, Congress has been kicking around more direct ideas to stimulate the slumping mortgage market as well. Their plan, if approved, would raise the cap of GSEs- Government Sponsored Enterprise for a 12-month period.

Up until now the story for trying to spark life into the mortgage industry has been one of slashed interest rates to make borrowing more appealing. This new stimulus plan would differ by actually (temporarily) lifting the dollar amount of loans that are eligible for purchase by Fannie Mae and Freddie Mac which are insured by FHA (Federal Housing Administration).

The package would actually be confronting the economic recession on two major fronts by putting more cash in the hands of the individual and by increasing the number of loans that will qualify for FHA backing (hence lower interest on fixed rate mortgages).

Many annalists feel that the government’s quick acting measures to compensate for the weak areas of the crumbling economy may be the measure that separates this slump from earlier (full blown) recessions. Will it work? Only time will tell.