Bankruptcy & Foreclosures

High foreclosure rates, talk of recession, it seems like there is nothing but doom and gloom in the news today concerning the economy. But alas there is hope coming in the form of our government and as fate would have it, this happens to be election time.

Majority Democrats want the government to get involved by backing up to $400 billion in troubled loans. The goal is twofold: First to help strapped borrowers and also to thaw a credit market plagued by uncertainty about the value of subprime mortgages that were issued to individuals with spotty credit or low income.

Interestingly, the republicans don’t share the democratic view of economic resolve. In his speech delivered on the 25th of March, Senator John McCain argued against a more expansive role for the government in dealing with the economic crisis. While the candidates themselves argue about the best means for recovery, the current body of leadership has issued its own proposal.

Issuing the most radical proposed overhaul of financial oversight since the Great Depression, the Bush administration has fired up a fierce debate by pitting those eager to revamp an antiquated system (such as plans proposed by the democratic candidates) against an industry that has been typically opposed to excessive regulation.

The plan, set to be released tomorrow is quite well aware of the current situation which has meant billions of dollars of losses for banks and investment firms, the near-collapse of the country’s fifth largest investment bank, made it harder for individuals and businesses to secure loans and has pushed the country to the brink of economic recession.

In addressing these issues, the plan is calling for the greatest alteration in financial regulation since many of the current oversight institutions were created in the 1930s. So what then is the debate about? Many experts in the financial industry are concerned that Congress could use the situation to rush in to legislate & regulate. Opponents to the proposal fear the government may use the current unstable economic conditions to grant themselves regulatory power that may remain long after the economy recovers. Whether or not these accusations prove true will remain a mystery until after the plan is released.

The Federal Reserve has been keeping busy lately as economic turbulence have them focusing on stabilization efforts. By on March 16th The Fed, for the first time in history, agreed to let investment firms temporarily acquire emergency loans directly from the central bank. This measure, similar to one that’s been available to commercial lenders for years, will continue for at least half a year. It is the broadest use of the Federal Reserve’s lending authority since the 1930s. The goal of course is to create a reliable source for investment firms to have access to short-term cash; at least until the economy becomes more stable.

While this development is being formulated, the Fed is under additional pressure from Congress for being too lax in its supervision methods of lending practices. In response the Fed has proposed a new rule to protect homeowners from shady lending practices. What began as problems for Subprime borrowers has since spread to include even credit-worthy borrowers and the Fed is taking a stand. This new proposal hopes to prevent prospective homebuyers from getting biting off more than they can chew in taking out a mortgage. Often fine print tactics and unwarranted rate hikes are to blame for record-high foreclosure figures.

So what can the Federal Reserve do to help? Their plan intends to restrict lenders from penalizing risky borrowers who pay loans off early, requires lenders to make sure these borrowers set aside money to pay for taxes and insurance, and prevents lenders from making loans without proof of a borrower’s income. Sure it sounds like the Fed is making it more difficult to secure a loan but this is in fact in the best interest of the consumer who, up until now, were often given loans for amounts they were unable to pay back.

As such this new plan would prohibit lenders from engaging in practice of lending without considering a borrower’s ability to repay a home loan from sources other than simply the value of the home itself. This proposal would also crack down on misleading ads for many types of mortgages and reinforce financial disclosures in easier to understand terms to borrowers (hence targeting the fine-print tactics many lenders were guilty of relying on).

If this plan is adopted, it will apply to home loans made by nearly all lenders (banks, credit unions, and brokers).

In keeping with the tradition of ups and downs, the economy showed a little dip today after some promising signs early in the week. Oil prices, after having fallen nearly $8 per barrel over the past month jumped up $5 per barrel today closing out at $106.

Sadly, American consumers are more skeptical about the economy right now than at any other point since even before the U.S. invasion of Iraq as indicated by the combination of slumping housing prices and soaring fuel costs. Theses extremes are unfortunately the worst they’ve been in five years.

We often talk about what this means in practical terms. In it’s simplest form we have to keep in mind that the economy is spending driven. Weakening consumer confidence in the economy most always foreshadows weakening consumer spending. Once spending slows, an already faltering economy can tumble into a full-blown recession.

On Tuesday the Fed said it had received bids of nearly $89 billion for $50 billion in short-term loans offered in its latest auction to banks. Here’s an eye-opener, thus far the Fed has made $260 billion in such loans since December to help take some of the pressure off tightening credit conditions.

All of this comes as news of stocks tumbling today after a drop in February’s durable goods orders injected the market with more pessimism about the economy. Sales of new homes fell as well in February (for the fourth straight month), which represents a 13-year low. While the rate of decline has slowed, the worst slump in more than two decades has not runs its course, analysts said.

About the only good news is that if the economic up and downs we’ve witnessed of late hold steady, perhaps the week will end closer to how it began.