Bankruptcy & Foreclosures

As foreclosures continue to mount in record-setting fashion, our friends on Capital Hill once again gathered to discuss what, if anything can be done to combat this disturbing trend. Lawmakers seek some kind of revolutionary new program to reverse the situation but the Bush Administration holds strong in claiming the existing FHASecure plan is up to the task.

For those unfamiliar (or in need of a refresher) FHASecure was launched back in August and has given subprime borrowers the option to switch to a low fixed-rate mortgage once they’ve fallen behind on payments because their adjustable rate mortgages took a rate hike. The program rewarded the responsible by offered a refinance option to individuals with strong credit histories who display a pattern of paying their mortgages before their loans reset.

Tomorrow the Senate Banking Committee is set to consider a comprehensive bill which if passed would have the government insure some $300 billion in loans. What’s interesting is that while FHA says that the program has helped 200,000 mortgage holders to remain in their homes, they also go on to say that really of those 200,000 only 3,000 of them were those in imminent danger of losing their homes. A majority of the borrowers were current on their payments and simply used the program as a means to refinance out of high-cost or unfavorable term loans.

Interestingly enough, despite individuals using the system as a loop hole, new rules will make FHASecure open to all subprime ARM borrowers- rather than just those whose loans have already reset- no more than 60 days late or 30 days late twice in a 12-month period. In addition these potential borrowers need to have home equity, or cash, equaling 3% of the mortgage principal.

With the changes, the agency says it hopes FHASecure will eventually reach a total of 500,000 borrowers. During the past 12 months, foreclosure filings have more than doubled to 650,000 through the end of March that erquates to over 210,000 Americans having lost their homes this year alone.

As a society we rely pretty heavily on the latent energy stored in a gallon of gasoline. For many of us, it’s simple to simply pull up to the pump, swipe our card in the reader, and fill up the tank. Believe it or not, using your credit card could be contributing to the record-high gas prices of late.

How so you wonder? The ability to accept a credit card isn’t a business freebie. In fact card issuers whack businesses with fees (usually in the form of a percentage of overall sales). Obviously since it would bad business to charge more per gallon just to individuals looking to use a credit card, these fees are made up by all of us; whether we pay with cash, credit, or debit. The gas station has no choice but to add a few cents per gallon to compensate for the fees they’re being charged.

According to Triple A, these fees can be as high as 7.5 cents per gallon! With a national average approaching $3.80 per gallon, every cent counts.

And speaking of the current crisis, gas prices approach a 20% rise this year alone and now Congress is finally asking the question, why is this happening? One week ago today House leaders sat down to hear testimony from consumer advocates, energy industry analysts, and truckers in effort to collect some answers.

Not surprisingly, they concluded that a majority of gas price increases could be attributed to crude oil’s dramatic price spike. More good news is that at the time of the meeting, crude was trading for $123.56 a barrel and analyst predict oil could rise to some $200/ barrel over the next six months to two years. Ouch!

Much of the heat, passion, and blame from both consumers and politicians alike has been aimed at the oil companies themselves. And perhaps with good reason too. While the oil companies claim they have no control over the cost of Middle Eastern-exported crude, the facts do still remain: Rising oil prices have helped drive up food costs, lowered trucking, refining, automaker and airline profits, and has actually changed individual driving habits, the oil industry has enjoyed record profits in the past few quarters. It’s tough to argue with facts that are so black and white.

So what, then, does the oil industry say in their defense? They say simply that as demand for oil and petroleum products rise globally, production costs naturally increase and oil becomes a rarer commodity. Fair enough, I suppose but what’s the solution? Some believe that taxing these companies (or at least closing up some of their tax benefits) would somehow benefit the consumer but Big Oil has that threat safely covered as well. After all, they say, how would charging us more lower the final cost to the consumer?

Good point.

In my last post I did my best to convince you that rising interest rates aren’t evil in and of themselves. In fact, after much digging, it turns out that there are others out there in cyber space who agree with this assessment and hence provided me with some valid truths about the way the world works.

This time let’s dig into how inflation affects some other aspects of daily living. Sure you saw it first hand the last time you filled up at the pump or got to the cash register at the supermarket when what you spent a few months ago netted you half the groceries but have you given a moment’s thought to the fact that hospital costs have risen 8%? Worse yet is that the Fed’s response to pump more money into the economy means that even if the economy gets its well-needed boost, inflation may be here to stay.

So here’s the good news- there are a few realities to consider in times of inflation. This is the era of the tangible good. As inflation rises and the value of the dollar sinks, tangible goods have an edge over securities (especially bonds). Blame it on the human condition if you must, but there is simple logic in the appeal of goods (gold, gems, diamonds, antiques, art, etc.) over paper. In rough waters, it is the anchor that keeps us feeling safe and secure and in this case that anchor comes in the form of intrinsic worth that doesn’t fluctuate, even as paper money loses its value.

In addition, fixed rate loans suddenly become much more appealing in times of rapid inflation. Lenders know it and regret not selling you a variable rate loan when they had the chance. What’s the logic here? Simple: You’ll repay a fixed number of dollars every month, even as the dollar’s value tumbles to less than it was when you took out the loan. Not the case with ARMs (adjustable rate mortgages), adjustable home equity lines, and most of all credit cards! To make up for the fact that the dollar is worth less, all it takes is a rate hike to make up the difference to the lender.