Bankruptcy & Foreclosures

We’re only human right? And as humans it is in our nature to celebrate low interest rates. Lower rates make loans cheaper and therefore the material goodness we all seek (cars, houses, boats, and motor homes) more attainable. After last week’s rate slash, the Federal Reserve has been hinting toward the fact that this may mark the end of the rate cuts in an effort to stimulate the economy. So does this mean goodbye to those material goods mentioned above? Perhaps, but there is no need for panic just yet. Believe it or not, low interest rates sometimes make big trouble as they tend to increase demand and with increases in demand without corresponding increases in supply we experience a little phenomenon known as inflation. In other words, yes, there are a few more dollars left in your pocket after you’ve paid all of your bills, but those dollars are worth a lot less than they would be had your interest rate been a bit higher.

It is true that US consumers could actually benefit by a slight rise in interest rates. It sounds blasphemous but it’s true. For starters, some goods and services would immediately get less expensive on account of a stronger dollar. Less inflation means lower prices of goods imported from other countries. Think about it, since the same amount of dollars will purchase more goods from overseas; expect immediate dives in the cost of clothing, appliances, and many other everyday products.

Additionally, higher rates could put an end to the quickly sliding value of the dollar. In case you’ve been living under a rock, let me be the first to tell you that the value of the dollar has been slipping against foreign currencies such as the euro. And why? Because low interest rates here in the US make it less appealing for foreign investors. After all, we all love high interest rates when it comes to money we make, rather than spend.

Along those lines of reasoning, the Fed’s move to slash interest rates has decreased the amount of money individuals make on their CDs, money market, and savings accounts. An increase in interest works both ways (outgoing and incoming).

Finally, and most pertinent to many, an increase in interest rates could potentially stabilize the cost of oil. As of yet, the trading of oil is still based on the exchange of the dollar (despite pleas from investors to transfer to the euro) so a sinking value of the dollar means that other countries can buy more oil for the same amount of currency. The ability to buy more oil around the globe means increases in demand and lower worldwide supply. Hence, the trouble we’re currently experiencing.

The bottom line is that we all cringe at the thought of interest rate hikes but keep in mind that this doesn’t automatically mean more money flying out of our wallets.

While tactics of credit card companies are often considered predatory at the very least, Uncle Sam has announced on Friday that things are about to improve for the little guy if their proposals are put into action. The Federal Reserve and other regulators have begun a crack down on unfair and deceptive practices that currently reign supreme in the credit card industry that have added billions of dollars of debt to individuals already struggling to cope with poor economic conditions.

In the most wide spread governmental crackdown on the credit card industry in decades, the Fed, in conjunction with the National Credit Union Administration and the Office of Thrift Supervision, is proposing a regulation that would, in its simplest form, put an end to the credit card company’s ability to unfairly raise interest rates. In addition these regulations would make certain card issuers give people enough time to pay their bills. Naturally, the banking industry is expected to fight these new rules.

So exactly what is the Fed proposing? The new rules would prohibit the following:

Unfairly allocating payments among balances with different interest rates.

Unfairly raising annual percentage rates on outstanding balances.

Unfairly adding security deposits and fees for issuing credit or making credit available.

Unfairly computing balances.

Placing unfair time constraints on payments.

Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.

Making deceptive offers of credit.

Representatives from the American Bankers Association have already announced plans of fighting these new proposals under the defense that such regulation does not allow the lender to base pricing on the risk of the individual borrower. In other words, if high-risk borrowers aren’t forced to incur higher interest rates, the burden is then spread evenly to customers in good credit standing.

With modest estimates claiming credit card debt to the tune of $850 billion it’s no wonder the Fed has taken note. What’s worse is that households that don’t pay their credit card bills in full every month owe an average of $17,000. The American mentality of charge now/ worry later has finally been catching up to many individuals on account of recent economic turmoil. For many, it looks like the time to worry is now and hopefully the Fed’s plan of attack isn’t too little too late.

We talk about the sub-prime mortgage mess quite often but some of my clients have recently presented a question that deserves some attention. With lenders wishing to take on less risk, many individuals are discovering that their home equity lines (or even revolving credit lines) have been frozen. The question of course is what can you do if this happens to you?

In recent months some hundreds of thousands of homeowners, some with perfect credit ratings, have witnessed shut-offs to their equity access. From a lender’s perspective this makes sense too as delinquencies on home equity lines were up 47% over last year (according to Economy.com) and what’s worse is that these numbers are expected to be worse in 2008.
Just last year it wasn’t uncommon for a consumer to have access up to 100% of a home’s value in borrowing. Today individuals with near-perfect credit would be hard pressed to get even up to 90% of their home’s value and in some areas 60% is the maximum!

So what can you do if it turns out yours is an account put on lock down? Contact your lender right away and don’t be afraid to request, in writing, an explanation as to why your line was suspended and the appeals process. If the lender says that your home’s value is simply too low to continue borrowing against, contact an approved appraiser and don’t be afraid to have an appraisal performed. Yes this will cost you out of pocket (a few hundred in most cases) but would be worth the investment if you happen to rely upon access to your credit line.

On the other hand it may be you and not the property that has fallen out of favor with the lender. If they report you as being the biggest risk factor check your credit and order a hard copy should you suspect an error. Remember that many lender moves are completely automated and don’t take errors or one-time slip ups into account.

If all else fails, try asking the lender to simply lower your available credit line rather than put a hold on it entirely. Even the most conservative lenders realize that the economy is cyclic in nature and should eventually stabilize itself. Sometimes they will allow a consumer limited access to their home’s equity until the situation improves.