Bankruptcy & Foreclosures

President Bush may finally have stopped denying that the economy is in fact in trouble, he announced Monday that he still strongly apposes any homeowner rescue legislations that would bail out lenders as well as customers.

This news comes as the Senate struggles to complete a bipartisan bill to assist borrowers in trouble through government backed mortgages. The trouble is that the money has to come from somewhere and in this case Uncle Sam would be forced to tap into funds that were established to help the poor.

Although the President didn’t comment directly on the proposal, he has in the past threatened to veto a House version of the bill, which aims to prevent foreclosures by having the government insure some $300 billion in new mortgages. While the president makes it clear that he’s opposed to laws that would bail out the lenders, he has been pushing Congress to pass legislation that more tightly regulates government sponsored lending institutions Fannie Mae and Freddie Mac.

Apologies to wishful thinkers, the Bush administration reiterated the fact that it’s still far too early to start talking about a second economic stimulus package (which many Democrats in Congress are currently pushing for in effort to help Americans battle rising fuel and food costs).

The Senate’s bill (which reached agreement on Monday) looks to tap into Fannie Mae and Freddie Mac’s profits to pay for the foreclosure-prevention program.

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.

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.