The Truth About the Bailout

The Truth About the Bailout

Millions of Americans were against the idea of a ‘bailout plan.’ Millions more were in favor of the plan. Once the bailout plan was passed, it seemed as though Americans counted on this as the way to save the economy.

The bailout plan was passed in a matter of only 10 days. The bailout plan was passed to treat symptoms, not the disease. The bailout plan is merely a way for the government to apply band-aids to a large, open wound.

The government promised that the bailout plan would remove the cancer caused by the failure of Fannie Mae, Freddie Mac and the insurance-giant, AIG. However, all it did was prolong the illness.

Billions of dollars will be spent fixing the balance sheets of banks around the country. However, this does not fix the root of the problem. The root of the problem is that millions of homes around the nation are worth a considerable amount less than the outstanding balance of the homeowner’s mortgage.

These billions of dollars are “destroying Main Street’s balance sheet.” This money is obliterating the value of home-based securities that American Taxpayers are about to start purchasing.

Simply put…the government is trying to fight home foreclosures with an extremely inefficient tool. The tool? Loan modification programs that cover up the problem instead of treating it. As long as the problem is masked instead of fixed, foreclosures will continue to set record numbers.

Todd Harrison of MSN.com wrote, “Defaults become delinquencies, which become foreclosures, which become evictions, which become repossessions, which flood the market, depressing prices as supply outstrips demand.”

It used to be that home prices only went up. Not in this market. Home prices have plummeted and the bailout plan really isn’t doing anything to treat the problem.

Here are a few things for the government to keep in mind…

Teach the American people to simply live within their means. Less is more. Simplistic living could solve this crisis better and faster than the bailout plan ever could. Bigger is not necessarily better.

These principles may be the only way to get America out of the mess it has created…not the bailout plan.

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Only One Bank?

Only One Bank?

Doesn’t it seem wrong to you that banks don’t have to track exactly how they used bailout money? The government has handed millions of dollars out to banks around the country with no strings attached. They didn’t say, “Here’s some money to get you back on track, but how you spend it needs to be itemized and recorded.”

No, instead the government passed out this money like candy. There weren’t any rules about how the banks should use the money. And, the banks don’t have to report how they used the money. Doesn’t that seem a little sketchy to you?

The U.S. Treasury has undergone a lot of scrutiny for not making bailout banks account for the money they received. On the flip side, it does learn from its mistakes. 200 or more banks were not required to keep a log of how they used their money. Only 1 was.

Citigroup was given about $20 billion in bailout money. It promised that it would use “its reasonable best efforts to track the money and will send the government quarterly reports.” But, has the U.S. Treasury really learned from its mistake?

Seven other banks were given money the same day Citigroup was. However, these banks were not required to keep a log or track how they spend the bailout money. Why Citigroup? Why is Citigroup the ONLY bank being required to track how its spends government money?

The U.S. Treasury says that it doesn’t want to “impose a burden on institutions it deems healthy.” Surely Citigroup isn’t the only unhealthy bank in the nation. Why are ‘healthy’ institutions getting government money anyways? Why is the U.S. Treasury handing out our taxpayer money and not requesting these banks to track how they spend it?

Neel Kashkari, a Treasury official, gave this shocking defense…”It’s not going to be perfect. And as you know, you put $1 into an institution, it’s impossible to follow where that $1 goes.”

Shocking and ridiculous. What will it take to get government officials to be honest and responsible when it comes to spending our money?

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Forgiving Your Debt

Forgiving Your Debt

Nowadays, lenders are much more willing to work with you if you come across a financially hard time. It wasn’t always this way. In fact, there was a time period when lenders wouldn’t work with you if you couldn’t pay. In order to avoid lawsuits, foreclosures and repossessions, lenders have changed their stance when it comes to working with you.

It used to be that lenders wouldn’t “work” with you because it was cheaper for them to just “write-off” delinquencies as bad debt. Default rates have recently soared to new heights. The economy has become extremely weak. Credit is much harder to come by. Because of this, the “rules” of working with the consumer have drastically changed.

Here are some interesting statistics to consider.

-During the second quarter of 2008, credit card lenders “charged off 5.47% of the total amounts owed on cards as bad debt.” Last year (during 2007), the charge-off rate was at only 3.85%

-Consumer bankruptcy filings experienced a 40% increase from last year during the month of October. During October of this year, more than 100,000 bankruptcies were filed. This is the highest number of filings since October 2005 when the Federal Bankruptcy Reform Law took effect.

-When it comes to being more than 60 days past due on mortgages, more than 2.2 million homeowners fall into this category.

-One in six homeowners owes more on their home than it is worth.

-”With home prices plummeting, every foreclosure now represents a loss of 44% of the original loan amount, up from 29% a year ago,” according to data from LPS Applied Analytics.

Can’t you see why lenders are more willing to work with consumers now? The more lenders work with financially-troubled consumers, the more revenue they are able stop from being lost. Some of the biggest relief programs are as follows:

-Fannie Mae and Freddie Mac will begin paying mortgage service companies $800 for every loan that is modified. This helps out the borrower in several ways. 1) Interest rates would be reduced 2) The borrower wouldn’t spend more than 38 percent of their “gross income on housing expenses.” 3) Home loan terms would be moved from 30 years to 40 years

-Citigroup also announced that it would suspend foreclosures for people who lived in their own homes, who had a good chance of making full, lower payments and who had decent incomes

-JPMorgan Chase also modified about $70 billion in home loans. This modification program could aid as many as 400,000 homeowners.

-Bank of America announced that it would modify 400,000 mortgages.

Yes, if you are upfront and honest with your lenders, chances are that you will end up just fine in this whole mess. Lenders are more willing to work with borrowers than ever before. Whether your loan is modified by your lender or your payment options are a little more flexible, it is certainly worth it to talk to your lender about your current situation.

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More on the Bailout Plan

More on the Bailout Plan

The American economy as we know it has drastically changed in recent months. Every segment of the economy has leaked into the next segment. Every aspect of the economy touches and affects other aspects. President Bush recently unveiled a new and very important segment of the bailout plan. The new plans calls for $17 billion to be given to the U.S. auto industry.

A federal aid package has arrived just in time for U.S. automakers. The $17.4 billion package should get them through this rough time and give them a fighting chance for survival. $13.4 billion will be given to Chrysler LLC and General Motors Corp this month and next month. General Motors will get $9.4 billion and Chrysler will get $4 billion. The Ford Motor Co has said that it won’t need immediate help, but would appreciate credit lines established in case of emergency.

Federal relief for the auto industry completely exhausts the first half of the federal bailout package. Additional money could be made available for the auto industry in February. However, that is contingent on Congress’ approval.

Presidential-elect Barack Obama recently told the auto industry that Americans do not have an infinite amount of patience for them. This relief package serves as only short-term loans. If auto makers fail to produce a specific plan by March 31, they will be required to repay the loans immediately.

President Bush said, “The time to make hard decisions to become viable is now, or the only option will be bankruptcy. The automakers and unions must understand what is at stake and make hard decisions necessary to reform.”

General Motor’s CEO Rick Wagoner eluded to the fact that the American automaker has a lot of work ahead. He also said that “federal loans are a blueprint for the century-old automaker’s next 100 years.”

Ron Gettelfinger, the president of the United Auto Workers union, said (regarding the auto bailout), “This will keep the doors of America’s factories open, keep Americans working and prevent the devastating economic consequences for millions of Americans and thousands of businesses that would have resulted from a liquidation of operations by one or more auto companies.”

The auto industry bailout may have a more powerful effect on the U.S. economy than anything else at this point.

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New Credit Card Regulations Are In

New Credit Card Regulations Are In

Credit card regulators and lawmakers recently approved a set of regulations that will protect credit card customers.

The news that the Federal Reserve Board approved credit card regulations came on Thursday December 18, 2008. This date is an important one for credit card customers around the world. However, the regulations won’t be put into effect until July 1, 2010.

There were three major boards that approved credit card restrictions. These were the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration. In short, the new credit card regulations will place tight reins on banks and other credit card companies.

These credit card regulations are revolutionary. They will prohibit credit card companies and banks from certain practices. These practices include: applying interest payments in ways that maximize penalties for the consumer. Lenders will now be forced to be more “transparent about their billing practices.”

Ben Bernanke, the Federal Reserve Chairman, said, “These protections will allow consumers to access credit on terms that are fair and more easily understood.”

The regulations will also put an end to:
-Double-cycle billing-This method takes an average of the balance from the previous two bills. Because this method will no longer be used, consumers “who carry a balance will no longer get hit with retroactive interest on their previous month’s bill.”

-Interest rate increases-Credit card companies will no longer be able to raise interest rates on “pre-existing credit card balances unless a payment is over 30 days” past due.

-Reasonable amount of time-Consumers will now be given a reasonable amount of time to make payments. Payments will also be applied to higher-interest-rate balances first. This tactic will go a long way in reducing interest fees and penalties.

-New credit card statements-Consumers won’t have to decipher confusing credit card statements anymore. Each statement will clearly list when each payment is due, including the time of day. Statements will also highlight any changes to the accounts.

-An end to universal defaults-This out-dated policy let credit card lenders increase interest rates on one particular card if the consumer missed a payment on a completely different card.

Currently, Americans have about $976.3 billion in revolving credit. Additionally, 4.9 percent of all credit cards were delinquent at some point during the third quarter. These new credit card regulations will really go to work for the consumer. Although, we will have to wait awhile before the policies take effect.

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Will the Final Rate Cut Matter?

Will the Final Rate Cut Matter?

The key interest rate is expected to be lowered to 0.5%. Although nothing has been finalized or announced, the Fed is expected to lower this rate. Will lowering key interest rates really make that much of a difference?

Experts don’t think so. Instead, they think that it will send a signal to the American people. This signal would mean that the central bank would have to take more drastic and creative measures to pull the economy out of its slump.

When the Feds do cut interest rates for the last time, it will mark the 10th interest rate cut for the Feds and Ben Bernanke. The Federal Reserve has been cutting interest rates sine September of 2007. Some experts think that this will be the last cut. They couldn’t possibly go under 0.5%. However, some others think that the Feds will be forced to lower rates to 0.25%.

Why do the Feds cut interest rates anyways? Federal interest rate cuts usually help the economy. When the Fed cuts its interest rate, banks and other financial institutions are forced to cut their prime rate as well. The Federal interest rate has a significant affect on credit card rates, home-equity rates, etc. Yes, when the Feds drop interest rates, it usually helps out the economy as a whole.

There hasn’t been any significant evidence that shows that federal rate cuts have stimulated the economy at all. David Resler, chief economist with Nomura Securities International Inc. said, I think the Fed is going to cut rates and it’s going to be intended as a signal that the Fed will do whatever is necessary to keep the economy from sliding too deeply in this recession.”

Once the Fed cuts the interest rate this time, there won’t be much room to cut it after that. It isn’t likely that Ben Bernanke will cut interest rates at all after this point.

Kurt Karl, chief U.S. economist with Swiss Re, said, “Once you get rates down to zero, it’s hard to move off of zero. Plus, you’ve made the price of money free and it shouldn’t be. There should be come cost to loans. The Fed may hint that this next rate cut is sufficient. But the other think the Fed will emphasize is that it has more tools, more arrows in the quiver. The Fed’s job is not over just because there may be no more interest rate cuts.”

What else should the Federal Reserve and Ben Bernanke do to stimulate the U.S. economy and bring it out of the depths of this recession?

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FICO 08

FICO 08

Have you heard about FICO 08? Fair Isaac announced on July 31, 2008 that it will begin using a new credit-scoring model. This model will include “authorized user accounts when calculating someones FICO credit score.”

Fair Isaac estimates that about 50 million consumers are legitimate, authorized users on someone else’s credit card. Legitimate authorized users include parents, spouses and children. These authorized users must have an established relationship with the primary account holder.

When it was originally developed, FICO 08 didn’t plan on taking authorized user accounts into consideration. The reason was to prevent piggybacking on a complete stranger’s credit card and “artificially inflating one’s score.”

FICO scoring has included authorized user accounts into consideration in the past. However, these versions weren’t used for long because it offered an easy way for people with bad credit to raise their FICO scores. Too many people took advantage of the system and abused it in order to inflate their real scores.

Some lenders have complained about using FICO 08 saying that it would “inhibit compliance with the Federal Reserve’s Regulation B.” Regulation B requires lenders to consider the credit history of each account that is shared by spouses in assessing a married person’s credit risk.

Of course, Fair Isaac is keeping the exact formula a secret. However, the company does say that it has found a way to reduce piggybacking while restoring authorized-user accounts.

Tom Quinn, the vie president of global scoring solutions for Fair Isaac, said, “The FICO 08 scores of legitimate authorized users will now reflect the information on their credit reports about the account(s) on which they are authorized users.”

VantageScore, the competing model, never considered such a move.

Barrett Burns, president and CEO of VantageScore Solutions, said, “VantageScore excludes authorized-user trade lines, whether with good or bad payment histories, to ensure the risk assessment of a credit applicant represents the true credit risk of the prospect and not the originating borrower with whom the authorized trade line is associated.”

Fair Isaac 08 should come as good news to consumers who depend on authorized users to boost their credit score. However, it could be quite some time before consumers see what their FICO 08 score really is.

What do you think? Is FICO 08 good news or bad news?

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Two Main Reasons Why Consumers Are Using Debit Cards Instead Of Credit Cards

Outstripping Credit Cards

Reports show that debit cards are the newest craze in the financial/money industry. More and more consumers are halting their spending using credit cards and switching to use a debit card.

Cancelling a credit card or two is becoming a fast-moving trend that is sweeping the nation. Instead of buying now and paying later, consumers are only buying now what they can pay for now. Debit card use is already beginning to surpass credit card use.

Consumers are using debit cards instead of credit cards for two main reasons:

1) Debit cards provide a reliable budgeting tool that significantly reduces spending.

2) Some consumers are using debit cards more because they can’t be approved for a credit card in such a tight credit crunch.

Whatever the reason, debit card use is sure to surpass and outstrip credit card use. Here are a few statistics for you.

-Debit card spending is expected to increase by 13 percent by the end of 2008.
-Credit card use is expected to increase only by 3 percent.
-Debit card purchases are expected to reach $1.2 trillion by the end of 2008.
-Compare that figure with the $1.9 trillion expected to be spent using credit cards.

The growing number of debit card use is definitely bittersweet for banks and other financial institutions. Debit cards to not present the same risk that credit cards do. Consumers can only spend what they have in their account when they use debit cards. On the other hand, debit cards are not nearly as profitable as credit cards because credit cards are associated with high interest rates and fees.

Banks will find a way to benefit more from the rising number of debit cards that are being used. They always do.

What are your plans for the future? Which plastic will you find yourself pulling out more often? Debit card or credit card?

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Investing in the Obama Recovery Plan

Investing in the Obama Recovery Plan

The main reason why President-Elect Barack Obama was elected was so that he could fix our crippled economy. When it comes down to it, it is always about the economy. Think back to past-Presidents. What are they remembered for?

FDR is remembered for The New Deal. Ronald Reagan is remembered for his economic reforms. Bill Clinton is remembered for transforming welfare and free-trade. What will Barack Obama be remembered for?

Obama promises to overcome this economic crisis that was “created” by President Bush. Whether you agree with that statement or not, Obama does have a plan for the White House. There are three main things that Obama has promised to investors. Investors and consumers alike will be encouraged to buy:

1. Anything green, especially the U.S. dollar
2. Anything with its “hand out”, especially the government
3. Anything like a cement truck

Obama is going to push alternative energy, municipal bonds and infrastructure. Here are three ways that you can invest in the Obama plan.

1. Go green. Obama is pushing hard for alternative energy. Petroleum is expensive and, for the most part, out of the control of the American people. Wind and solar power are expensive too. The cost curve is going down for alternative energy. Stocks in the alternative energy realm can be volatile. This makes it a prime arena for investors.

2. Buy American. Obama is trying to convince the country to buy more American products. If more people bought American-made goods, we could keep more money within our borders. Buying American products would stimulate the economy and get it breathing again.

3. Buy government bonds. Buying government bonds really hasn’t been all that popular in recent years. Investors can buy these bonds and get 10 percent back when they help out local communities. A Manhattan financial adviser, Lewis J. Altfest, recently asked, “Where does anyone come off giving you triple tax-free for a rate so much above Treasurys? It’s not an overstatement to say it’s unheard of.” This is the way to invest because the government is bound to really pay up to investors.

These are the three ways to invest under Obama’s plan. Obama will hopefully stimulate the economy enough to make these times better ones. Only time will tell if his plan will actually work.

This guest post has been brought to you by Plastic Rewards, the best place to apply for credit cards online.

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Expect Your Credit Card Rate to Go Up

Expect Your Credit Card Rate to Go Up

Just the other day, I received a notice from our credit card company. In short, the letter was explaining that our credit card rates would be going up as of January 1, 2009. My husband and I use our credit card responsibly, practice good money management and pay off the balance every month. We have never missed a payment and have never been late. So, why is our credit card company hiking up the rate by over 10 percent?

The economy has forced companies everywhere to make changes to their policies and procedures. However, consumers from around the country are still wondering “why them?” Although the Federal Reserve recently cut the benchmark rate to 1 percent, many people’s credit card rates are still going up.

Traditionally, when the Federal Reserve cuts rates, credit card companies slash their rates as well. This is a good sign for consumers because their monthly payments are reduced every time interest rates are reduced. So, why the disparity now? Credit card companies and other financial institutions are trying to offset the rising costs of credit card operations with higher rates and fees.

It used to be that high rates and fees were distributed among higher-risk consumers. Not anymore. Credit card rates and fees are being raised even among low-risk consumers. Banks, financial institutions and credit card companies have really tightened the grip on risky consumers. Now, responsible consumers that pay their bills on time are being hit hard with higher rates and more expensive fees. Everyone will soon find it much more expensive to carry a balance on their credit card.

People are finding it more difficult than ever to get and use credit. Consumers around the country are also finding it more expensive to live off of credit these days. Even though the Federal Reserve is cutting interest rates, credit card companies are raising them to offset the rising cost of credit card operations. Simply put, you can expect your credit card rate to get higher just like mine has.

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