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Personal Finance Blog By MoneyRates - December 2008

What are Banks Doing with TARP Money?

December 23, 2008

By MoneyRates Team | Money Rates Columnist

The Treasury Department is rumored to have committed nearly half of the $700 billion in taxpayer funds allocated by Congress in their economic recovery bill. Congressman, financial reporters, and private citizens have been increasing their questions of where the funds are actually going. Many major banks, which have received multi-billions in TARP dollars, have declined to account for their capital injections other than recording them on their balance sheets. The $700 billion was originally targeted for buying toxic mortgage securities, but morphed into direct investments in the nation's largest banks. Congressmen have been outspoken about ensuring that TARP funds are not used for bank executive bonuses, but the funds have not directly flowed into easier credit for auto loans, home loans, and credit cards for cash-strapped Americans. While rates on bank savings accounts, money market accounts, and CDs have dropped to below 5%, banks have been slow to drop many of their lending rates which are not directly indexed to the prime rate. Expectations are that the TARP-gifted banks will face more questions in 2009.

The Top 20 TARP Recipients

(1) Citigroup $45 billion

(2) AIG $40 billion

(3) Wells Fargo $25 billion

(4) Bank of America $25 billion

(5) JPMorgan Chase $25 billion

(6) Goldman Sachs $10 billion

(7) Morgan Stanley $10 billion

(8) PNC Financial Services $7.7 billion

(9) U.S. Bancorp $6.6 billion

(10) SunTrust $4.9 billion

(11) Capital One Financial Corp. $3.6 billion

(12) Regions Financial Corp. $3.5 billion

(13) Fifth Third Bancorp $3.5 billion

(14) BB&T $3.1 billion

(15) Bank of New York Mellon $3.0 billion

(16) KeyCorp $2.5 billion

(17) Comerica Incorporated $2.3 billion

(18) State Street $2.0 billion

(19) Marshall & Ilsley $1.7 billion

(20) Northern Trust $1.6 billion
Source: Treasury Department
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Mortgage Rates to Lowest Level in 37 Years

December 19, 2008

By MoneyRates Team | Money Rates Columnist

Freddie Mac reported that the average rates on fixed mortgages fell to 5.19% on a 30-year loan and 4.92% on a 15-year loan which marks the lowest level since the Freddie Mac lender surveys began in the early 1970s. The ability to refinance a mortgage loan at lower rates is better for homeowners who have a good credit score and equity in their houses after the credit market for borrowers with poor-to-average credit scores or little home equity has been decimated. The decrease in mortgage applications which are funded by lenders has fallen to ten-year lows and is not expected to improve. Credit analysts advise that homeowners with a strained credit score or negative equity in their houses may need to wait another six months to a year, before market conditions open again and allow more widespread refinancing.

The Federal Reserve and Treasury Department have pledged strong support to the mortgage industry which should help keep mortgage rates below 6% for some time. Some analysts predict that the 30-year fixed loan average could go as low as 4.50% in 2009 or 2010 as the government continues to offer support by buying mortgage-backed securities. Homeowners who want to compare mortgage rates quickly and easily and visit the online tools at GuidetoLenders.com.

Posted in: Mortgage

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The Fed Goes to the Mat

December 16, 2008

By MoneyRates Team | Money Rates Columnist

The Federal Reserve delivered another strong shot of adrenaline to the sagging U.S. economy by reducing the federal funds rate to an all-time low of 0.25%. The benchmark rate used by banks for lending is likely to stay low for quite a while according to the language in the released statement from the policy-making committee. Good news for consumers is that major banks will immediately reset their own prime lending rate to 3.25% which will impact credit cards, student loans, variable mortgages, and home equity lines of credit. While credit markets remain tight, those with superior credit scores will reap the biggest benefits as their prime + 1% rate now stands at 4.25%.

An obvious point moving forward is that the Fed has now only a single bullet remaining in their holster before we bottom at a 0% Fed Funds rate. Again, good news for Americans is that any deflation in the economy (which is forecast for parts of 2009) would mean that real interest - as measured by the difference between nominal rates and inflation - would go up. Anytime, real interest rates go up funds held in bank savings accounts, bank money markets accounts, checking accounts, and CDs become more valuable. Of course the flip side of deflation could also mean devastating unemployment and anemic consumer spending. The Wachovia Bank Annual Economic Outlook is forecasting 7.9% unemployment in 2009 and 8.9% unemployment in 2010 which is depressing news to say the least.
The lesson for the average American today is to keep finding the best rates on credit cards at Cardratings.com, the best rates on mortgage loans at guidetolenders.com, and the best savings rates at Money-Rates.com and save, save, save because the rainy day is here.
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Financial Experts Warn Against Tapping Retirement Assets Early

December 9, 2008

By MoneyRates Team | Money Rates Columnist

The historic loss in jobs over the last 90 days has had an unfortunate impact for thousands (and perhaps millions) of Americans who have been forced to withdraw funds from their Individual Retirement Accounts (IRA) in order to make ends meet. While in some cases the withdrawals may be unavoidable, financial experts across the country have been advising that IRA accounts should be one of the last places to go for funds for the following reasons:

(1) Distributions are taxed at ordinary Federal and State income tax rates

(2) For accountholders under the age of 59 1/2 a 10% penalty applies

(3) With stock market indexes down over 40% for the year - the market timing is less than ideal for selling - and capital gain losses cannot be carried over on IRA accounts

(4) The prime lending rate is at a very low 4% making many conventional loans more affordable

Americans who have no where else to go for funds do have the option of taking out a loan from their IRA account as long as the funds go back into the IRA or a different IRA in 60 days. The consensus amongst tax planners for those considering this type of short-term IRA loan has been to wait to make the transfer until after January 1, 2009, so that any part of the loan that is not ultimately put back into an IRA within 60 days will not be taxable until 2010.

The tax code does provide a way to avoid the 10% penalty for early withdrawals. In Section 72(t) of the Internal Revenue Code the law states that if you elect to receive "a series of substantially equal periodic payments" that are based on your life expectancy then the taxpayer will not have to pay the extra 10%. However the major problem with Section 72 withdrawals are that they only allow a small percentage (2% to 3% depending upon your age) of the the total assets in the IRA to be withdrawn in a year. The IRA account would have to hold significant assets to benefit the taxpayer in the current year with their withdrawal.

More information about the IRA withdrawal rules are available at IRS.gov.

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President-Elect Obama's Plan for Student Loans

December 2, 2008

By MoneyRates Team | Money Rates Columnist

One of the biggest concerns for parents in the United States is affording the cost of higher education. President-Elect Obama has highlighted on his website his plan to make loans available for parents. The plan has two elements:

(1) Create the American Opportunity Tax Credit: President Obama will make college affordable for all Americans by creating a new American Opportunity Tax Credit. This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students. Recipients of the credit will be required to conduct 100 hours of community service.

(2) Simplify the Application Process for Financial Aid: President Obama will streamline the financial aid process by eliminating the current federal financial aid application and enabling families to apply simply by checking a box on their tax form, authorizing their tax information to be used, and eliminating the need for a separate application.

Parents who are combining loans from various sources can find an excellent resource on Virgin Money's website called "The Lender Blender". This interactive tool allows the user to compare rates on various loan sources with average rates for each type of loan which can be adjusted.

Family or Friend Loans (4%)

Private Student Loans (11%)

Credit Cards (12%)

Home Equity Loans (5.70%)

Federal PLUS Loan (8.50%)

Other Loans (5%)

The Lender Blender will compute the amount of savings by using any loan which charges an interest rate below that of the average private student loan.

More information about student loans and college savings plans is available on the Money-Rates.com College Savings Page.

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