Personal Finance Blog By MoneyRates - October 2010

Driving interest rates into the ground: take two

October 27, 2010

| MoneyRates.com Senior Financial Analyst, CFA

The Federal Reserve is expected to announce another program of Treasury bond purchases, as part of their continuing effort to drive interest rates into the ground.

Of course, Fed officials would characterize this as "quantitative easing to stimulate the economy." If the prospect of the U.S. government buying its own bonds -- effectively, borrowing money from itself -- doesn't impress you, then you won't be surprised to note that the strategy hasn't worked so far. The financial markets, however, seem to have high expectations for the approach.

Market expectations exceed economic impact

The bond market and stock market both seem to fully expect the Fed to go through with another round of bond purchases. Lower interest rates are considered positive for both bonds and stocks, which would help explain the strong performance of both markets this year.

Of course, those high expectations may be part of the problem. Some say the Fed has painted itself into a corner, raising an expectation of more interest rate intervention that it dare not disappoint. On the other hand, continuing to raise those expectations may be creating asset bubbles in stocks and especially bonds which could be painful when they burst.

Savings accounts continue to suffer

Notably, none of the euphoria in the financial markets seems to have translated into the actual economy. It has been apparent for some time that the Fed is fighting the wrong battle -- striving to lower interest rates when loan demand just isn't there.

Meanwhile, the Fed's policies are holding back Americans with healthy balance sheets. People with bank savings are seeing rates on savings accounts languish at 0.18 percent, while money market rates average just 0.25 percent, and CD rates range between 0.15 percent at the short end and 1.63 percent for five-year CDs.

Sure, you could do a little better by shopping for the best CD rates, etc., but overall the point is this: low interest rates are taking money out of the economy. It seems the economy could use that extra income right about now.

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Why didn't more economists predict the housing market collapse?

October 26, 2010

By Barbara Marquand | Money Rates Columnist

With the 20-20 vision that hindsight provides, the collapse of the housing market two years ago seems like something economists should have seen coming.

So why didn't many of them?

A recent public policy paper for the Federal Reserve Bank of Boston sheds some light on the question.

In "Reasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash," authors Kristopher Gerardi, Christopher Foote and Paul Willen note that although some economists were pessimistic about the housing market, they constituted a minority in their profession, and economists who were optimistic were not easily dismissed.

"Many in the optimistic camp were serious researchers with established reputations who made convincing arguments in respected academic forums," they write. "These optimists cannot be dismissed as purveyors of self-serving industry propaganda, nor as scholars who would dismiss counterarguments without giving such opposing viewpoints due consideration."

The authors assert that economic science didn't have state-of-the-art tools in 2006 to predict with any certainty the collapse of the housing market. Even the best models today can't explain large changes in asset prices.

Housing bubble predictions tough to make

"We may need to acknowledge that we do not currently have the ability to prevent a bubble from forming or the ability to identify a bubble in real time," they write. "Instead, we could focus on ensuring that potential homeowners and investors understand the risks associated with their investments, and take necessary precautions against such declines."

Millions of homeowners now are underwater on their mortgages; some face foreclosure, and others are unable to move or refinance to take advantage of low current mortgage rates.

The authors write that one way to make sure homeowners can withstand future price drops is by requiring substantial down payments for home loans. Another possibility is development of insurance against house price declines.

"At the very least, any policy that encourages buyers to take on loans with low down payments deserves to be evaluated carefully, given the sharp decline in house prices we have recently experienced," they conclude.

Posted in: Mortgage

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Ask the expert: Bank procedures for posting transactions

October 26, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Q: Why is it that a bank can charge an overdraft fee on a Sunday (when banks are closed) but can't be credited for a mortgage payment on a Sunday?

A: That is an excellent question, and you are probably not going to be totally satisfied with the answer.

The truth is that banks have a fair amount of latitude with regard to what are called "posting procedures." Posting is the formal recognition of bank transactions.

An example of this latitude? Suppose you have a $50 balance in your checking account, and overdraft your account by writing checks in the following amounts, in this order: $5, $10, $20, $50. In reality, it would only be the last check that would overdraft your account, so you'd expect to be subject to one overdraft fee. However, you might find that your checks were posted from largest to smallest. In this case, everything after the first check would be an overdraft, and you'd be subject to three overdraft fees.

In the case of any given bank, you'll probably find information about posting procedures nestled deep within their discosure documents for checking accounts, savings accounts, mortgage loan agreements and other accounts.

Given the latitude they have, chances are those posting procedures will be somewhat stacked in the bank's favor. This is probably the type of thing that started out with some common-sense cushions designed to protect the banks, but over time drifted into the realm of squeezing ever more profits out of customers.

This past August, the FDIC did send a cautionary letter to financial institutions which, among other things, touched on posting procedures as they affect overdrafts. However, the letter did not outline any specific guidelines -- it pretty much just said, "we'll be watching you, and we expect you to be fair." It remains to be seen whether the FDIC will follow through by cracking down on any specific posting procedures.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our "Ask the Expert" feature. Just go to our home page, and look for the "Ask the Expert" box on the lower left.

Posted in: Checking Accounts

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From advice to action: Using the MoneyRates.com series "10 steps to a comfortable retirement"

October 25, 2010

| MoneyRates.com Senior Financial Analyst, CFA

All this week, MoneyRates.com is continuing its special series, 10 steps to a comfortable retirement, with a new article every day. You'll find these articles full of valuable advice -- but the advice is only really valuable if you act on it.

In all, the series presents articles from ten different personal finance professionals. Those differing perspectives can be helpful -- there is more than one way to plan for retirement successfully, and if you read through the different articles you may find one or two approaches that resonate particularly for you.

A no-excuses approach to retirement planning

For all the differences in topics and perspectives you'll find in those ten articles, there are some recurring themes throughout the series:

  • Retirement planning is a personal responsibility.
  • Saving for retirement requires a systematic approach.
  • No matter what stage of your life or career you are at, there are responsible retirement planning steps you can take.

To be sure, each person's financial challenges are a little different, but no matter what yours are, your best chance at success comes from taking a no-excuses approach to retirement planning.

Putting time on your side

There's one more theme that comes through in these articles: time can be a powerful ally for retirement savers.

Time can allow you to spread the burden of saving for retirement out over a number of years -- if you do it right, you should be saving for longer than you are living off savings. Time can also allow your money to go to work for you, growing by earning compounding returns.

Best case, you would use time to your maximum advantage by starting to save for retirement very early in your career. If you've already missed that boat, you can get time working for you by planning on working a few extra years at the back end of your career. Either strategy works -- but only if you get serious about saving for retirement now.

No matter how you approach it, you need to have a sense of urgency about saving for retirement. Time can be an ally, but it won't wait around for you.

Posted in: Miscellaneous

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Foreclosure documentation scandal speaks volumes about the mechanics of the mortgage mess

October 20, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Current mortgage rates are at an all-time low, but if you are wondering why this hasn't provided the desired support for the housing market, look no further than the foreclosure documentation scandal that has recently rocked some prominent banks.

Recent revelations about faulty foreclosure documentation provide a window into the reality of how banks operate -- and the view isn't pretty.

The foreclosure documentation scandal -- what it says about banks

Bank officials are supposed to personally verify the information on foreclosure documents before signing off on them. It turns out, though, that when faced with an overwhelming volume of foreclosures, some bank officials signed off on the documents automatically, without reviewing them -- a practice that has become known as "robo-signing."

Does this mean that the epidemic of foreclosures over the past couple years need not have occurred -- that it was just a banking error? Unfortunately, no. The likely outcome is that the vast majority of foreclosures that were robo-signed would have gone through anyway had they been properly reviewed.

What this does confirm is two things about the way some banks responded to the flood of foreclosures:

  • Besides the financial losses of loan defaults, the mortgage crisis saddled banks with a paralyzing bureaucratic burden. At a time when banks were cutting back on mortgage staff, mortgage departments were trying to process an avalanche of paperwork. Some cut corners as a result.
  • Banks were tone-deaf about how to handle the crisis. If they couldn't keep up with the pace of foreclosures anyway, banks could have gotten some public relations benefit at no cost to themselves by extending a grace period to troubled home owners. This would have helped mortgage departments catch up on foreclosure paperwork, and might even have allowed some home owners to turn things around.

Muting the impact of current mortgage rates

What happened instead has muted the potential benefit of current mortgage rates. Houses have been precipitously dumped on the market via foreclosures, and overwhelmed mortgage departments have been slow to write new loans. To the extent this has prolonged the housing slump, banks may be victims of their own bureaucracy.

Posted in: Mortgage

Tagged in: banking, banks, interest rate

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