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Personal Finance Blog By MoneyRates - March 2011

Why aren't borrowers able to get help through the federal mortgage refinance program?

March 31, 2011

| Money Rates Columnist

Banks seem to be no more than mildly interested in cooperating with a new federal mortgage program that helps homeowners who owe more than their home is worth.

The Obama administration program is designed to put borrowers into more affordable loans that will allow them to avoid foreclosure. Refinance rates for borrowers usually wind up being a little higher than current mortgage rates, but the principal on their loan has in some cases been cut by a third.

The U.S. Department of Housing and Urban Development estimates that between 500,000 and 1.5 million borrowers could be eligible for the Federal Housing Administration's $11 billion refinancing program, called Short Refi.

Lenders the holdup?

The challenge for borrowers is getting lenders to participate. Lenders have to agree to write off at least 10 percent of the principal balance, and investors who own the mortgage also have to agree to the deal. To qualify, homeowners have to have kept up on their mortgage payments, and can't already have an FHA loan. The size of the new loan can't be more than 97.75 percent of the current property value. New mortgages with higher refinance rates for homes carrying a second loan--such as a home equity line of credit--can't exceed 15 percent of the value of the property.

Although two dozen lenders are taking part in the program, including Wells Fargo and Ally Financial, some very big players are not involved. These include Fannie Mae and Freddie Mac, the two government agencies that buy mortgage loans, Bank of America, Citibank and JPMorgan Chase.

According to the New York Times, the 23 lenders who have agreed to participate in the program have processed just 44 loans since the program began in September. But since the loans can take up to four months to complete, the Times said experts expect many more to start coming out of the system in the next few months.

The plan will only help people who are on the brink of foreclosure but still have the wherewithal to pay for their modified loan with the new refinance rates. To qualify, your monthly payment has to exceed 31 percent of your gross monthly income.

Posted in: Personal Finance

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Japan's tragedy: What are the economic consequences for the US?

March 29, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Whenever one considers the economic impact of a tragedy like the earthquake and tsunami in Japan, it is important to remember that human concern comes first. Beyond that though, people who have responsibility for making decisions about money must analyze and understand the economic repercussions of such events, so they can make informed decisions.

Given Japan's importance in the world economy, it is inevitable that the after-effects of such massive natural disasters would be felt by economies and markets around the world. This goes for the U.S. economy, its stock market, and even for CDs, savings accounts, and money market accounts.

Trade and inflation

The most immediate market impact of the disaster in Japan was to send the price of oil back below $100 a barrel. The logic is that with much of the Japanese economy likely to be effectively off-line for a while, an important source of demand for oil will be diminished. However, this easing of the price of oil does not really ease the inflation threat to CD, savings, and money market rates.

Japan is the fourth-largest trading partner of the United States. Imports from Japan topped $120 billion in 2010. Restrict some of that supply of products, even temporarily, and inflation would be a likely result. The disaster in Japan could also drive commodity inflation - in the short term, due to disruptions in the food supply, and longer term, due to demand for construction materials as Japan rebuilds.

Japan is also a major buyer of U.S. goods. The U.S. exported over $60 billion in goods to Japan last year. Disruption to that demand is going to be felt by the exporting segments of the U.S. economy.

To a large extent, then, the problem for CDs, savings accounts, and money market accounts is much the same as the problem created by rising oil prices lately. It hits depositors in two ways, as inflation pressures eat into purchasing power, and a drag on the economy makes it more difficult for interest rates to rise.

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Consumers are tired of controlling their spending

March 23, 2011

| Money Rates Columnist

It's getting tough to be an American consumer these days.

As the dense fog of Recession starts to lift a little bit, we find ourselves with lower fees and new rights as credit cardholders. Those punitive, retroactive interest rates are gone, and so are the exorbitant fees for late payments.

But instead we now are looking at new fees on our checking account, low interest rates on even the best savings accounts, and threats from banks who want to put limits on our debit card purchases. Even as we show progress toward whittling down our credit card debt and building up our savings accounts, we're faced with the prospect of having to start using credit cards again.

How are you supposed to get ahead in this kind of world?

Frugal fatigue

As a measure of how bad it is, the National Foundation for Credit Counseling recently released the results of a poll showing that Americans were suffering from a severe case of "frugal fatigue"--a malady related to long-term restricted spending and tight controls on their checking account.

According to the survey, 66 percent of us admitted we're tired of pinching pennies but acknowledge that we're going to have to continue for a while. About one in five of the survey respondents felt the fiscal adjustments they've made will be permanent.

According to Apprisen Financial Advocates, a nonprofit consumer credit counseling agency, these financial changes include tracking spending, creating a budget in line with our income and using savings accounts for a rainy-day fund.

Keeping your fiscal health in check

Apprisen has been pushing these kinds of habits in recent months, and offered up these tips for keeping your finances on track:

  • Keep an accurate check register. If you've abandoned the register as an ancient custom that was common before online bill pay, think again. Apprisen recommends you keep all your receipts until your checking account is balanced each month.
  • Balance your checking account right after the statement arrives in the mail. As Apprisen notes, it's easier to correct a problem that is 24 hours old than one that's 24 days old.
  • Set up automatic bill payment. If these bills are triggered automatically, you run less of a risk of being late or having a payment lost in the mail, an excuse no one believes anyway.

The year is still young, so you still have time to develop the kind of fiscal habits that might wear you out at first but will ultimately lead to a richer checking account, fuller savings accounts and a loftier credit score.

Posted in: Personal Finance

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Recent events abroad leave few financial options

March 16, 2011

| MoneyRates.com Senior Financial Analyst, CFA

With interest rates on most CDs, savings accounts, and money market accounts near zero, it has been natural for people to consider other investment options. Indeed, one theory behind the Federal Reserve's low interest rate policy has been that it has been intended to support asset prices by driving people out of conservative investments. Still, recent developments have shown that other asset classes have their drawbacks as well.

If unrest in the Middle East made the markets nervous, then the disaster in Japan has made them downright panicky. The bottom line: CD, savings, and money market rates may not look so bad after all.

Financial market reaction

Here's how some prominent asset classes have reacted since last Friday, when the trouble in Japan began with a major earthquake:

  • Stocks. Over the course of Monday and Tuesday of this week, the Dow Jones Industrial Average fell nearly 189 points, or about 1.6 percent.
  • Bonds. Bond yields extended their decline during the first two days of this week. When investors are nervous, a "flight to quality" often brings them to invest in bonds, driving yields down. Bond yields had been on a roll since late last year, with 10-year Treasuries peaking at 3.725 percent early last month. Now, those same yields are down to 3.323 percent.
  • Gold. Gold has led something of a charmed life in recent years, at times resembling Teflon more than a precious metal. Still, even gold has not been immune to the reaction to the disaster in Japan. The price of gold fell by $28.90 over the first two days of this week, or roughly 2 percent. This may be a jarring development to people who have bought the pitch that gold is the ultimate asset to own in a disaster scenario.

CD, savings, and money market rates may be low, but they are at least stable. Under the present situation, you might do better to look for higher rates within those deposit classes, than by looking for riskier alternatives outside of those accounts.

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Why your savings accounts aren't earning you more money

March 15, 2011

| Money Rates Columnist

Americans are saving more than in recent years. According to the Christian Science Monitor, 6 out of 10 Americans say they prefer saving over spending, and saving rates have increased from less than 2 percent in 2005 to around 5.4 percent in 2010. Historically, however, Americans over the last 50 years have saved at a 7 percent rate.

But the motivation for our recent interest in savings has not been the lure of high savings rates. Many of the best savings accounts offer just over 1 percent, and that's not enough to keep up with increasing costs of things like energy and health care. Even the best CD rates and money market rates are low when you compare them to other times in recent history and certainly when you compare them to some of the costs rising all around you.

Why are interest rates low?

One reason interest rates are low on money market accounts and savings accounts is because banks aren't making as much money off your savings accounts as they used to. They used to lend your money out to people who needed it to expand the economy, but since that activity has diminished drastically during the recession, banks are more frequently buying Treasury Bills, which don't pay as much.

Although some savers have turned to credit unions for helping in getting the best savings accounts and the best CD rates, credit unions--even though they are only beholden to their members and not to shareholders--can only do so much. While one member wants the best CD rates, another member wants a low-interest loan. Balancing these two demands keeps interest rates on savings accounts low.

Another reason interest rates on savings accounts, CDs and money market accounts remain low is because, well, you allow banks to keep them that way. If more people were more willing to withdraw their savings and move it to higher-yield savings accounts --such as one with Sallie Mae or an online account with PerkStreet or Smartypig--large commercial banks would notice and take steps to keep you.

Posted in: Personal Finance

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