Personal Finance Blog By MoneyRates - April 2011
April 27, 2011
When does no change in plan represent a change?
One example could be seen in the conclusion of this week's Federal Reserve board meetings. The Fed announced no change to its plan to conclude its quantitative easing program in June. This announcement could finally bring a welcome change for CDs, savings accounts, and money market accounts.
What's at stake for CD, savings, and money market rates?
The latest quantitative easing program is one of a few different forces which have helped drive down CD, savings, and money market rates. This quantitative easing program involved the purchase of $600 billion in U.S. Treasury bonds, which was designed to drive market interest rates lower.
This program added to the forces suppressing interest rates, including low Federal Reserve discount rates, weak lending demand, and low inflation. The last of the Fed's bond purchases are scheduled for June, after which one of these low-interest rate forces will be gone. The change will be even more pronounced once the Fed starts to sell off the massive Treasury bond positions it has accumulated.
Key factors to watch
An end to quantitative easing could be good news for depositors in CDs, savings accounts, and money market accounts, who have been suffering through dismally low interest rates for two years now. However, because quantitative easing has been only one of the forces keeping interest rates down, the effect of this program's end is by no means certain.
So, as the quantitative easing program ends, depositors should keep their eyes on two dynamic economic forces which could determine what happens to interest rates in the months ahead:
- Economic growth. The economy has been technically out of recession for some time now, but has not yet sustained enough momentum to revive the lending business. Until this happens, bank rates are likely to remain low.
- Inflation. Inflation is on the rise. Now depositors have to hope that interest rates will respond, or else they will face further erosion of purchasing power.
In short, the end of quantitative easing will mark one change, but more change is needed for rates to rise.
Posted in: The economy, the Fed, and interest rates
April 27, 2011
If selling your home and downsizing or refinancing your existing mortgage is part of your retirement planning, your plans could be affected by a behind-the-scenes debate going on in Washington these days.
The QRM debate and why you should care
The debate focuses on something called "qualifying residential mortgage," or QRM, which is a new set of mortgage financing rules in which only home buyers who can put at least 20 percent down on a conventional 15- or 30-year loan would get the best available current mortgage rates or refinance rates. Everyone else would have to get their loan from a broker who would be required to maintain 5 percent of the risk from that loan--along with cash reserves to cover a default--and that additional cost will be reflected in a higher mortgage rate for the borrower.
The proposed QRM rules, which aren't expected to go into effect until 2012, also will require borrowers getting the best current mortgage rates and best refinance rates meet certain strict debt-to-income ratios. For instance, under one proposal, the best current mortgage rates would only go those buyers who are spending no more than 28 percent of their gross monthly income on housing expenses. Not many homeowners can look at their checking account and make that claim.
Why are stricter standards on the horizon?
These proposed new rules are part of the Dodd-Frank financial reform law, which aims to reduce the kind of free-money style of mortgage lending that led to the housing market collapse. In those days, borrowers could easily borrow more than they could afford without putting much money down or even verifying their income, and the result has been the flood of foreclosures that have sent housing prices into a death spiral the last four years.
Banks and mortgage brokers were able to hand out all that money because they were able to sell the loan to Wall Street and Fannie Mae and Freddie Mac and thereby dodge any risk from a default. This made financial institutions pretty indifferent to the balances in their borrowers' checking account or savings accounts; financial institutions made their money by closing the deal, and if you stopped making your payments on the mortgage, well, that was someone else's problem.
But Dodd-Frank proposes that financial institutions making these loans keep some "skin in the game" by requiring them to set aside 5 percent of loan balances in reserves to handle default losses even if they've sold the loan. Under the proposed new rules, the only loans exempt from this requirement would be the ultra safe QRM loans in which the borrowers have their own skin in the game to the tune of a 20 percent down payment. In return for that investment, those borrowers will get the best current mortgage rates while everyone else will be looking at mortgage rates up to 3 percentage points higher.
Homes harder to get
While these new proposals promise to make widespread loan defaults less likely, they are also expected to make it tougher for many people to buy a home. According to Slate magazine, 47 percent of the homebuyers who borrowed money to buy a home in 2009 put down less than 10 percent. Under the new rules, all those people would be looking at an interest rate higher than current mortgage rate.
And if you're interested in refinancing, you'll need a 25 percent equity stake to get the best possible refinance rates. According to the Washington Post, that equity stake will need to be 30 percent if you want to pull any money out, and you'll also need a very good credit history; if you were 60 days late on any credit account during the previous two years, you won't qualify for the best refinance rates.
Federal regulators will be hammering out the details of the new regulations in coming months, so expect to read more about them as banks, Wall Street, home builders, Realtors and everyone else linked to the housing market weigh in with their objections and recommendations.
But the bottom line for anyone who was planning to tap the equity in the homes for retirement is this: Even when the housing market finishes slogging through the glut of foreclosures, which have been dragging down the price of homes for several years now, don't expect prices to start suddenly rising to their previous lofty heights. The pool of potential buyers will be limited to those who can either afford a 20 percent down payment or an interest rate that is 2 or 3 percentage points higher than current mortgage rates.
Posted in: Personal Finance
April 24, 2011
If you're looking for a new tool for choosing the best savings and money market accounts, check out the America's Best Rates feature on the MoneyRates.com homepage. This feature has just been updated for the first quarter of 2011.
What's different about America's Best Rates
There will always be a place for snapshots of the best deposit rates available, because when you are ready to choose a bank you need up-to-date information. Still, there is more to choosing a bank than one day's rate information. Changing banks involves some effort, so you don't want to have to make frequent switches just to maintain competitive rates.
That's why the America's Best Rates feature takes the unique approach of focusing on the consistency of high rates. Looking at a sample that includes the nation's biggest names in banking, it averages the rates offered by those banks throughout the calendar quarter. The result is a list of the 10 banks with the highest rates on savings accounts, and the 10 with the highest rates on money market accounts, during the most recently-completed calendar quarter.
The importance of consistency for savings accounts and money market accounts
Consistency is especially important for savings accounts and money market accounts. After all, if you find a great CD rate, you can lock it in for a period of time, and then it doesn't matter to you if that bank lowers its CD rates next week. For savings accounts and money market accounts, your rates are subject to constant fluctuation. You don't want to be drawn to a bank by a high rate one day, only to see it plummet after you sign up.
The approach of the America's Best Rates feature really seems to work in identifying which banks offer consistently high rates. Eight of the ten banks with the highest savings account rates from the prior quarter repeated in the first quarter of 2011, and all ten banks with the highest money market accounts repeated.
So congratulations to all the banks that made these lists, but the real winners are customers who now have some insight into where to find consistently high rates.
Posted in: Money Market Accounts
April 24, 2011
As the Federal Reserve board prepares to meet this week, economists are giving negative reviews to the Fed's quantitative easing program. Depositors in CDs, savings accounts, and money market accounts might be inclined to agree.
In its second round of quantitative easing, the Federal Reserve began a program in November to purchase $600 billion worth of Treasury securities. This program is scheduled to end in June, leaving the Fed with the question of what comes next, and how to unwind its portfolio of Treasury securities. Fed chairman Ben Bernanke is expected to assess the quantitative easing program, and lay out possible next steps, after the Fed's meeting this week. Meanwhile, a look at the evidence will give you a sense of how quantitative easing has influenced some key variables:
- Interest rates: Interest rates were the most direct target of quantitative easing. The argument was that by driving interest rates down, the Fed could make borrowing more affordable and thus stimulate the economy. Interest rates have remained low, but it doesn't seem as though quantitative easing has helped boost lending. Housing has not recovered, and credit quality seems a bigger barrier to borrowing than interest rates.
- Inflation: Quantitative easing was also intended to reverse signs of deflation. Inflation has indeed gone from flat to above 2 percent, but with oil prices starting to run out of control, Bernanke might not want to take too much credit for rescuing inflation.
- The stock market: The greatest area of agreement about quantitative easing seems to have been that it has bolstered the U.S. stock market. However, it's not clear whether contributing to an asset bubble has created useful wealth, or just a dangerous illusion of wealth.
The bottom line is that it's impossible to say what would have happened without quantitative easing. Still, since there hasn't been a robust recovery in lending, it's hard to argue that it has pumped much new money into the economy. Meanwhile depositors are left wondering how much money its collateral effects, including low CD, savings and money market rates, have taken out of their pockets.
Posted in: The economy, the Fed, and interest rates
April 19, 2011
The stock market has taken a deep drop today, on news that Standard & Poors has downgraded its outlook for U.S. debt from stable to negative. The ripple effects could extend well beyond today's stock market.
What it means
Standard & Poors is one of the prominent issuers of assessments of the creditworthiness of countries and corporations. By dropping the outlook for U.S. debt to negative, Standard & Poors is signaling that there is a possibility that it will lower the credit rating of U.S. debt. Currently, that debt enjoys a AAA rating, the highest rating given.
The move by Standard & Poors, which may be followed by other debt rating agencies, reflects concern about the ability of the United States to honor its debt obligations. This is a function of the country's rapidly-expanding debt level in general, and specifically this negative rating from Standard & Poors comes in the context of the U.S. bumping up against its debt ceiling.
In a sense, a lower credit rating for a country is like an individual who has a shaky, but not terrible credit rating - credit is still available, but it is likely to be more expensive.
Potential silver linings?
One can actually point to two silver linings in the debacle:
- It represents market-imposed discipline. Politicians have argued extensively about the national debt, but haven't accomplished anything substantive to address it. The higher interest rates that come with a lower credit rating could force the tough solutions - in the form of budget cuts and tax increases - that the government has not yet found the political will to implement.
- It could raise deposit interest rates. People with CDs, savings accounts, and money market accounts have been suffering from artificially-low interest rates, due in part to government policies to stimulate the economy. A lower U.S. credit rating is likely to raise interest rates generally, which should benefit CD, savings, and money market rates.
Unfortunately, these side benefits would come at the cost of a slowing economy and painful austerity measures. In short, it's a pretty sad day for U.S. finances.