March 17 (Bloomberg) -- Susan Woodward isn’t renewing the lease on her music boutique and internet cafe in Jackson Hole, Wyoming, after nine years. The reason: doubling interest rates on her credit cards.
“My business is seasonal, so we count on credit to stock the store at the end of the slow season and prepare for the busy season,” said Woodward, who canceled her Citibank and Capital One credit cards in February after learning that rates would climb to 19 percent from 10 percent. She said she always made timely payments and kept low balances.
Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit- card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey of 250 firms by the National Small Business Association, a trade group with more than 150,000 members.
The increase in credit-card costs has forced some business owners to stop using their cards, and at the same time declining credit limits are cutting their access to cash, said Todd McCracken, president of the Washington-based NSBA. Twenty-eight percent of small businesses in NSBA’s December survey said they had their card limits or lines of credit lowered in the second half of 2008.
There were about 27 million companies with fewer than 500 employees in 2007, according to estimates by the Small Business Administration’s Office of Advocacy.
Loans Drying Up
Bank loans are drying up as an estimated 70 percent of U.S. banks have tightened standards for small-business loans, based on a Federal Reserve January survey of senior loan officers.
Financial institutions may slash $2.7 trillion in credit- card lines by the end of 2010, according to a report published last week by Meredith Whitney, chief executive officer of Meredith Whitney Advisory Group LLC in New York. Small-business owners often use business and personal credit cards, with 41 percent relying on a combination of both, based on data compiled by the NSBA.
“Small businesses in particular are getting squeezed on multiple credit fronts,” said Alan Blinder, an economics professor at Princeton University and former vice chairman of the Federal Reserve. “Some businesses are forced to turn to very expensive forms of credit or not get credit at all.”
Independent businesses with fewer than 500 employees created 60 to 80 percent of new jobs annually in the U.S. during the last decade, according to the Washington-based Small Business Administration’s Web site.
Credit Plan
President Barack Obama and Treasury Secretary Timothy Geithner said yesterday the U.S. will free up credit for small businesses by raising federal loan guarantees on Small Business Administration lending and increasing bank liquidity.
“Small businesses are the heart of the American economy,” Obama told a gathering of small-business owners, community banking executives and lawmakers at the White House. He said the measures announced yesterday are a “first step” of a continuing effort to help small business.
The Fed plans to start disbursing funds on March 25 from its Term Asset-Backed Securities Loan Facility program, or TALF, to prop up the market for consumer and small-business loans.
“If it succeeds, the TALF can be an important step in both preserving what’s left of consumer and small business lending and restoring those markets,” Blinder said.
Decrease Balances
If card limits are slashed or interest rates are increased, small-business owners should try to decrease the balances on all of their cards, not just one, so the ratio of debt to available credit is lower, a key in determining credit scores, said Jeff Van Winkle, an attorney in Grand Rapids, Michigan who represents small-businesses owners.
Borrowers should also ask vendors if they will extend credit so they can defer payment to the vendor, without penalty, instead of to the credit-card company, Van Winkle said.
Vendor financing may not be an option for Ralph Soto, who owns a construction company in Lutz, Florida. Twenty percent of the suppliers he uses won’t extend credit or are reducing credit lines, which has prevented him from bidding on certain projects that require up-front funding. Soto, 41, said the rate on his card issued by Capital One Financial Corp. has tripled, forcing him to cancel the card.
“If lenders don’t manage risk, they won’t have the funds to lend to anyone else,” said Ken Clayton, senior vice president of card policy at the Washington-based American Bankers Association. One significant way to manage risk in these economic circumstances is to reduce credit lines, Clayton said.
Risk Environment
Charge-offs, which are loans the banks don’t expect to be repaid, were 7.1 percent on average in January compared with 4.6 percent a year earlier, according to data compiled by Bloomberg. Consumers are falling behind on credit-card payments as U.S. unemployment reached 8.1 percent in February, the highest level in more than a quarter century.
American Express Co., the largest credit-card company by purchases, said yesterday net charge-offs rose to 8.7 percent of loans in February from 8.3 percent the previous month.
New York-based Citigroup Inc. may cut credit lines by $600 billion and Charlotte, North Carolina-based Bank of America Corp. by $500 billion, according to Whitney. She estimated New York-based JPMorgan Chase & Co. and American Express would decrease lines by $300 billion and $100 billion, respectively.
Rate Increase
Some customers will have their interest rates increased to reflect the current risk environment, said Pam Girardo, a spokeswoman for McLean, Virginia-based Capital One. Customers were notified in writing with a minimum 45-day notice and can opt to decline the changes and close the account, she said. A Citigroup spokesman, Samuel Wang, declined to comment on the specifics of Woodward’s case.
Woodward, 41, said three other stores along the main square in Jackson Hole are already empty, an unprecedented sight in her more than 20 years living there.
Since American Express reduced Jim MacRae’s credit limit from $25,000 to $1,500 and San Francisco-based Wells Fargo & Co. almost halved his business line of credit, he has been forced to require more than a 50 percent deposit from customers who buy office furniture from him. He can no longer afford to keep inventory in stock and sales have dropped by about 80 percent, he said.
“The stimulus package isn’t giving the companies I sell to the feeling that everything is going to be okay,” said MacRae, 59, who lives in Newport Beach, California. “Instead of buying office furniture, they’re laying people off.”
Tax Credit Forms and Rules Now in Place
The Treasury Department has moved at record speed to implement one piece of the new American Recovery and Reinvestment Act of 2009 Act aka the stimulus act.
The Department and the Internal Revenue Service which will manage it announced on Wednesday that forms and regulations are already in place for homebuyers who wish to claim the first-time credit enabled under the act.
The credit is available to homebuyers who purchase a home before December 1 of this year. In an effort to make the effects of the credit felt quickly in the economy, homebuyers can claim the credit either on their 2009 tax return or immediately on the 2008 return due in April.
The tax credit represents 10 percent of the purchase price of a home up to a maximum of $8,000 or $4,000 for married taxpayers filing separate returns. The $7,500 credit that was authorized under earlier legislation last year was actually a 15 year loan; the new tax credit does not have to be repaid by the homeowner under ordinary circumstances.
The credit does have to be repaid if the homeowner sells the home in less than 36 months or if the home ceases to be his principal residence during that time.
For the purpose of this credit, a first time homeowner is defined as one who has not owned a home for the 36 months ending on the date of purchase.
The credit is available to taxpayers with adjusted gross incomes up to $75,000 or $150,000 for married taxpayers filing jointly. Above those income levels the credit is phased out gradually.
Homeowners who purchased a house between April 8 and December 31, 2008 are not eligible for the new credit. They are covered by the earlier legislation and can claim the $7,500 repayable credit.
Treasury Secretary Tim Geithner said in a press release from his department, "The expansion of the first-time home buyer tax break as part of the President's recovery agenda gives money to taxpayers when they need it most, while also targeting an important group of buyers. We view our economic recovery plan, our financial stability plan, and now this homeowner affordability plan as three legs of the same stool - an integrated whole that represents our immediate response to the current crisis."
Forms and instructions for claiming the credit on 2008 tax returns are available at www.irs.gov. The form number is 5405.
The Department and the Internal Revenue Service which will manage it announced on Wednesday that forms and regulations are already in place for homebuyers who wish to claim the first-time credit enabled under the act.
The credit is available to homebuyers who purchase a home before December 1 of this year. In an effort to make the effects of the credit felt quickly in the economy, homebuyers can claim the credit either on their 2009 tax return or immediately on the 2008 return due in April.
The tax credit represents 10 percent of the purchase price of a home up to a maximum of $8,000 or $4,000 for married taxpayers filing separate returns. The $7,500 credit that was authorized under earlier legislation last year was actually a 15 year loan; the new tax credit does not have to be repaid by the homeowner under ordinary circumstances.
The credit does have to be repaid if the homeowner sells the home in less than 36 months or if the home ceases to be his principal residence during that time.
For the purpose of this credit, a first time homeowner is defined as one who has not owned a home for the 36 months ending on the date of purchase.
The credit is available to taxpayers with adjusted gross incomes up to $75,000 or $150,000 for married taxpayers filing jointly. Above those income levels the credit is phased out gradually.
Homeowners who purchased a house between April 8 and December 31, 2008 are not eligible for the new credit. They are covered by the earlier legislation and can claim the $7,500 repayable credit.
Treasury Secretary Tim Geithner said in a press release from his department, "The expansion of the first-time home buyer tax break as part of the President's recovery agenda gives money to taxpayers when they need it most, while also targeting an important group of buyers. We view our economic recovery plan, our financial stability plan, and now this homeowner affordability plan as three legs of the same stool - an integrated whole that represents our immediate response to the current crisis."
Forms and instructions for claiming the credit on 2008 tax returns are available at www.irs.gov. The form number is 5405.
Freddie Mac says it will ask for about $30B to $35B
McLEAN, Va. (AP) — Mortgage finance company Freddie Mac said Friday it will need an additional $30 billion to $35 billion in government aid as it copes with losses on loans the company backed during the U.S. housing bubble.
The company disclosed in a Securities and Exchange Commission filing late Friday that it expects its government regulator, the Federal Housing Finance Agency, to make the request from the Treasury Department.
It comes on top of the $13.8 billion the company received last year after it was seized by the government. Sibling company Fannie Mae has yet to request any such aid but has warned it may need to do so.
Federal regulators seized control of both companies in September after they faced mounting losses from the housing market's bust. An agreement with the Treasury Department allows the government to invest up to $100 billion in each company.
The actual amount of the request will reflect the amount of losses the company sustained in the fourth quarter, Freddie Mac said in the filing.
The request suggests that losses are continuing for Freddie Mac, which posted a loss of $25.3 billion for the third quarter. In that report, Freddie Mac said that rising unemployment rates, tightening credit and deteriorating economic conditions caused the number of delinquent loans to rise, including prime loans made to borrowers with strong credit.
Meanwhile, Freddie Mac also disclosed that it settled a dispute with JP Morgan Chase & Co., which will now collect payments on mortgages previously handled by failed thrift Washington Mutual. The agreement settles a dispute with JPMorgan, which purchased Washington Mutual in late September for $1.9 billion.
The company disclosed in a Securities and Exchange Commission filing late Friday that it expects its government regulator, the Federal Housing Finance Agency, to make the request from the Treasury Department.
It comes on top of the $13.8 billion the company received last year after it was seized by the government. Sibling company Fannie Mae has yet to request any such aid but has warned it may need to do so.
Federal regulators seized control of both companies in September after they faced mounting losses from the housing market's bust. An agreement with the Treasury Department allows the government to invest up to $100 billion in each company.
The actual amount of the request will reflect the amount of losses the company sustained in the fourth quarter, Freddie Mac said in the filing.
The request suggests that losses are continuing for Freddie Mac, which posted a loss of $25.3 billion for the third quarter. In that report, Freddie Mac said that rising unemployment rates, tightening credit and deteriorating economic conditions caused the number of delinquent loans to rise, including prime loans made to borrowers with strong credit.
Meanwhile, Freddie Mac also disclosed that it settled a dispute with JP Morgan Chase & Co., which will now collect payments on mortgages previously handled by failed thrift Washington Mutual. The agreement settles a dispute with JPMorgan, which purchased Washington Mutual in late September for $1.9 billion.
Keep Your Home. Know Your Loan.” campaign promotes free housing counseling
HUD KICKS OFF SIX-CITY FINANCIAL LITERACY CAMPAIGN TO HELP TROUBLED HOMEOWNERS AVOID FORECLOSURE AND RESCUE SCAMS
NEW YORK - U.S. Housing and Urban Development Secretary today announced HUD's latest effort to prevent foreclosure by launching an aggressive consumer education campaign in six cities. HUD's "Keep Your Home. Know Your Loan." campaign will kick off in Chicago, Detroit, Los Angeles, Miami, New York and Phoenix. Preston launched the public awareness initiative at Neighborhood Housing Services, a New York City agency that offers clients free mortgage delinquency and default resolution counseling.
HUD's financial literacy campaign builds on the Department's continuing commitment to support its 2,600 housing counseling agencies across the country. In 2008, demand for HUD-approved counseling increased significantly. Meanwhile, the number of foreclosure rescue scams has also increased in response to the nation's housing crisis.
"This campaign is a call to action for families at risk of losing their homes," said Preston. "We want people to pick up the phone and call a HUD-approved housing counseling agency before they reach a point of no return.
Keeping your home may be as easy as dialing
(877) HUD-1515."
Many troubled homeowners seek help late in their financial crisis thereby limiting their loan modification options. HUD's campaign will target homeowners who are three-to-six months from defaulting on their mortgage, facing a reset on their adjustable-rate mortgage, or are experiencing a family crisis such as unemployment or skyrocketing health care costs in 2009.
The "Keep Your Home. Know Your Loan." campaign will include print, radio and television public service announcements, as well as a tool kit for non-profit counseling agencies that will support the effort. In each PSA, consumers are directed to call HUD's toll-free counseling hotline (877-HUD-1515) to arrange free face-to-face meetings with a counselor near them. Since most HUD-approved counseling agencies lack the resources for marketing and outreach, the Department is launching this campaign to help consumers earlier in their financial crisis and to fight the explosion of "pay-to-play" loan modification scams.
HUD's support for housing counseling agencies has grown significantly, from $20 million in 2001 to $50 million in 2008. In addition, federal support has now grown exponentially with $360 million in additional funds in 2008 specifically for foreclosure prevention counseling. HUD has requested another $65 million to support local housing counseling agencies in FY 2009.
Research finds HUD-approved housing counseling is effective to prevent foreclosure. A recent HUD study noted a 55 percent increase in the number of clients receiving foreclosure prevention counseling between 2006 and 2007. Of the approximately 136,000 families that completed this counseling during 2007, 45 percent were able to remain in their homes while 14 percent ultimately lost their home through foreclosure. This report also found that in the years leading up to the current crisis, more than 55 percent of low-income families seeking to buy their first home did not seek out pre-purchase counseling. This lack of counseling likely left them unprepared to make one of the biggest financial commitments of their lives and may have contributed to some of today's high rates of default and foreclosure.
Challenge: In light of the economic conditions, including declining home values and the increase of resetting mortgage rates, many Americans are facing significant challenges that are contributing to the alarming rate of foreclosures. HUD-approved Housing Counseling Agencies can help homeowners navigate their financial challenges. However, counselors have more options to assist clients when homeowners call early in the process before they are in crisis.
Response: Over the next 6 months, the U.S. Department of Housing and Urban Development is launching a national consumer education campaign urging homeowners to seek free, HUD-approved housing counseling advice. The campaign is a call to action for homeowners and target communities and demographic groups that are most at-risk.
Campaign goal: Provide marketing and outreach materials and technical support to assist housing counseling and non-profit agencies that provide services to homeowners. The hope is to target current homeowners to assist them in keeping their homes by:
Informing them of their loan terms and associated financial options;
Encouraging them to seek assistance early – call to action; and
Educating consumers on how to improve general financial literacy.
Components: The campaign provides a 'tool kit' which includes print, radio and TV PSAs, to support community, non-profit agencies that provide housing counseling services.
Partners: HUD is urging community, cultural, faith-based and political advocates to become involved in the campaign. In addition, HUD is seeking homeowner associations, real estate brokers and other members of industry to take an active role.
Target cities: Six cities were chosen for the launching of the campaign which are New York, Miami, Chicago, Detroit, Los Angeles, and Phoenix.
Campaign brand and hotline: Keep Your Home. Know Your Loan.
Call 1 (877) HUD-1515 for one of HUD's 2300 approved Housing Counseling Agencies in your local area. Visit http://www.hud.gov/keepyourhome.
NEW YORK - U.S. Housing and Urban Development Secretary today announced HUD's latest effort to prevent foreclosure by launching an aggressive consumer education campaign in six cities. HUD's "Keep Your Home. Know Your Loan." campaign will kick off in Chicago, Detroit, Los Angeles, Miami, New York and Phoenix. Preston launched the public awareness initiative at Neighborhood Housing Services, a New York City agency that offers clients free mortgage delinquency and default resolution counseling.
HUD's financial literacy campaign builds on the Department's continuing commitment to support its 2,600 housing counseling agencies across the country. In 2008, demand for HUD-approved counseling increased significantly. Meanwhile, the number of foreclosure rescue scams has also increased in response to the nation's housing crisis.
"This campaign is a call to action for families at risk of losing their homes," said Preston. "We want people to pick up the phone and call a HUD-approved housing counseling agency before they reach a point of no return.
Keeping your home may be as easy as dialing
(877) HUD-1515."
Many troubled homeowners seek help late in their financial crisis thereby limiting their loan modification options. HUD's campaign will target homeowners who are three-to-six months from defaulting on their mortgage, facing a reset on their adjustable-rate mortgage, or are experiencing a family crisis such as unemployment or skyrocketing health care costs in 2009.
The "Keep Your Home. Know Your Loan." campaign will include print, radio and television public service announcements, as well as a tool kit for non-profit counseling agencies that will support the effort. In each PSA, consumers are directed to call HUD's toll-free counseling hotline (877-HUD-1515) to arrange free face-to-face meetings with a counselor near them. Since most HUD-approved counseling agencies lack the resources for marketing and outreach, the Department is launching this campaign to help consumers earlier in their financial crisis and to fight the explosion of "pay-to-play" loan modification scams.
HUD's support for housing counseling agencies has grown significantly, from $20 million in 2001 to $50 million in 2008. In addition, federal support has now grown exponentially with $360 million in additional funds in 2008 specifically for foreclosure prevention counseling. HUD has requested another $65 million to support local housing counseling agencies in FY 2009.
Research finds HUD-approved housing counseling is effective to prevent foreclosure. A recent HUD study noted a 55 percent increase in the number of clients receiving foreclosure prevention counseling between 2006 and 2007. Of the approximately 136,000 families that completed this counseling during 2007, 45 percent were able to remain in their homes while 14 percent ultimately lost their home through foreclosure. This report also found that in the years leading up to the current crisis, more than 55 percent of low-income families seeking to buy their first home did not seek out pre-purchase counseling. This lack of counseling likely left them unprepared to make one of the biggest financial commitments of their lives and may have contributed to some of today's high rates of default and foreclosure.
Challenge: In light of the economic conditions, including declining home values and the increase of resetting mortgage rates, many Americans are facing significant challenges that are contributing to the alarming rate of foreclosures. HUD-approved Housing Counseling Agencies can help homeowners navigate their financial challenges. However, counselors have more options to assist clients when homeowners call early in the process before they are in crisis.
Response: Over the next 6 months, the U.S. Department of Housing and Urban Development is launching a national consumer education campaign urging homeowners to seek free, HUD-approved housing counseling advice. The campaign is a call to action for homeowners and target communities and demographic groups that are most at-risk.
Campaign goal: Provide marketing and outreach materials and technical support to assist housing counseling and non-profit agencies that provide services to homeowners. The hope is to target current homeowners to assist them in keeping their homes by:
Informing them of their loan terms and associated financial options;
Encouraging them to seek assistance early – call to action; and
Educating consumers on how to improve general financial literacy.
Components: The campaign provides a 'tool kit' which includes print, radio and TV PSAs, to support community, non-profit agencies that provide housing counseling services.
Partners: HUD is urging community, cultural, faith-based and political advocates to become involved in the campaign. In addition, HUD is seeking homeowner associations, real estate brokers and other members of industry to take an active role.
Target cities: Six cities were chosen for the launching of the campaign which are New York, Miami, Chicago, Detroit, Los Angeles, and Phoenix.
Campaign brand and hotline: Keep Your Home. Know Your Loan.
Call 1 (877) HUD-1515 for one of HUD's 2300 approved Housing Counseling Agencies in your local area. Visit http://www.hud.gov/keepyourhome.
Fannie Mae Announces National REO Rental Policy
Renters in Fannie Mae-Owned Foreclosed Properties
Eligible to Stay in Their Homes
WASHINGTON, DC -- Fannie Mae (FNM/NYSE) today announced the establishment of a new National Real Estate Owned (REO) Rental Policy that will allow qualified renters in Fannie Mae-owned foreclosed properties to stay in their homes. The company currently has an eviction suspension in place through the end of January which will allow for the new policy to be fully operationalized prior to the suspension concluding.
"Renters in foreclosed properties have often been a casualty of the foreclosure crisis the country is facing," said Michael Williams, chief operating officer of Fannie Mae. "This policy will allow qualified renters to remain in Fannie Mae-owned properties should they choose to do so, mitigate the disruption of personal lives that foreclosures can cause, and help bring a measure of stability to communities impacted by high foreclosure rates."
The new policy applies to renters occupying foreclosed properties at the time Fannie Mae acquires the property. Renters occupying any type of single-family property will be eligible including residents of two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property.
While the company markets the properties for sale, Fannie Mae will manage the properties through a real estate broker or a property management company. The company will not require security deposits to be posted in connection with this program.
Renters in the foreclosed properties will be asked to pay market rate rent under the new leases. Rates may be determined by reviewing local comparable rents, conducting a neighborhood survey, or through other relevant indicators. Rates will also be subject to any legal rent control restrictions. The company will review each instance where the market rate may require a tenant to pay additional rent and will work to reach an equitable resolution.
On behalf of the company, property managers are contacting renters in Fannie Mae-owned foreclosed properties to notify them of their options.
Eligible to Stay in Their Homes
WASHINGTON, DC -- Fannie Mae (FNM/NYSE) today announced the establishment of a new National Real Estate Owned (REO) Rental Policy that will allow qualified renters in Fannie Mae-owned foreclosed properties to stay in their homes. The company currently has an eviction suspension in place through the end of January which will allow for the new policy to be fully operationalized prior to the suspension concluding.
"Renters in foreclosed properties have often been a casualty of the foreclosure crisis the country is facing," said Michael Williams, chief operating officer of Fannie Mae. "This policy will allow qualified renters to remain in Fannie Mae-owned properties should they choose to do so, mitigate the disruption of personal lives that foreclosures can cause, and help bring a measure of stability to communities impacted by high foreclosure rates."
The new policy applies to renters occupying foreclosed properties at the time Fannie Mae acquires the property. Renters occupying any type of single-family property will be eligible including residents of two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property.
While the company markets the properties for sale, Fannie Mae will manage the properties through a real estate broker or a property management company. The company will not require security deposits to be posted in connection with this program.
Renters in the foreclosed properties will be asked to pay market rate rent under the new leases. Rates may be determined by reviewing local comparable rents, conducting a neighborhood survey, or through other relevant indicators. Rates will also be subject to any legal rent control restrictions. The company will review each instance where the market rate may require a tenant to pay additional rent and will work to reach an equitable resolution.
On behalf of the company, property managers are contacting renters in Fannie Mae-owned foreclosed properties to notify them of their options.
Rates are low, but that doesn't help consumers when banks aren't given loans
The Federal Reserve may have cut its key short-term interest rate to the lowest level on record, but that doesn't mean credit will be any easier to get.
The move to lower the fed funds target rate to a range between 0% and 0.25%marked the tenth time the Fed has cut rates in the past 15 months in an attempt to jumpstart the economy.
Generally, the Fed lowers rates when it is concerned about the economy slowing because consumers tend to spend more when the cost of borrowing is cheap. But economists say the problem for consumers and businesses right now is not the cost of borrowing, but the availability of credit.
"Consumers might see lower rates but it's still hard to get a loan "Banks are taking big hits, and they're still trying to preserve capital. So they'll only make loans if you're a good credit risk."
How it works
The federal funds rate is an overnight lending rate that is used as a benchmark to determine the price of a variety of loans, including credit cards, home equity loans, lines of credit and car loans.
Most types of consumer loans are pegged to the prime rate, which is directly influenced by the federal funds rate. Typically, the prime rate is 3 percentage points higher than the federal funds rate. It was 4% before Tuesday's rate cut; just after the decision, several banks announced they were lowering their prime rate to 3.25%.
In turn, all credit cards with variable interest rates will automatically reset to reflect the lower rate. That is good news for card holders, but expect issuers to counter it by setting rate floors in order to preserve their margins, as well as scaling back consumer credit lines and closing old accounts.
Banks are trying to mitigate losses, "New credit is going to be a problem, "If you have shaky credit you're going to be very challenged to find money...even people with good credit are going to find it's not as easy to get credit.
Those in the market for a new car will certainly find deals, but that's mostly thanks to slashed sticker prices, not lower interest rates. That's because auto loans are not overly rate sensitive. For example, despite the Fed rate cuts, the average five-year note for a new car loan is at 7.05%, down from 7.60% a year ago But remember the rates are based on your credit score and lenders like GMAC or Ford want to see scores over 800 to get there tier 1 financing.
Plus, even if borrowers can get financing, the difference of a percentage point doesn't seriously impact affordability. "Nobody is upgrading to a Hummer based on lower interest rates,".
For many mortgage holders, the cumulative Fed rate cuts will result in lower payments when their variable-rate loans reset in 2009. But there is also a diluted effect: While this is a good time to refinance your existing mortgage, those in the market for a new home will need excellent credit to get a low rate.
"To obtain today's low interest rates, you need to have a down payment - or equity position in your home in the case of a refi - of at least 10% and fully document your income and your assets," If you don't have good credit, you're going to have trouble getting financing. But as long as your loan is within FHA limits for your state and county you still can finance up to 97% of your loan. Just remember FHA loans are more expensive then your normally conventional loan and the PMI is more expensive as well.
The move to lower the fed funds target rate to a range between 0% and 0.25%marked the tenth time the Fed has cut rates in the past 15 months in an attempt to jumpstart the economy.
Generally, the Fed lowers rates when it is concerned about the economy slowing because consumers tend to spend more when the cost of borrowing is cheap. But economists say the problem for consumers and businesses right now is not the cost of borrowing, but the availability of credit.
"Consumers might see lower rates but it's still hard to get a loan "Banks are taking big hits, and they're still trying to preserve capital. So they'll only make loans if you're a good credit risk."
How it works
The federal funds rate is an overnight lending rate that is used as a benchmark to determine the price of a variety of loans, including credit cards, home equity loans, lines of credit and car loans.
Most types of consumer loans are pegged to the prime rate, which is directly influenced by the federal funds rate. Typically, the prime rate is 3 percentage points higher than the federal funds rate. It was 4% before Tuesday's rate cut; just after the decision, several banks announced they were lowering their prime rate to 3.25%.
In turn, all credit cards with variable interest rates will automatically reset to reflect the lower rate. That is good news for card holders, but expect issuers to counter it by setting rate floors in order to preserve their margins, as well as scaling back consumer credit lines and closing old accounts.
Banks are trying to mitigate losses, "New credit is going to be a problem, "If you have shaky credit you're going to be very challenged to find money...even people with good credit are going to find it's not as easy to get credit.
Those in the market for a new car will certainly find deals, but that's mostly thanks to slashed sticker prices, not lower interest rates. That's because auto loans are not overly rate sensitive. For example, despite the Fed rate cuts, the average five-year note for a new car loan is at 7.05%, down from 7.60% a year ago But remember the rates are based on your credit score and lenders like GMAC or Ford want to see scores over 800 to get there tier 1 financing.
Plus, even if borrowers can get financing, the difference of a percentage point doesn't seriously impact affordability. "Nobody is upgrading to a Hummer based on lower interest rates,".
For many mortgage holders, the cumulative Fed rate cuts will result in lower payments when their variable-rate loans reset in 2009. But there is also a diluted effect: While this is a good time to refinance your existing mortgage, those in the market for a new home will need excellent credit to get a low rate.
"To obtain today's low interest rates, you need to have a down payment - or equity position in your home in the case of a refi - of at least 10% and fully document your income and your assets," If you don't have good credit, you're going to have trouble getting financing. But as long as your loan is within FHA limits for your state and county you still can finance up to 97% of your loan. Just remember FHA loans are more expensive then your normally conventional loan and the PMI is more expensive as well.
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