Aug

28

The Gross Domestic Product (GDP) was revised upward from 1.9% to 3.3% on an annual basis for the second quarter of 2008, exceeding expectations of 2.7% increase:

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Aug

28

How often do you find yourself setting a financial budget but never sticking to it? The reason may be that many of us set budgetary goals in the short term. Instead of setting a weekly or monthly budget, try setting up one for six months to a year. Allowing yourself to spend a certain amount of cash during a given week or month doesn’t usually allow for larger, unexpected purchases that often pop up:

If you struggle with keeping a budget, it may be because you’re trying to predict your spending in time chunks that are just too small. A new study published in the Journal of Consumer Research found that people who made annual budgets were better able to predict their spending than those who made monthly budgets.

One reason yearly budgets are more accurate is that consumers consider a greater number of expense categories when they construct them.

Take for example contact lenses. It just so happens I’ve run out of my six-month supply that cost approximately $150. I admit, I don’t keep tabs on my disposable-contact inventory per se, so when I notice I have only one pair left, that’s an unexpected expense of nearly two hundred dollars, more than enough to throw my budget put me in the red.

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Aug

28

From Forbes.com:

While no one is ready to call the bottom of the worst housing collapse in decades, there were glimmers this week that the severity could be waning.

Reports Tuesday showed the glut of newly built homes on the market fell to a five month low last month, while the decline in home prices is starting to ease, and in some cities values are even starting to rise. What’s more, existing home sales rose slightly from June to July, according to data Monday.

“The bottom of the housing downturn is coming into view,” said Moody’s Economy.com Chief Economist Mark Zandi.

It’s still a long road ahead for the housing market. As the housing crisis turns around in the coming months, other economic factors could continue to hamper its comeback. Unemployment, increased lending restrictions, and inflation coupled with a lack of wage increases, are all obstacles that consumers and the economy must first overcome.

As consumers once again become acclimated to the home buying market, home prices will begin to stabilize as already seen in some areas throughout the country. Home prices have become a double-edged sword — while cheaper prices have attracted buyers, cheap and foreclosed properties can devalue neighborhoods. On the other hand, according to Forbes, cities like Los Angeles that have been marked by foreclosures, have seen an increase in the sale of foreclosed and reduced-priced properties — which will aid in the stabilization of those neighborhoods.

Consistency is key. Just as the economy as a whole has technically avoided a recession but remained dangerously close, sporadic good news from housing reports have kept the industry from going under. These good reports must persist over time. If buyers continue to take advantage of cheaper foreclosed properties, they will help create a healthy turn-over rate in the market. Stabilization of home prices, decreased housing inventory, and hopefully a softening of mortgage rates will begin to nurse the housing market back to health.

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Aug

27

The housing crisis has many little helpers that have contributed to its devastating effect. Real estate agents and mortgage brokers seeking higher commissions through an inflated home-sale price, have sought out home appraisers to fraudulently estimate the value of a home:

After the nation’s last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating the value of homes at the direction of equally unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.

But a six-month Associated Press investigation found that the system is crippled by both the bumbling of its policemen and their inability to effectively punish those caught committing fraud.

And despite ample evidence that appraisers are pressured into inflating home values — sometimes to prices in support of loans that are more than buyers can afford — the federal regulators charged with protecting consumers have thus far made a conscious choice not to act.

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Aug

27

Many can remember back on July 11 when hundreds, if not thousands, of IndyMac customers lined up in front of the closed-bank doors demanding their hard earned (and federally-insured) money back. The largest bank failure of the year so far, IndyMac’s closure was just one of nine banks that had been taken over in 2008. According to ABC News, at the start of the year, 90 banks were on the FDIC’s (unpublished) watch list; now there are 117, the highest number in five years. Some experts even expect that number to grow.

In an attempt to ensure the FDIC’s insurance fund doesn’t become depleted – the federal insurer may exercise the open line of credit it maintains with the Treasury Department to bolster the fund utilized to pay back insured depositors:

“I fully expect the FDIC insurance fund to be depleted,” (Sterne Agee banking analyst Sean) Ryan added. “The FDIC is going to be one of what is going to be an increasing string of government bailouts.”

If that happens, ultimately taxpayers will be on the hook. The FDIC borrows money with a line of credit from the U.S. Treasury, which essentially is taxpayer money.

The FDIC is also considering upping its premiums to the banks it insures:

In a bid to replenish the $45.2 billion fund, (FDIC Chairman Sheila) Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.

ABC News reported yesterday that profits at the 8,500 FDIC-insured banks have dropped 86% in the second quarter alone. Despite the ugliness of the continued credit crisis, it’s a beautiful financial system that allows consumers’ hard-earned money to be protected and insured.

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Aug

27

New orders for durable goods, products meant to last three years or more, posted their third consecutive increase in July, raising 1.3%, the same increase reported in June. With consumers holding back from supporting the economic structure, businesses — along with consistently strong exports — have supported the wounded economy recently. Yet, as foreign markets continue to slow, the question is: how long can American exports and business spending prop up the fragile economy? Consumer spending and the housing market will have to improve first and foremost to keep the wheels turning.

The good news is that the housing market began to stabilize in July: existing-home sales rose by 3.1%, lifting annual home sales to the 5 million mark. Single-family home sales rose 2.4% in July as well. Cheaper energy prices were the main cause for consumer confidence to rebound to 56.9 in August, up from a reading of 51.0 in June, the lowest level in 16 years.

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Aug

26

Two main proponents can most often cause an increase in mortgage rates: speculation or a change in policy. This month, Fannie Mae and Freddie Mac increased the fee they charge to lenders for most loans, due to result in an increase in interest rates to borrowers with mid-level credit. Fannie was the first to act, raising their fee by 0.5%, and Freddie was quick to follow with a similar increase:

This doesn’t mean every new consumer loan will increase by a half point, though. First, the policy applies only for borrowers with credit scores lower than 680. Credit rating agencies do not disclose “average” credit score figures, but the Fair Isaac Corporation, whose software is used by many credit rating agencies, said the median score was about 723.

Fannie and Freddie’s new policy will be especially felt by homeowners who wish to refinance. In recent months, fewer borrowers have been able to refinance due to increased lending restrictions and higher mortgage rates. The increased fee may result in a somewhat smaller number of homeowners who qualify for refi loans:

Even those with excellent credit will not be able to take cash out of their homes if, after the loan, they have less than 15 percent equity in the homes. Previously, the threshold was 10 percent, and people with low credit scores could not get such deals.

Rather than an attempt to raise extra capital, Fannie and Freddie have increased their fee in reaction to the abundant risk in the market:

One thing that indicates the extent of this risk, of course, is that by and large nobody but the GSEs are buying mortgage loans right now. When nobody else but the government-chartered investors are in the market, that can be understood to mean that risk is so high that nobody else is even feeling strong enough to be willing put a price on it. The absence of competitors in a market often suggests that risk has risen in that market. If you’ve ever tried to get flood insurance, you may have noticed this phenomenon.

Higher Fees for Mortgages

Higher Fees for Mortgages

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Aug

26

For months different versions of the housing rescue bill were kicked back and forth between lawmakers, debating and rejecting various stipulations that called for tax credits for first-time homebuyers, as well as financial relief for businesses and communities weakened by the housing crisis. So how did a mandate involving credit cards and the IRS wind up somewhere in between government-backed refinanced mortgages and counseling for lending agencies?

In an attempt to narrow the national tax gap, starting in 2011 lawmakers will require that every merchant who collects over $20,000 in payment-card transactions, or over 200 card transactions, be reported to the IRS:

While the new rule may bring more IRS audits, it’s also aimed at encouraging business owners to report income accurately. “It’s probably designed to lead to increased compliance,” said Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher.

“If the IRS, through this system, gets information on a merchant that shows X amount of credit-card sales and their statistics show that type of merchant probably has 80% of their business done on credit-card sales, and total reported revenue doesn’t seem to mesh up, it probably will result in audits,” Luscombe said.

Neither business owners nor payment-card processors are very happy over the upcoming arrangement. The new stipulations are likely to increase costs, which always seem to find their way back to the consumer:

Small-business owners are worried about higher costs under the new rule. “The credit-card companies or the banks are going to have to build this [reporting] system out. That cost is likely to be passed on to the small-business owner,” said Bill Rys, tax counsel for the National Federation of Independent Business, a trade group in Washington.

They’re also worried about mistakes because any mismatch or problem related to a business owner’s taxpayer identification number on the report means the payment processor creating the report must withhold 28% of the total sales. That’s a 28% hit to gross sales, not taxable income.

The American Bankers Association is especially displeased with the mandate, as expressed in a letter submitted to lawmakers:

“This burdensome unfunded mandate would impose hundreds of millions of dollars in costs on the business community. In order to comply with this mandate, the payment card industry and its third-party processors would be required to fundamentally redesign card processing systems that were developed to accommodate the efficient and reliable processing and settlement of transactions between consumers and merchants.”

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Aug

25

At least one person thinks so. Phil LeBeau of CNBC explains in his blog “Behind the Wheel” that if the “Big Three” — Ford, General Motors, and Chrysler — were to fold “the implications for the broader economy will be significant.” LeBeau goes on to make the point that the US auto industry “has perhaps the broadest impact on the economy of almost any industry.”

The resounding question that should be asked first is “What form would the ‘bailout’ take?” I use the term “bailout” loosely, since back in 1980 Chrysler received a $1 billion loan from the US government. Lee Iacocca and company paid back the loan in full, allowing the auto maker to get back on its feet with thousands of jobs intact — the US manufacturing wheels kept rolling:

(July 13, 1983) What saved Chrysler, we are told, are the 1.2 billion in loan guarantees provided by the federal government–so successful was the timely injection of cash that the company could announce today that it will pay off the remaining 800 million by September. And it didn’t cost the taxpayer a penny, did it, they ask gloatingly. Chrysler chairman Lee Iacocca, who came to Washington four years ago with begging bowl in hand, is now in the vanguard of the push for more government intervention in American industry.

Allow me to take off my rose colored glasses for a minute and ask “What, or how much, would the big three be asking for? And what guarantees could the companies provide that they could and would stay in business to pay back the loan?” Economics 101 teaches us that private companies should be allowed to fail, the very reason Fannie Mae and Freddie Mac became quasi-government entities — so they could never fail, they are too big to fail.

And there lies the deciding factor. Are the Big Three too big to fail? Will the effects from one, if not three, folded US automakers be devastating to the economy and the citizens as a whole? Discussion on this topic will be quite lively. Would a bailout once again save a struggling manufacturer, or are the government and its tax payers saving private companies who have made poor business decisions?

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Aug

25

This week’s issue of HSH’s Market Trends Newsletter, “Mortgage Rates Ease Slightly,” examines how recent economic conditions like the health of Fannie Mae and Freddie Mac, and current spreads between 30-year Fixed Rate Mortgages and the 10-year Treasury have affected the movement of mortgage rates:

For their part, rates were steady to slightly lower for the week. HSH’s Fixed Rate Mortgage Indicator (FRMI), the average interest rate for all 30-year FRMs — including conforming, jumbo and expanded conforming offerings — slid below the 7% threshold for the first time in four weeks, closing our national survey at 6.99%, a three basis point (.03%) decline. For 5/1 Hybrid ARMs, the overall shed a lone basis point to finish the week at 6.63%.

We noted some discussions in the media this week about how wide the spreads have become for 30-year FRMs when compared against other benchmarks such as the 10-year Treasury. It’s true that spreads are extraordinarily wide for both conforming and jumbos, but we thought we’d look back into the past to see how today’s gap compares with history.

This issue also reported on how economic indicators like the Producer Price Index, Housing Starts, and the Index of Leading Economic Indicators reflected upon the current state of the market:

Some spread premium would also disappear if inflation cools. The Producer Price Index leapt by 1.2% in July after a 1.8% lift in June, so there’s little indication that price pressures are easing at the moment. While the ‘core’ rate of PPI lifted by ‘just’ 0.7%…

The Index of Leading Economic Indicators had nothing nice to say about the present state of the economy, as well. The LEI slipped by 0.7% during July, but much of the decline was due to the June building permits issue noted above, as it created a vacuum in the July calculation.

HSH’s free, weekly Market Trends Newsletter, an in-depth analysis of various financial markets of the week prior, is published every Monday. Email subscribers — receive it in your inbox by Friday night, so sign up today!

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