Tag Archives: rate
FOMC pledges to keep loan interest rates at historic levels
Loan interest rates are at the top of mind for most every consumer and business owner in todays economy. The economic collapse that led to one of the worst recessions in the past fifty years has affected every borrower in the country. The government quickly approached the FOMC to work to create a plan to free up capital and help keep the economy moving forward by drastically lowering interest rates. The drop with Fed interest rates helped bring down rates on car loans, credit cards and mortgage loans, helping consumers and businesses improve their financial balance sheet with lower payments.
Consumers and business owners who have been able to obtain a loan over the last two years should have benefitted with historically low rate loan offerings. The drop with interest rates allowed banks to continue borrowing money from the Federal Reserve and benefit with improved margins, while offering consumers incentives to refinance their home mortgages and businesses to benefit from lower rates on their variable rate credit loans. The ability for borrowers to obtain low rate financing was a key component with the government pushing the Federal Reserve to aggressively assist to help contain the economic crisis.
The prospect of low interest rates being available for the balance of the year were all but guaranteed by Chairman of the Fed Ben Bernanke in testimony last week. The Fed has made clear that they will not look to raise rates without a strong signal that the economy is on solid footing. The Fed will closely monitor the labor markets with an expectation that the economy should start producing new jobs in the second half of 2010 as well as the real estate market to monitor home sales. Consumer confidence is certainly an area that has been hurt by the economic catastrophe and the Federal Reserve and government are both acutely aware of the lack of confidence main street has in the government as well as banking industry.
Lending will continue to draw the highest scrutiny from the public and government as groups monitoring the banking industry will try to push for additional funds to help spur growth. To date, the banks have been very hesitant to begin lending to small business owners and consumers who have sought out personal loans. The lack of financing by the lending market has been detrimental to helping create job growth as well as spur purchasing which could help the economy. Consumers who historically obtained signature or personal loans from their banks have found limited financing options for borrowing money without collateral in the new banking world. Limiting these options tends to push consumers into higher rate alternatives such as cash advance loans, payday loans and credit card cash advances. Savvy consumers are also exploring beginning relationships with credit unions, which have significantly grown in popularity over the past twenty four months with their ability to fulfill a critical portion of the lending market.
Interest rates should stay low and this is the best news for the market, as additional financing options become available to consumers and businesses look for a heightened pace to the economic recovery.
The Casualties of Subprime Lending (Page 1 of 2)
Subprime lending has recently caused over 56 lenders to either go out of business or stop issuing subprime loans because of excessive foreclosure rates. The lending community made decisions in the last few years that dramatically eased a borrowers qualifications with a resultant dramatic increase in foreclosures.
The housing demand was so strong that lenders started to compete for the insatiable mortgage demand by making qualifying very easy. One example was the creation of the stated income loan, or the liars loan. In the loan application, the borrower only had to state his income without showing any proof of that that income. Unfortunately about 60% of borrowers over-stated their income on their loan applications to qualify for their loans. A review of lending practices showed racial disparities in African-American and Hispanic low-income neighborhoods which had 1 ½ times as many subprime loans at higher interest rates and closing costs as compared to low-income white neighborhoods.
The lenders planned to compensate for higher default rates by charging higher interest rates and closing costs. But to make payments as low as possible for the borrowers, lenders developed low-initial interest rate loans (teaser rates) or negative amortization (Neg Am) mortgages. With a Neg Am loan, a borrower would actually owe more than he originally borrowed when he went to sell.
The teaser rates combined with adjustable interest rates caused borrowers to be hit with huge mortgage payment increases. Most borrowers couldnt afford huge monthly payment increases and foreclosure rates began to rise. Lenders gave the loans on the assumption that the homeowner would do whatever necessary to make the payments, or the lender would get the property back in foreclosure and re-sell it for a profit in hot real estate markets.
Overlooked by lenders was the fact that real estate investors had become a major factor in the real estate market that had previously been dominated by the retail buyers or single family homeowners. The actual statistics went from investors owning about 2% of all single family homes in 1990 to almost 28% in 2006. This huge increase in investor ownership caused the tail to wag the dog and sent the real estate market into price advances that exceeded historical stock market gains.
Lenders were not discouraged, and to make loans even more affordable, developed 100% financing loans designed to eliminate PMI or Principal Mortgage Insurance by using an 80% first and a 20% second mortgage. This 80/20 program was so successful that it became the standard loan for most new homeowners for an 18 month period in 2003 2005. Now the borrower had two mortgages, the first at a traditional interest depending on the borrowers credit rating and a second mortgage with a higher interest rate of 3% to 5% above the first mortgage rate.
We are now seeing huge default rates among 80/20 financings because the borrowers saw an opportunity to refinance their properties, cash out an equity profit without having to sell their homes, and just walk away without making any mortgage payments.