How the credit crisis affects your finances
By Sarah Mills, ninemsn Money
April 2008
The average Australian suburban householder now has a couple of things in common with some of the world's most powerful investment bankers, hedge fund operators and corporations.
Many are teetering on the edge of insolvency and all are asking the same question: how does the failure by backwater mortgage-holders in Cabbage-ville USA to repay their loans affect me?
Rising bank interest rates, share-market bloodbaths and slumping superannuation returns are just a few of the phenomena that can, to some extent, be traced back to the global credit crisis triggered by the bankruptcy of small US mortgage holders. And as the effects ripple through the interconnected global economy, households can expect greater repercussions to unfold.
In the beginning … everyone wanted to play Monopoly…
The sub-prime crisis, as it has been dubbed, stemmed from a toxic cocktail of cheap credit, shonky lending practices and consumer greed and ignorance.
…So the bankers gave everyone money to play
Banks by law have to maintain a ratio of deposits to loans to stay healthy. However, in the 1990s, securitisation was introduced, whereby banks could bundle up a pile of loans and on-sell them for a fee, often as AAA-rated investments, to a market hungry for "secure" returns.
Having removed these assets from their balance sheet, banks were free to make more loans and earn more money. The asset bundles were normally divided into tranches based on credit quality — prime loans (pretty schmick), mid-prime loans (okay) and risky sub-prime loans (junk).
US Federal Reserve swallows the spider to catch the fly — we all pass Go
After the tech-stock boom and crash and the events of September 11, 2001, the US Federal Reserve dropped interest rates to refire the economy. Banks and other financiers, aided by low rates and securitisation vehicles, sought to push loans, often on extremely unfavourable terms, to many who couldn't afford them — the sub-prime market.
Double, double, toil and trouble, investment banks stir the cauldron
Then global investment banks bought securitisation assets, sliced and diced and on-sold them as collateralised debt obligations (CDOs). As a result, sub-prime loans (loans to people who couldn't afford them) were mixed in with prime loans and when this component of the loan-bundle went belly up, the value of the assets fell sharply.
Oranges and lemons — debt collectors force everyone to sell up
Then it got worse. Many investors had borrowed money to invest in these high-yielding "secure" assets, so when the value of the assets fell, they had to pay a margin call. Investors, such as banks, hedge funds and individuals, were forced to liquidate assets to pay the call, sending share markets into a tailspin.
Musical chairs
Unfortunately, everybody was doing the same thing at the same time, so it was hard to raise the money, particularly in a weak share market. It also became hard to borrow money to pay the obligations, because people suddenly had less money to lend and what they did have, they had to use to service their own debt.
Stand off at the OK Corral
Overnight, people and organisations became very cautious about lending whatever money was left, recognising that many of their counterparties could be holding huge undisclosed losses.
Screws tighten on Aussie banks
Enter Australia's banks. Aussie banks borrow quite a bit of money from overseas to fund their lending activities here. So as the global credit crunch tightened and the supply of money dwindled, the banks had to pay more for it. These costs were passed on to consumers when the banks lifted interest rates in Australia outside the Reserve Bank cycle for the first time in nearly a decade.
Consumers left holding the baby
This means that credit is now more expensive and, as one might expect in a global economy with many geographic funnels to distribute risk, consumers globally are paying for the US sub-prime debacle in the following ways.
Higher interest rates
Whether for home loans, credit cards, margin loans, student loans, car loans, personal loans or business loans, the price of debt has risen across the board. It is particularly hitting the mortgage belts but is also taking its toll on any individuals with high debt-to-income ratios.
Less money available, businesses, jobs threatened
With the securitisation market in tatters, banks have less money to lend. Tight credit can choke economic growth, posing a threat to businesses and jobs.
Superannuation
The superannuation situation is not entirely clear. It is doubtful Australia's largest funds would have invested in high-yielding debt instruments like CDOs and if they did, presumably the market would have been informed by now. Of concern is the strange relative silence on this topic in the press.
DIY super funds can invest in securitised assets, so there may be many individual investors out there seriously suffering.
Superannuation returns, meanwhile, have taken a beating along with the share market. This may not affect as many people over the long term but it certainly affects those who are cashing in their pensions at this stage of the cycle.
Small share investments such as household education funds or nest eggs will have fallen in value.
Business loans — household goods
The price of business loans is rising. That means that the prices of all goods and services are likely to rise as higher funding costs are passed on to consumers. This, of course, has an inflationary effect, keeping a floor under interest rates.
Higher business loan rates will prove particularly painful for SME owners, for whom rising business loan costs have a more direct relationship to the household budget.
How much can the consumer bear?
The big question is: how much can the consumer bear? With rising oil and food prices, combined with debt prices, the market can only be propped up for as long as the economy remains strong enough to provide jobs.
Some small short-term mercies
In some ways, Australia may have been relatively sheltered from the global trauma, at least in the short term. Buoyed by a global resources boom and a relatively stable property market, it was already in the middle of an upward interest-rate cycle when the credit crisis hit.
If the banks had not raised interest rates, the Reserve Bank would have, so it could be argued that the consumer may yet, in the very short term, end up in a net-steady interest-rate position, although this will be short-lived. The Reserve Bank is also likely to proceed cautiously on the interest rate front in the near term, just in case the world slips into recession.
Cheap overseas imports continue to have an offsetting effect on household budgets and food prices are taking a breather.
Longer term risks — US Federal Reserve swallows a cow
Despite this, the long-term outlook remains shaky. Only a fraction of the world's sub-prime losses (estimated at a trillion dollars) have been revealed. More will be shaken out over the next two years. Some may also lie with Australia's major trading partners.
Interest rates remain a big concern for Australia. As the US slashes interest rates to prop up the economy, it risks letting loose an inflationary monster. This will probably cause US interest rates to rise within a year if the global economic boom continues. This in turn will place a floor beneath our interest rates to support the Australian dollar in the long term.
Robbing Peter to pay Paul
Attempts to defer the pain through easing interest rates are the equivalent of robbing Peter to pay Paul. It is an exercise that runs the risk of magnifying the problems in the long term. For example, if FAI had gone under in the first instance, the greater disaster of HIH could have been avoided. As long as households continue to borrow, they essentially will be accepting a greater proportion of the credit crisis risk.
The International Monetary Fund also notes that industrialised countries with inflated house price levels relative to fundamentals and high levels of household debt to income are at risk from the crisis. Sound like any country we know? Batten down the hatches.
taken from http://money.ninemsn.com.au/article.aspx?id=447851
Jumat, 2008 April 18
Pressure for paid clicks
Analysts and observers have been skeptical about Google's paid click volume after Internet tracking company comScore (SCOR, news, msgs) recently said Google's growth rate rose only 1.8% in the first quarter from the fourth quarter.
Google countered comScore in its report Thursday, saying that paid clicks grew 20%; Google included its international search markets in tallying its rate.
Paid clicks measure how many site visitors click on sponsored ads.
Still, quarter to quarter, 2008 showed a slowdown from the 30% growth rate posted between the fourth quarter of 2006 and the first quarter of 2007. "It's a far cry from where it used to be," said First American Funds manager Jane Snorek to Bloomberg News.
Schmidt had an optimistic outlook. "We are working to improve the quality of search," he said, with "fewer but better-quality ads."
ComScore shares were knocked down 8.4% in after-hours trading last night but were down 1.6% to $23.20 Friday.
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Google countered comScore in its report Thursday, saying that paid clicks grew 20%; Google included its international search markets in tallying its rate.
Paid clicks measure how many site visitors click on sponsored ads.
Still, quarter to quarter, 2008 showed a slowdown from the 30% growth rate posted between the fourth quarter of 2006 and the first quarter of 2007. "It's a far cry from where it used to be," said First American Funds manager Jane Snorek to Bloomberg News.
Schmidt had an optimistic outlook. "We are working to improve the quality of search," he said, with "fewer but better-quality ads."
ComScore shares were knocked down 8.4% in after-hours trading last night but were down 1.6% to $23.20 Friday.
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Google calms critics with profit jump
Google (GOOG, news, msgs) skeptics can settle down: The Internet giant late Thursday quashed any concerns about its ability to make money.
Google earned $1.31 billion, or $4.12 per share, in the first quarter, a 30% increase from the $1 billion, or $3.18 per share, it earned in the same period a year ago.
Excluding one-time items, Google earned $4.84 per share, topping analysts' expectations of $4.55 per share.
The stock surged on the news, jumping $84.98, or 18.9%, to $534.52 a share.
Google's revenue soared 42% to $5.2 billion. Excluding shared advertising sales, sales came in at $3.7 billion, ahead of expectations.
Analysts had positive comments about the results.
"The company remains extremely well-positioned to benefit from the growth in display and branded advertising on the Internet," Bank of America analyst Brian Pitz wrote in a note to clients. "We also see significant opportunities for Google in the mobile and local advertising spaces."
Google CEO Eric Schmidt dismissed worries about the economy. "We do not see an impact" of the slowdown, Schmidt told analysts on a conference call.
"Google continues to further refine its ad technologies in the display area," David Garrity, the director of research with Dinosaur Securities, told CNNMoney.com. "That will help Google outgrow the downturn in the U.S. economy."
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Google earned $1.31 billion, or $4.12 per share, in the first quarter, a 30% increase from the $1 billion, or $3.18 per share, it earned in the same period a year ago.
Excluding one-time items, Google earned $4.84 per share, topping analysts' expectations of $4.55 per share.
The stock surged on the news, jumping $84.98, or 18.9%, to $534.52 a share.
Google's revenue soared 42% to $5.2 billion. Excluding shared advertising sales, sales came in at $3.7 billion, ahead of expectations.
Analysts had positive comments about the results.
"The company remains extremely well-positioned to benefit from the growth in display and branded advertising on the Internet," Bank of America analyst Brian Pitz wrote in a note to clients. "We also see significant opportunities for Google in the mobile and local advertising spaces."
Google CEO Eric Schmidt dismissed worries about the economy. "We do not see an impact" of the slowdown, Schmidt told analysts on a conference call.
"Google continues to further refine its ad technologies in the display area," David Garrity, the director of research with Dinosaur Securities, told CNNMoney.com. "That will help Google outgrow the downturn in the U.S. economy."
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Honeywell, Caterpillar power ahead
Adding to Friday's positive sentiment were those upbeat earnings reports from Honeywell and Caterpillar.
Honeywell reported first-quarter net income of $643 million, or 85 cents per share -- up 22% from the $526 million, or 66 cents per share, the company earned in the same period last year. The results topped analysts' expectations by 3 cents.
Honeywell said sales jumped 11% to $8.89 billion, thanks to strong demand for its aerospace products and contracts from Gulfstream and Airbus.
Honeywell boosted its 2008 guidance to between $3.70 and $3.80 per share, up from a previous forecast of between $3.65 and $3.80 per share. The consensus estimate for 2008 is $3.76 per share.
"We remain confident in Honeywell's outlook despite tougher global economic conditions," CEO Dave Cote said.
Shares of Honeywell rose $2.54, or 4.4%, to $59.94 this morning.
Meanwhile, Dow component Caterpillar (CAT, news, msgs) earned $922 million, or $1.45 per share, a 13% increase from the $816 million, or $1.23 per share, the heavy-machinery company reported in the same quarter last year.
Sales jumped 18% to $11.8 billion on strong sales in China, Indonesia and India. Analysts had pegged Caterpillar to earn $1.33 per share on revenue of $10.7 billion.
Caterpillar was a big winner from the dollar's decline. Machinery sales to Europe and the Middle East were up 27% to $2.3 billion, and about half the gain was a function of translating currencies back into dollars.
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Honeywell reported first-quarter net income of $643 million, or 85 cents per share -- up 22% from the $526 million, or 66 cents per share, the company earned in the same period last year. The results topped analysts' expectations by 3 cents.
Honeywell said sales jumped 11% to $8.89 billion, thanks to strong demand for its aerospace products and contracts from Gulfstream and Airbus.
Honeywell boosted its 2008 guidance to between $3.70 and $3.80 per share, up from a previous forecast of between $3.65 and $3.80 per share. The consensus estimate for 2008 is $3.76 per share.
"We remain confident in Honeywell's outlook despite tougher global economic conditions," CEO Dave Cote said.
Shares of Honeywell rose $2.54, or 4.4%, to $59.94 this morning.
Meanwhile, Dow component Caterpillar (CAT, news, msgs) earned $922 million, or $1.45 per share, a 13% increase from the $816 million, or $1.23 per share, the heavy-machinery company reported in the same quarter last year.
Sales jumped 18% to $11.8 billion on strong sales in China, Indonesia and India. Analysts had pegged Caterpillar to earn $1.33 per share on revenue of $10.7 billion.
Caterpillar was a big winner from the dollar's decline. Machinery sales to Europe and the Middle East were up 27% to $2.3 billion, and about half the gain was a function of translating currencies back into dollars.
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Does Citigroup's signal a bottom?
It may sound bizarre, but Wall Street clearly greeted Citigroup's first-quarter loss with relief.
The banking giant this morning reported a $5.1 billion loss in the period, $1.02 per share, a huge reversal from the profit of $5 billion, or $1.01 per share, that Citigroup earned in the first quarter of 2007. Analysts had expected a loss of 95 cents per share.
Although Citigroup has lost money for two consecutive quarters, investors took Friday's news as more evidence that the financial crisis is nearing an end.
Citigroup's loss this quarter, while ugly, is not nearly as bad as the $9.83 billion loss the bank reported in the fourth quarter of 2007 -- its worst quarter ever.
Citi's revenue picture also brightened in the first quarter, coming in at $13.2 billion, a 48% decline from last year but up from the fourth quarter's $7.2 billion. Wall Street was looking for revenue of $14.3 billion.
Gains for Citigroup and Merrill Lynch suggested that credit and mortgage problems have been priced into financial stocks, "regardless of what kind of abysmal numbers they came out with," said Chris Conefry, a trader at Madison Proprietary Trading.
In addition, investment managers are sitting on huge amounts of cash, he said, and the rally has forced some short sellers with big positions to buy shares back.
This week's rallies have some observers speculating about how much the Federal Reserve will cut rates at its April 29-30 meeting.
"The dilemma the Fed faced with the moves they made at the last few meetings was sacrificing the dollar to save the economy," Conefry explained. "Now that their previous stimulus has appeared to invigorate the markets, they may be a bit mindful of making cuts to protect the dollar."
from : http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
The banking giant this morning reported a $5.1 billion loss in the period, $1.02 per share, a huge reversal from the profit of $5 billion, or $1.01 per share, that Citigroup earned in the first quarter of 2007. Analysts had expected a loss of 95 cents per share.
Although Citigroup has lost money for two consecutive quarters, investors took Friday's news as more evidence that the financial crisis is nearing an end.
Citigroup's loss this quarter, while ugly, is not nearly as bad as the $9.83 billion loss the bank reported in the fourth quarter of 2007 -- its worst quarter ever.
Citi's revenue picture also brightened in the first quarter, coming in at $13.2 billion, a 48% decline from last year but up from the fourth quarter's $7.2 billion. Wall Street was looking for revenue of $14.3 billion.
Gains for Citigroup and Merrill Lynch suggested that credit and mortgage problems have been priced into financial stocks, "regardless of what kind of abysmal numbers they came out with," said Chris Conefry, a trader at Madison Proprietary Trading.
In addition, investment managers are sitting on huge amounts of cash, he said, and the rally has forced some short sellers with big positions to buy shares back.
This week's rallies have some observers speculating about how much the Federal Reserve will cut rates at its April 29-30 meeting.
"The dilemma the Fed faced with the moves they made at the last few meetings was sacrificing the dollar to save the economy," Conefry explained. "Now that their previous stimulus has appeared to invigorate the markets, they may be a bit mindful of making cuts to protect the dollar."
from : http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Stocks have best week in 5 years
By Charley Blaine and Elizabeth Strott
Stocks finished their best week since 2003 with a big rally built on gains for Google (GOOG, news, msgs), Caterpillar (CAT, news, msgs) and Citigroup (C, news, msgs).
Google had its best day ever as a public company, jumping $89.87 a share, or 20%, to $539.41 after reporting better-than-expected earnings Thursday.
Caterpillar led the Dow Jones industrials Friday with an 8.5% gain to $85.28, also on the strength of earnings that topped expectations. The gain for the maker of construction equipment and engines added 52 points to the blue-chip index.
Citigroup was up 5.5% to $25.25 because the $5.1 billion loss it reported Friday could have been worse. The company had lost $9.8 billion in the fourth quarter of 2007, and
The Dow closed up 229 points, or 1.8%, to 12,849, its highest close since Jan. 10. The Standard & Poor's 500 Index added 25 points, or 1.8%, to 1,390, and the Nasdaq Composite Index was up 61 points, or 2.6%, to 2,403.
The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, was up 59 points, or 3.2%, to 1,900.
Google's gain led the S&P 500 and the Nasdaq-100. Caterpillar was fourth among S&P 500 stocks.
Mostly thanks to rallies on Wednesday and Friday, the Dow and S&P 500 had their best weeks since March 2003. The Nasdaq, which is dominated by tech stocks, had its best week since August 2006. (The Dow was up 257 points on Wednesday.)
The market's big gains on Friday came despite another record close for crude oil, which finished at $116.69, up 1.6% from Thursday. Energy shares were mostly higher.
At its high during the day, the Dow was sporting a gain of 273 points. Though the rally faded a bit, it was strong enough to give traders confidence that a bottom from this winter's slump is now firmly in place. It would be too much, however, to expect the market to make another run at peaks reached in October.
Fueling the confidence are three assumptions:
* Despite a recession in the United States, companies with significant sales outside the U.S. continue to do well and are benefiting tremendously from a lower dollar.
* Many technology companies appear to be weathering the domestic slowdown.
* Investors believe the big financial companies appear, finally, to be close to understanding the depths of the problems from the subprime-mortgage crisis. That's why Citigroup and Merrill Lynch (MER, news, msgs) both moved higher Friday. Merrill Lynch was up 1.4% to $47.35 on Friday and ended the week with an 8.4% gain.
Also pushing stocks higher Friday was a strong earnings report from former Dow component Honeywell (HON, news, msgs), up 6.3% to $60.99, also because of strong non-U.S. business.
In addition, the market saw what may have been an important technical breakthrough: The Dow finished above its intraday high in February, which suggests the market may be headed higher. Whether that occurs remains to be seen.
Some big earnings are due next week including:
* Monday: Dow components Bank of America (BAC, news, msgs) and Merck (MRK, news, msgs) plus Texas Instruments (TXN, news, msgs)
* Tuesday:Baker Hughes (BHI, news, msgs) and Yahoo (YHOO, news, msgs).
* Wednesday: Amazon.com (AMZN, news, msgs) and Apple (AAPL, news, msgs).
* Thursday: Dow components American Express (AXP, news, msgs) and Microsoft (MSFT, news, msgs).
Important economic reports are also due, including reports on existing-home sales on
Tuesday and new-home sales on Thursday.
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Stocks finished their best week since 2003 with a big rally built on gains for Google (GOOG, news, msgs), Caterpillar (CAT, news, msgs) and Citigroup (C, news, msgs).
Google had its best day ever as a public company, jumping $89.87 a share, or 20%, to $539.41 after reporting better-than-expected earnings Thursday.
Caterpillar led the Dow Jones industrials Friday with an 8.5% gain to $85.28, also on the strength of earnings that topped expectations. The gain for the maker of construction equipment and engines added 52 points to the blue-chip index.
Citigroup was up 5.5% to $25.25 because the $5.1 billion loss it reported Friday could have been worse. The company had lost $9.8 billion in the fourth quarter of 2007, and
The Dow closed up 229 points, or 1.8%, to 12,849, its highest close since Jan. 10. The Standard & Poor's 500 Index added 25 points, or 1.8%, to 1,390, and the Nasdaq Composite Index was up 61 points, or 2.6%, to 2,403.
The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, was up 59 points, or 3.2%, to 1,900.
Google's gain led the S&P 500 and the Nasdaq-100. Caterpillar was fourth among S&P 500 stocks.
Mostly thanks to rallies on Wednesday and Friday, the Dow and S&P 500 had their best weeks since March 2003. The Nasdaq, which is dominated by tech stocks, had its best week since August 2006. (The Dow was up 257 points on Wednesday.)
The market's big gains on Friday came despite another record close for crude oil, which finished at $116.69, up 1.6% from Thursday. Energy shares were mostly higher.
At its high during the day, the Dow was sporting a gain of 273 points. Though the rally faded a bit, it was strong enough to give traders confidence that a bottom from this winter's slump is now firmly in place. It would be too much, however, to expect the market to make another run at peaks reached in October.
Fueling the confidence are three assumptions:
* Despite a recession in the United States, companies with significant sales outside the U.S. continue to do well and are benefiting tremendously from a lower dollar.
* Many technology companies appear to be weathering the domestic slowdown.
* Investors believe the big financial companies appear, finally, to be close to understanding the depths of the problems from the subprime-mortgage crisis. That's why Citigroup and Merrill Lynch (MER, news, msgs) both moved higher Friday. Merrill Lynch was up 1.4% to $47.35 on Friday and ended the week with an 8.4% gain.
Also pushing stocks higher Friday was a strong earnings report from former Dow component Honeywell (HON, news, msgs), up 6.3% to $60.99, also because of strong non-U.S. business.
In addition, the market saw what may have been an important technical breakthrough: The Dow finished above its intraday high in February, which suggests the market may be headed higher. Whether that occurs remains to be seen.
Some big earnings are due next week including:
* Monday: Dow components Bank of America (BAC, news, msgs) and Merck (MRK, news, msgs) plus Texas Instruments (TXN, news, msgs)
* Tuesday:Baker Hughes (BHI, news, msgs) and Yahoo (YHOO, news, msgs).
* Wednesday: Amazon.com (AMZN, news, msgs) and Apple (AAPL, news, msgs).
* Thursday: Dow components American Express (AXP, news, msgs) and Microsoft (MSFT, news, msgs).
Important economic reports are also due, including reports on existing-home sales on
Tuesday and new-home sales on Thursday.
taken from http://articles.moneycentral.msn.com/Investing/Dispatch/080418markets.aspx
Rabu, 2008 April 09
The New Climate for Mortgage Borrowers
Credit may be tougher to get, but good loan programs are still available. Even people having difficulty paying their mortgages have options for saving their homes from foreclosure.
You've probably read or heard about recent problems in the housing market — even if you haven't directly experienced declining home values, higher interest rates on mortgages or more stringent lending standards. But what does it all mean for you, especially if you're thinking about buying a new home or refinancing an existing loan?
FDIC Consumer News wants you to know that while some mortgages may be tougher to get than in the past, you shouldn't be discouraged — many good loan programs are still available to homeowners. The key is to be proactive — to understand your options and to put yourself in the best position to take advantage of them.
And, if you're facing the prospect of losing your home to foreclosure because of rising payments, you need to contact your lender or loan servicer as soon as possible to work out a reasonable solution. A loan servicer is a company that collects payments and performs other work for lenders, even including negotiating new payment plans with borrowers who are late or delinquent on their loan payments. "No one gains from foreclosure — not the lender nor, least of all, the homeowner," said FDIC Chairman Sheila C. Bair.
We've previously published tips to help mortgage borrowers, but here is a roundup of our latest suggestions. These ideas are for all homeowners because anyone can be affected by tighter credit standards or find themselves having trouble making their mortgage payments due to a job loss, health problems or other misfortune.
What's Happened and Why
First, a few words about how conditions have changed and why. From about 2000 through 2005, interest rates were low and home values soared in many parts of the country. Many lenders met the strong demand for mortgages by promoting nontraditional mortgages (NTMs), which are characterized by low monthly payments in the early years in exchange for the deferred repayment of principal and/or interest. In addition, lenders offered "hybrid" adjustable-rate mortgages (ARMs), which have a low fixed-interest rate for the first two or three years, after which the interest rate periodically adjusts and mortgage payments generally increase.
Although NTMs (see examples) and hybrid ARMs can be appropriate for some borrowers, such as people who are likely to have increasing income or to move in a few years, for many other consumers these loans can result in unaffordable monthly payments as the deferred principal becomes due and higher interest rates apply.
A large number of borrowers used NTMs or hybrid ARMs to buy houses they otherwise could not afford. It now appears that many of them may not have fully understood the risks of these products, and lenders did not adequately evaluate their ability to make higher payments over the life of the loan. Some lenders also provided NTMs and hybrid ARMs to "subprime" borrowers — individuals with damaged or limited credit histories — on the assumption that real estate prices would continue to rise and would protect the lenders if the borrowers defaulted on the loans.
Starting in 2006, however, home values began to flatten or even fall. As interest rates on NTMs and hybrid ARMs reset, borrowers faced significantly higher and even unaffordable monthly payments. Borrowers who had planned to refinance to obtain lower payments found it difficult due to the declining housing market. Many people whose loans have reset, particularly those in the subprime market, have already missed payments, and that puts them at risk of losing their homes.
Now, lenders have tightened their standards for all borrowers. In general, they want to lend to applicants with a good credit record, the ability to make a reasonable downpayment, and fully-documented income to repay the loan. Lenders also are trying to better match borrowers with loans they can afford for the next 15 or 30 years, not just for the short term. So, how can mortgage borrowers find a loan that works for them?
If You're Looking for a New Mortgage or to Refinance
Try to raise your credit score in the months before you apply for a mortgage. Lenders look at a person's credit score, a numerical summary of a person's credit record, when deciding on loan applications. By aiming for the best possible score, you may be able to obtain a lower-cost loan and save hundreds each year in interest.
Protect your existing credit score by making all of your credit card and other bill payments on time. Beyond that, there are some quick things you can do to try to boost your credit score. One is to pay off much or all of what you owe on credit cards. "But don't close any credit card accounts and don't open any new ones before you get a mortgage, because either action could negatively affect your credit score," added Mira Marshall, an FDIC Senior Policy Analyst.
taken from :http://www.fdic.gov/consumers/consumer/news/cnfall07/mortgage.html
You've probably read or heard about recent problems in the housing market — even if you haven't directly experienced declining home values, higher interest rates on mortgages or more stringent lending standards. But what does it all mean for you, especially if you're thinking about buying a new home or refinancing an existing loan?
FDIC Consumer News wants you to know that while some mortgages may be tougher to get than in the past, you shouldn't be discouraged — many good loan programs are still available to homeowners. The key is to be proactive — to understand your options and to put yourself in the best position to take advantage of them.
And, if you're facing the prospect of losing your home to foreclosure because of rising payments, you need to contact your lender or loan servicer as soon as possible to work out a reasonable solution. A loan servicer is a company that collects payments and performs other work for lenders, even including negotiating new payment plans with borrowers who are late or delinquent on their loan payments. "No one gains from foreclosure — not the lender nor, least of all, the homeowner," said FDIC Chairman Sheila C. Bair.
We've previously published tips to help mortgage borrowers, but here is a roundup of our latest suggestions. These ideas are for all homeowners because anyone can be affected by tighter credit standards or find themselves having trouble making their mortgage payments due to a job loss, health problems or other misfortune.
What's Happened and Why
First, a few words about how conditions have changed and why. From about 2000 through 2005, interest rates were low and home values soared in many parts of the country. Many lenders met the strong demand for mortgages by promoting nontraditional mortgages (NTMs), which are characterized by low monthly payments in the early years in exchange for the deferred repayment of principal and/or interest. In addition, lenders offered "hybrid" adjustable-rate mortgages (ARMs), which have a low fixed-interest rate for the first two or three years, after which the interest rate periodically adjusts and mortgage payments generally increase.
Although NTMs (see examples) and hybrid ARMs can be appropriate for some borrowers, such as people who are likely to have increasing income or to move in a few years, for many other consumers these loans can result in unaffordable monthly payments as the deferred principal becomes due and higher interest rates apply.
A large number of borrowers used NTMs or hybrid ARMs to buy houses they otherwise could not afford. It now appears that many of them may not have fully understood the risks of these products, and lenders did not adequately evaluate their ability to make higher payments over the life of the loan. Some lenders also provided NTMs and hybrid ARMs to "subprime" borrowers — individuals with damaged or limited credit histories — on the assumption that real estate prices would continue to rise and would protect the lenders if the borrowers defaulted on the loans.
Starting in 2006, however, home values began to flatten or even fall. As interest rates on NTMs and hybrid ARMs reset, borrowers faced significantly higher and even unaffordable monthly payments. Borrowers who had planned to refinance to obtain lower payments found it difficult due to the declining housing market. Many people whose loans have reset, particularly those in the subprime market, have already missed payments, and that puts them at risk of losing their homes.
Now, lenders have tightened their standards for all borrowers. In general, they want to lend to applicants with a good credit record, the ability to make a reasonable downpayment, and fully-documented income to repay the loan. Lenders also are trying to better match borrowers with loans they can afford for the next 15 or 30 years, not just for the short term. So, how can mortgage borrowers find a loan that works for them?
If You're Looking for a New Mortgage or to Refinance
Try to raise your credit score in the months before you apply for a mortgage. Lenders look at a person's credit score, a numerical summary of a person's credit record, when deciding on loan applications. By aiming for the best possible score, you may be able to obtain a lower-cost loan and save hundreds each year in interest.
Protect your existing credit score by making all of your credit card and other bill payments on time. Beyond that, there are some quick things you can do to try to boost your credit score. One is to pay off much or all of what you owe on credit cards. "But don't close any credit card accounts and don't open any new ones before you get a mortgage, because either action could negatively affect your credit score," added Mira Marshall, an FDIC Senior Policy Analyst.
taken from :http://www.fdic.gov/consumers/consumer/news/cnfall07/mortgage.html
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