federal government http://www.wisebread.com/taxonomy/term/11951/all en-US 5 Financial Regulations That Protect Your Wallet http://www.wisebread.com/5-financial-regulations-that-protect-your-wallet <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-financial-regulations-that-protect-your-wallet" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/money_finance_statue_000031734608.jpg" alt="Learning about finance regulations that protect your wallet" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>You can take out a mortgage loan no matter your race, gender, religious preference, or sexual orientation. Credit card companies can&rsquo;t suddenly send your interest rate soaring from 8% to 19%. Debt collectors can&rsquo;t call you 15 times a day or threaten to throw you in prison. The reason? Financial regulations put in place by the federal government.</p> <p>The government has a well-deserved reputation for red tape, dysfunction, and Congressional bickering. But government bodies have also passed several regulations that protect the money in your wallet. Here is a look at some of the most important regulations protecting the financial health of consumers today.</p> <h2>1. Credit CARD Act of 2009</h2> <p>The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, better known as the Credit CARD Act, rolled out a series of regulations designed to protect consumers from the sometimes shady practices of credit card providers.</p> <p>A key component of this act? It forbids credit card providers from randomly jacking up the interest rates of its cardholders. Under the act, card providers can usually only raise rates on consumers&rsquo; existing purchases if cardholders have missed two consecutive payments. Providers must then reinstate the lower initial rate if cardholders make six consecutive months of on-time payments.</p> <p>In the past, card providers could keep the higher penalty interest rates &mdash; often as high as 29% &mdash; in effect permanently. Some card providers included clauses in their contracts stating that they could raise interest rates for any reason at any time. Those clauses are no longer allowed.</p> <p>If banks want to boost the interest rate on new credit card purchases, they must first notify cardholders in writing at least 45 days before the rate change is scheduled to go into effect. Consumers must be allowed to cancel their accounts during this 45-day period.</p> <p>The act also states that card providers must send their billing statements at least 21 days before payments are due. Before this change, card providers needed only to send their statements 14 days before payments were due.</p> <h2>2. Equal Credit Opportunity Act</h2> <p>Having access to credit, mortgage loans, auto loans, and other forms of debt is a necessity for most consumers. Imagine trying to save up enough money to buy a car or home with cash.</p> <p>The Equal Credit Opportunity Act ensures that all U.S. adults are judged only on their financial health when applying for credit cards, student loans, mortgages, auto loans, and other forms of credit. The act states that financial institutions can&rsquo;t deny credit to consumers based on applicants&rsquo; race, color, age, sex, religion, national origin, or marital status.</p> <p>The act also forbids financial institutions from automatically rejecting applicants because they receive public assistance. This doesn&rsquo;t mean that lenders and banks can&rsquo;t reject your application for a home loan. It just means that they have to base their decision on financial or credit reasons.</p> <h2>3. Fair Debt Collection Practices Act</h2> <p>This act, enforced by the Federal Trade Commission, regulates the way debt collectors can pursue the money you owe and are late in paying back. The act basically establishes the rights that consumers have even when they legitimately owe money.</p> <p>Under the act, debt collectors are forbidden from threatening to throw debtors in jail, using profane language, pretending to be attorneys, or threatening physical violence against consumers who owe money. They also can&rsquo;t call at unreasonable times of day, such as before 8:00 a.m. or after 9:00 p.m., and are forbidden from calling debtors several times a day.</p> <p>Debt collectors can call the friends, family members, and employers of debtors. But they can only do so to find these consumers&rsquo; addresses, phone numbers, and places of employment. They can&rsquo;t talk to other people about how much debtors owe or what kind of debt they owe.</p> <p>Under the act, consumers can, in writing, request that collection agencies and debt collectors stop contacting them, even if they do owe the money in question. After consumers submit such a letter, collection agencies can only contact them for two reasons &mdash; to tell consumers that they are stopping contact, or to report that creditors are taking an action such as filing a lawsuit.</p> <h2>4. Magnuson-Moss Warranty Act</h2> <p>You might not have heard of the Magnuson-Moss Warranty Act, but every time you&rsquo;ve taken a malfunctioning computer or car back to the manufacturer for free repairs or a refund, you&rsquo;ve benefited from it.</p> <p>This act states that when companies offer a warranty on their products, they must provide a written warranty that is clear and easy to understand. They must also make copies of the warranty available at the locations in which they are selling their products.</p> <p>It also forbids companies from creating deceptive warranties. The FTC provides this example: A warranty would be deceptive if it covered only moving parts on an electronic product that features no moving parts.</p> <p>The act does not require companies to provide warranties. But it does require them to follow its provisions if they do decide to offer them.</p> <h2>5. Home Equity Ownership and Equity Protection Act</h2> <p>This regulation protects homeowners who, because of income or credit issues, can only qualify for what is known as a high-cost mortgage, more commonly known as a subprime mortgage loan.</p> <p>A high-cost mortgage is one in which a lender is charging an annual percentage rate that is more than 6.5 percentage points higher than the rate that the average borrower with good credit would pay for a similar loan.</p> <p>Under this act, lenders must provide written information in advance stating that consumers are getting a higher-cost loan. This notice must list the terms, costs, and fees associated with the loan.</p> <p>The act also forbids lenders from charging late fees on high-cost mortgages that are larger than 4% of a consumer&rsquo;s past-due mortgage payment.</p> <p><em>Were you aware of these financial regulations? Are there any we missed? Share with us in the comments!</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/dan-rafter">Dan Rafter</a> of <a href="http://www.wisebread.com/5-financial-regulations-that-protect-your-wallet">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/12-financial-moves-to-make-when-a-loved-one-dies">12 Financial Moves to Make When a Loved One Dies</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-online-tools-to-manage-your-money-in-under-10-minutes-a-week">5 Online Tools to Manage Your Money in Under 10 Minutes a Week</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-best-pieces-of-financial-wisdom-from-oprah-winfrey">The 3 Best Pieces of Financial Wisdom From Oprah Winfrey</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-financial-decisions-youll-never-regret">8 Financial Decisions You&#039;ll Never Regret</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/whats-a-split-credit-report-and-how-much-is-it-hurting-your-score">What&#039;s a Split Credit Report - And How Much Is It Hurting Your Score</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance discrimination federal government protecting consumers regulations Tue, 10 Nov 2015 13:15:17 +0000 Dan Rafter 1609273 at http://www.wisebread.com Debt Ceiling Contingency Plans http://www.wisebread.com/debt-ceiling-contingency-plans <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/debt-ceiling-contingency-plans" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/civil-war-eagle.jpg" alt="Eagle statue" title="Eagle statue" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>What will the Treasury do if there's no increase in the debt ceiling? What should you do?</p> <p>Back in April I wrote a post about <a href="http://www.wisebread.com/stalemate-on-the-debt-ceiling">what would happen if the debt ceiling were not raised</a>. I suggested that the Treasury could deal with a cash shortage the same way Illinois had &mdash; by delaying some payments and prioritizing others. I also suggested that Congress, seeing the Executive branch grab all that power, would move quickly to end that experiment.</p> <p>Looking back, even though I intended that post to be a bit tongue-in-cheek, I'm thinking I was a bit blasé about the whole thing. (See also: <a href="http://www.wisebread.com/the-debt-ceiling-crisis-in-everyday-english">The Debt Ceiling Crisis in&nbsp;Everyday English</a>)</p> <h2>Can the Treasury Prioritize?</h2> <p>Everyone has been assuming that the Treasury will respond by prioritizing certain payments &mdash; interest on the debt will be paid, social security will be paid, soldiers will be paid &mdash; and that other bills will be deferred.</p> <p>The Treasury has been at pains to refute this assumption:</p> <blockquote><p>Treasury officials have maintained that the department lacks formal legal authority to establish priorities to pay obligations, asserting, in effect, that each law obligating funds and authorizing expenditures stands on an equal footing. In other words, Treasury would have to make payments on obligations as they come due. &mdash; <a href="http://www.fas.org/sgp/crs/misc/R41633.pdf">Reaching the Debt Limit: Background and Potential Effects on Government Operations</a> (PDF)</p> </blockquote> <p>Beyond statements like that, the Treasury (and the Federal Reserve) have been quite steadfast about refusing to discuss contingency plans.</p> <p>This is primarily a tactical move. Their position is that not raising the debt limit is unthinkable. Any indication that they're thinking about it would tend to undermine that position.</p> <p>Still, their position is not unreasonable. Several presidents have tried the tactic of not spending all the money that Congress had appropriated &mdash; sometimes because they didn't like the program the money was being spent on, other times because they wanted to reduce government spending. Whenever this has been done, the courts have ruled against the practice. Congress has the power to spend money; the president has no power to &quot;just not spend&quot; money that Congress has appropriated.</p> <p>Of course, this is a special case. The power to tax and to borrow also belongs to Congress. When Congress chooses not to get the arithmetic right &mdash; when the spending is greater than the sum of the taxing and the borrowing &mdash; the Treasury is placed in an untenable position. When it's impossible to follow the law, the Treasury has to make a choice. Currently the Treasury is playing its cards very close to the vest. There were rumors that it would provide some hints as to its contingency plans last night or today, but so far it has not.</p> <p>Prioritizing payments has been the preferred strategy of the House Republicans who have been most adamant about refusing to raise the debt ceiling. They claim that the government should just live within its means, and that refusing to raise the debt limit, combined with prioritization, would be a way to force that.</p> <p>Other people point out that the arithmetic goes against this strategy very quickly. Once you pay for Social Security, Medicare, Medicaid, the Defense Department, and unemployment, you've already spent all the money.</p> <p>As I explained in my post <a href="http://www.wisebread.com/stalemate-on-the-debt-ceiling">Stalemate on the Debt Ceiling</a>, that's not how I figure things will go &mdash; because government contractors will go on providing services for some time, even if they aren't getting paid, so those are the bills to not pay. Seniors would still get health care (for a little while), even if the Medicare service providers didn't get paid. Fuel for fighter jets would still get delivered (for a little while), even if the oil companies didn't get paid.</p> <p>I still think the most likely option would be for the Treasury to prioritize spending. It would pay the interest on the debt, it would pay Social Security, it would pay federal employees (perhaps after laying off non-essential ones), it would pay soldiers. What it wouldn't pay would be the ordinary business debts of the government &mdash; defense contractors, drug companies, landlords, utility bills &mdash; including the big ones, like payments for Medicare and Medicaid, etc. (No smart drug company executive would quit delivering drugs to a VA hospital just because its bill was a bit late getting paid.)</p> <p>And, as I said, I think Congress would cave pretty quickly, once business interests found that they were still providing services for the government, but were no longer getting paid.</p> <h2>Other Options</h2> <p>With the Treasury being so coy, I thought I'd at least touch on the other possibilities.</p> <h3>Pay Late</h3> <p>The Treasury has hinted that it would just pay the government's obligations in the order that they were due, making payments as and when the money arrives. For the first few days, we'd just be paying a few days late. Very shortly after, we'd be paying several days late. They'd treat every debt the same, including interest payments on the national debt. The result would be technical default almost immediately.</p> <p>I think that's pretty unlikely. The Treasury is keeping the option on the table to pressure Congress, but managing the debt is the department's whole reason for existence; they'd never willingly make an interest payment late.</p> <h3>Issue Debt Anyway</h3> <p>Some people have pointed to a provision in the 14th Amendment to the Constitution, which says, &quot;The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned,&quot; and suggested that the Treasury could call that authority for selling enough debt to make the payments that Congress has already authorized.</p> <p>I think that's even less likely.</p> <h3>Run an Overdraft at the Fed</h3> <p>The Federal Reserve acts as the Treasury's bank. When someone deposits a government check, the bank presents it to the Fed. The Fed then gives the bank money, and debits the Treasury's account at the Fed. The Treasury's accounts are kept topped off through tax receipts and issuing government debt.</p> <p>Suppose the Treasury just went right on writing checks, even though there wasn't enough money in the account? The Fed could either bounce the check, or pay it &mdash; letting the Treasury run an overdraft.</p> <p>Paying the check would create money out of thin air, threatening inflation. However, the Fed could &quot;sterilize&quot; that money by selling enough assets to soak up the excess cash.</p> <p>I see that as almost as unlikely as the 14th Amendment scenario. The folks at the Fed are bankers; they're not going to let the Treasury run an unlimited overdraft.</p> <h2>What You Can Do</h2> <p>I've been wracking my brain to come up with anything clever that individuals can do to make the whole situation less fraught, and I haven't come up with anything.</p> <p>You could sell your Treasury securities, but what would you do with the money? If U.S. government bonds are no good, in what way would U.S. government currency be better? You could invest in foreign bonds, but which ones? The euro has its own problems &mdash; arguably worse than ours, because they're real (while ours are entirely self-inflicted). You could put some money in Swiss francs or Japanese yen or Canadian dollars, but that's a lot of trouble for no particular gain that I can see. You could buy gold, but it's already gone up a lot on the panic trade, and will almost certainly come down if debt problems are resolved.</p> <p>The only bit of advice I've got is to trust banks over money funds. Money funds invest all their money in just the sort of securities that suddenly become worthless if the markets seize up (as they did after the Lehman bankruptcy in 2008). Banks, on the other hand, have actual assets (loans to local businesses) and they have access to the Federal Reserve to get cash if necessary.</p> <p>The Treasury has started hinting that it will provide some guidance about its contingency plans before August 2nd. I'll keep an eye out and will post further, if there's any new news.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/debt-ceiling-contingency-plans">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/stalemate-on-the-debt-ceiling">Stalemate on the Debt Ceiling?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-debt-ceiling-crisis-in-everyday-english">The Debt Ceiling Crisis in Everyday English</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-reform-of-fannie-mae-and-freddie-mac-will-affect-you">How the Reform of Fannie Mae and Freddie Mac Will Affect You</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-ways-a-donald-trump-presidency-could-impact-your-wallet">6 Ways a Donald Trump Presidency Could Impact Your Wallet</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-cities-you-never-knew-went-bankrupt">9 Cities You Never Knew Went Bankrupt</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Financial News debt ceiling federal government treasury securities Fri, 29 Jul 2011 22:59:53 +0000 Philip Brewer 644067 at http://www.wisebread.com Stalemate on the Debt Ceiling? http://www.wisebread.com/stalemate-on-the-debt-ceiling <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/stalemate-on-the-debt-ceiling" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/geithner-treasury.jpg" alt="Treasury Secretary Geithner in front of the Treasury" title="Treasury Secretary Geithner in front of the Treasury" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>The news is full of speculation about the result if there's a stalemate on the debt ceiling, but I know what would really happen. I live in Illinois.</p> <p>You see, Illinois has been in much the same situation for years now. The legislature has appropriated more in spending than they raise in taxes, but there are sharp restrictions on how much money the state can borrow. (See also: <a href="http://www.wisebread.com/borrowers-lenders-and-others-beware-trusting-the-government">Borrowers, Lenders, and Others &mdash; Beware Trusting the Government</a>)</p> <p>So what happened? Well, interest on our debt got paid. State employees' salaries got paid. State pensions got paid. Tax refunds got paid. Unemployment checks got paid. Direct benefits like food stamps got paid.</p> <p>Who didn't get paid? Anyone who did business with the state. The state quit paying its bills. Business and contractors who provided services for the state got stiffed for months, and the state is by no means caught up on paying its bills (even though it recently raised taxes).</p> <p>I'm confident that, if there's no increase in the debt limit for the federal government, the result would be much the same. There are a number of temporary measures the Treasury would take first &mdash; redeeming some debt owed to states, cities, and federal retirement funds &mdash; but once it exhausted those maneuvers, it would have to stop making some budgeted payments. But the Treasury would be deciding which payments to make and which to delay. The effect would be to give Treasury Secretary Geithner complete control over who gets paid when.</p> <p>As I read it, there is only one constitutional requirement for federal payments &mdash; judges have to get paid. After that, if there's not enough money, the Treasury can pretty much pick and choose.</p> <p>I'm sure the Treasury would pay the interest on the debt, because the <a href="http://www.wisebread.com/treasury-bills-for-ordinary-folks">public debt of the United States</a> is what it cares about most. It'd also go ahead and roll over maturing debt (staying under the ceiling). It would go on paying military personnel and government employees. It would go on paying social security, railroad pensions, and other direct payments to individuals.</p> <p>What the Treasury would quit doing, just like in Illinois, is paying contractors. It wouldn't <em>refuse</em> to pay them, it just wouldn't cut a check until the money came in. (It would rack up late-payment charges, but neither those nor the unpaid bills themselves count against the debt ceiling.)</p> <p>In Illinois, where this went on for years, the government didn't just pay the bills in order. They gave priority to businesses that might fail if they didn't get paid. (Lots of businesses that contracted with the government to provide services to the poor had no non-government business. If they didn't get paid, they would be out of businesses in a matter of a weeks.) There was a whole procedure in place for businesses to make urgent claims for relief. If the situation went on at the Federal level for any length of time, I'm sure the same sort of thing would happen.</p> <p>Think of the power this gives the Treasury! I'm sure they wouldn't do anything so crass as to pay companies that were donors to their party before paying companies that donated to the other party, but I wouldn't be surprised to see the power brought to bear only a little more subtly than that. For example, employers in a state where a senator was blocking a bill to raise the debt ceiling might have particular trouble getting their bills paid.</p> <p>Personally, I don't think that situation would go on for very long. When the many large companies that do business with the United States quit getting paid, they'd have a quick chat with the Senators from every state where they have an office. When the many, many small businesses that have contracts with the federal government quit getting paid, they'd call up their Representatives and make it clear that they wanted the problem fixed. Most especially, once members of Congress realized that what they'd done was to hand the power of the purse over to the Treasury &mdash; give Timothy Geithner the power to decide who gets paid and who doesn't &mdash; they'd raise the debt ceiling and grab that power right back.</p> <p>These insights brought to you thanks to my long experience living in Illinois.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/stalemate-on-the-debt-ceiling">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/debt-ceiling-contingency-plans">Debt Ceiling Contingency Plans</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-debt-ceiling-crisis-in-everyday-english">The Debt Ceiling Crisis in Everyday English</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-reform-of-fannie-mae-and-freddie-mac-will-affect-you">How the Reform of Fannie Mae and Freddie Mac Will Affect You</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-to-reduce-your-tax-bill-with-bonds">4 Ways to Reduce Your Tax Bill With Bonds</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-ways-a-donald-trump-presidency-could-impact-your-wallet">6 Ways a Donald Trump Presidency Could Impact Your Wallet</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Financial News debt ceiling federal government treasury Fri, 29 Apr 2011 10:00:14 +0000 Philip Brewer 532333 at http://www.wisebread.com How the Reform of Fannie Mae and Freddie Mac Will Affect You http://www.wisebread.com/how-the-reform-of-fannie-mae-and-freddie-mac-will-affect-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-the-reform-of-fannie-mae-and-freddie-mac-will-affect-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/house_contract.jpg" alt="House sitting on sales contract" title="House sitting on sales contract" class="imagecache imagecache-250w" width="250" height="144" /></a> </div> </div> </div> <p>On Friday, February 11, 2011, the Treasury Department announced the Obama Administration&rsquo;s <a href="http://www.treasury.gov/press-center/press-releases/Pages/tg1059.aspx">plan</a> to reform the nation&rsquo;s housing finance system, which entails winding down Fannie Mae and Freddie Mac within the next five to seven years. (See also: <a href="http://www.wisebread.com/root-cause-of-the-financial-crisis">Root Cause of the Financial Crisis</a>)</p> <h3>What <em>Are</em> Fannie Mae and Freddie Mac, Anyway?</h3> <p>According to the report, &quot;<a href="http://www.treasury.gov/initiatives/Documents/Reforming%20America's%20Housing%20Finance%20Market.pdf">Reforming America's Housing Finance Market</a>,&quot; the Federal Housing Administration (FHA) created Fannie Mae in 1938 in response to mortgage market disruptions, widespread foreclosures, and declining homeownership rates. Fannie Mae essentially provided community banks with federal money to finance home loans in order to raise homeownership levels and increase the availability of affordable housing. Many years later, in 1970, the government formed Freddie Mac in order to expand the secondary mortgage market and provide competition to Fannie Mae, which had converted from a government sponsored enterprise to a private corporation in 1968.</p> <h3>Why Do Fannie Mae and Freddie Mac Need to Be Reformed?</h3> <p>For many years, Fannie Mae and Freddie Mac did what they were created to do &mdash; expand access to homeownership, particularly in parts of the country without access to traditional mortgages. Fannie and Freddie did this primarily by creating a secondary mortgage market in which investments were secured by mortgages. In the years leading up to the financial collapse, however, a number of factors (including easier access to credit, the creation of investments that shifted risk away from the mortgage originator, and the assumption that housing prices would rise indefinitely) caused Fannie and Freddie to fail. As a result of declining home prices, Fannie and Freddie experienced catastrophic losses and were ultimately placed in government conservatorship on September 7, 2008. They remain under conservatorship today.</p> <h3>What Reforms Is the Government Proposing?</h3> <p>There are three main paths to reform outlined in the government&rsquo;s proposal. The first would largely leave the mortgage market to the private sector, leaving only limited programs to aid credit-worthy low- and moderate-income borrowers. The second plan is similar to the first, but it would also include a &ldquo;backstop&rdquo; mechanism to ensure continued access to credit in the event of another housing crisis. The final option would add a government reinsurance (essentially, a guarantee) for some mortgage-backed securities. Each of these would, as the report says, &ldquo;dramatically transform the role of government in the housing market.&rdquo; Currently, the government insures or guarantees more than nine out of ten new mortgages.</p> <h3>How Will These Reforms Affect You?</h3> <p>Although there are currently a number of unknowns associated with the plan, there are some things we can say for sure:</p> <p><strong>There will be increased pricing at Fannie and Freddie.</strong></p> <p>Fannie and Freddie&rsquo;s <a href="http://www.investopedia.com/articles/07/fannie-freddie.asp">implied government guarantee</a> of their securities allowed them to save billions annually in borrowing costs. The new plan will end unfair capital advantages to Fannie and Freddie.</p> <p><strong>Conforming loan limits will be reduced.</strong></p> <p>Fannie and Freddie only purchase <a href="http://www.fhfa.gov/Default.aspx?Page=185">conforming loans,</a> or loans less than $417,000 (or less than $729,750 in certain high-cost areas). If a loan is not conforming, and it is not able to be purchased by Fannie or Freddie, the lender will hold all risk of default on its books and will price accordingly. In other words, interest rates on those loans will likely increase (on new mortgages only &mdash; your fixed-rate mortgage would not change). Conforming loan limits are set each year by the Office of Federal Housing Enterprise Oversight (OFHEO) based on median home prices.</p> <p><strong>Nearly all lenders will require a 10 percent down payment.</strong></p> <p>Under the new plan, Fannie and Freddie would only be able to purchase and guarantee loans that had at least a 10% down payment. Lenders, in turn, would likely require at least 10 percent down. In the interest of fully honesty, I can say that I am not sure how the requirement of a higher down payment would affect the various <a href="http://www.fha.com/fha_programs.cfm">down payment grants</a> available to home buyers.</p> <p><strong>The maximum loan size that can qualify for Federal Housing Administration (FHA) insurance will decrease.</strong></p> <p>The main benefit to a homeowner of an FHA-insured home loan is a lower interest rate than might be obtained without the insurance. Decreasing the maximum loan size that qualifies for this insurance will mean that a home buyer&rsquo;s interest rate on a loan that could have once qualified for FHA insurance, but no longer does, will be higher. The maximum loan size that the FHA will insure is <a href="https://entp.hud.gov/idapp/html/hicostlook.cfm">determined by county</a>. In addition, the price of FHA insurance will increase.</p> <p><strong>Only new mortgages are likely to be affected.</strong></p> <p>If your mortgage is already sold to Fannie or Freddie, fear not. Your interest rate will not arbitrarily rise before the loan's maturity date. It is likely, however, that your home loan will be sold to another party in the coming years. This is because the government's proposal also stipulates that Fannie and Freddie must sell off their investment portfolios at an annual pace of 10% or more. Check out this piece from the <em>LA Times</em> for insight about <a href="http://www.latimes.com/classified/realestate/news/la-fi-lew23-2009aug23,0,714106.story">what to do if your home loan is sold</a>.</p> <p>All signs seem to be pointing to <a href="http://www.wisebread.com/low-interest-rates-do-not-make-homes-affordable">higher interest rates</a> for new home loans or refinancings, though. For that reason, you might want to carefully weigh the costs and benefits of purchasing or refinancing your home now versus waiting. Of course, I would recommend doing your due diligence and talking to a knowledgeable lender or financial professional before making that decision.</p> <p>Those are some of the most noticeable ways in which the winding down of Fannie and Freddie will affect you. The proposal is fairly broad, however, and there will undoubtedly be a number of other effects felt by homeowners, investors, and even renters. Following updates of the progress of this proposed reform will help you to make sound housing decisions regarding homeownership and refinancing.</p> <p><em>What effects do you think the Treasury Department&rsquo;s plan to dissolve Fannie and Freddie will have on homeowners in general, or you in particular? What questions do you have about the changes? Share your thoughts and questions in the comments!</em><b><i><br /> </i></b></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/janey-osterlind">Janey Osterlind</a> of <a href="http://www.wisebread.com/how-the-reform-of-fannie-mae-and-freddie-mac-will-affect-you">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/a-mortgage-crisis-solution">A Mortgage Crisis Solution</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-housing-market-is-finally-rebounding">The Housing Market Is Finally Rebounding</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/coming-to-terms-with-your-long-term-debt">Coming to Terms With Your Long-Term Debt</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/low-interest-rates-do-not-make-homes-affordable">Low Interest Rates Do Not Make Homes Affordable</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/you-shouldn-t-buy-a-home-if">You Shouldn’t Buy a Home If…</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Financial News Real Estate and Housing federal government home mortgage Housing Reform mortgage crisis Tue, 15 Feb 2011 14:36:10 +0000 Janey Osterlind 490680 at http://www.wisebread.com