Fannie Mae Offers Early Workouts

For homeowners who are in financial trouble, one of the worst parts of seeking mortgage loan modification assistance is the requirement that the borrower be behind in payments by two to three months before the loan modification process can begin. Lenders wanted proof that the borrower was in dire financial straits before they would consider reworking the terms of the loan agreement to provide more a favorable monthly payment schedule. The stress of being in default on the mortgage, however, is often more than a borrower can stand.

Fannie Mae announced last week, however, that borrowers whose mortgages are guaranteed by Fannie Mae can seek “early workouts” without having to miss a single payment. The policy change is designed to help individuals who are likely to encounter trouble as the recession worsens.

Effective immediately, Fannie Mae will require firms that service its 12 million guaranteed mortgages to provide information about loan modifications to borrowers who haven’t experienced any difficulty yet. Borrowers can request temporary modifications to their loan terms that will reduce mortgage payments for a period of four months. If the modified terms are honored during the four-month trial period, the loan may be eligible for a permanent modification, depending upon whether the borrower’s financial situation has improved.

Fannie Mae and other loan guarantors are looking for ways to reduce the number of foreclosures, without requiring borrowers to fall deeply into debt to “prove” their financial hardship. As a result, loan modifications are becoming easier to obtain and can be put into place before changes in the borrower’s financial situation deliver serious damage to the borrower and lender alike.

College Savings In 2009

Saving for college is hard, even when times are good. The cost of a college education has risen at nearly twice the rate of inflation for several years running. The various ups and downs of the market mean that college savings may be vulnerable at a time when stability should rule.

All states now have a 529 college savings plan, and most states allow participants from other states to save in their plans. Parents can reap tax breaks from their local state government for college savings they set aside right now. As an added benefit, most 529 plan withdrawals are exempt from taxes, although the non-taxability of these plans isn’t guaranteed into the future.

Most firms that offer 529 savings plans take an age-based approach to college savings. As the beneficiary inches toward college age, the child’s portfolio is exposed to a decreasing amount of risk. While this approach does turn down the gains that might be made in a good market, it also protects college funding from market downturns when families are most likely to need cash.

Parents need to be very careful about college savings however. Not all 529 plans are age-based, meaning that if the goal is to maximize gains, a child’s college funding could be at significant risk.

The beginning of the financial year is a good time to take stock of college savings plans. Make sure you understand the goal of the plan, and whether or not your savings will be transferred to less risky investments as the child’s college enrollment date approaches. If not, talk to the fund manager about shifting assets from more risky to less risky investments as the child ages.

Optimistically, 2009 will be a turnaround year for investments, but most analysts don’t believe that things will start looking up until 2010 or even later. Under these circumstances, it makes more sense to hang on to what you have or settle for small gains than it does to swing for the fences and lose a semesters or years of tuition.

College Savings In 2009

Saving for college is hard, even when times are good. The cost of a college education has risen at nearly twice the rate of inflation for several years running. The various ups and downs of the market mean that college savings may be vulnerable at a time when stability should rule.

All states now have a 529 college savings plan, and most states allow participants from other states to save in their plans. Parents can reap tax breaks from their local state government for college savings they set aside right now. As an added benefit, most 529 plan withdrawals are exempt from taxes, although the non-taxability of these plans isn’t guaranteed into the future.

Most firms that offer 529 savings plans take an age-based approach to college savings. As the beneficiary inches toward college age, the child’s portfolio is exposed to a decreasing amount of risk. While this approach does turn down the gains that might be made in a good market, it also protects college funding from market downturns when families are most likely to need cash.

Parents need to be very careful about college savings however. Not all 529 plans are age-based, meaning that if the goal is to maximize gains, a child’s college funding could be at significant risk.

The beginning of the financial year is a good time to take stock of college savings plans. Make sure you understand the goal of the plan, and whether or not your savings will be transferred to less risky investments as the child’s college enrollment date approaches. If not, talk to the fund manager about shifting assets from more risky to less risky investments as the child ages.

Optimistically, 2009 will be a turnaround year for investments, but most analysts don’t believe that things will start looking up until 2010 or even later. Under these circumstances, it makes more sense to hang on to what you have or settle for small gains than it does to swing for the fences and lose a semesters or years of tuition.

Reviewing End-Of-Year Finances

The end of the year provides an ideal time to review your spending habits. As you’re collecting information for your tax returns, take time to review bank and credit card statements, along with savings and investment statements to get a good idea of where your money is going.

While you’re looking at your finances, don’t forget to consider your insurance coverage for the upcoming year. If you’ve experienced a life-changing event – marriage, birth of a child, divorce, or death of a spouse or other family member – the end of the year is an ideal time to reconsider your new circumstances.

If you’ve married, you’ll want to add your new spouse as a beneficiary for your retirement and insurance plans through your employer. Look carefully at other assets and determine whether you need to adjust your beneficiary statements.

If you’ve experienced the birth or adoption of a child, you’ll want to verify that the child has a Social Security Number – you’ll need it to file your year-end income tax return. You’ll also want to make sure the new family member is added to your health insurance, if you have it. Finally, you’ll want to make sure the child is included in any existing wills, and you’ll want to have pre-arranged guardianship plans in place in case something should happen to you and your spouse.

If you’ve divorced, check with your attorney regarding the status of your former spouse as a beneficiary for your retirement and life insurance policies. In most states, a divorce decree automatically terminates those claims, but you’ll want to identify a new beneficiary as soon as possible. If you have minor children, you may want to establish a testamentary trust to receive insurance benefits to be distributed on their behalf. You’ll need the help of a probate attorney to set this up.

If you’ve experienced the death of a spouse, you may have a flood of tax-related year-end activities to cope with. While handling the paperwork for this unenviable task may be time-consuming and painful, you’ll want to make sure that you and your family are protected. Consult with an attorney or a licensed financial planner about the best ways to conserve your remaining assets, make required distributions, and handle incoming life insurance and other death benefits. If you have minor children, they may be entitled to Social Security payments if your spouse qualified for them. Consult the Social Security Administration for information about how you can collect this benefit on their behalf.

The year-end review also provides a great opportunity to plan for retirement, next year’s expenses and next year’s deductions. If you have not made a contribution to your retirement account, you may do that before April 15, 2009 for the 2008 tax year. You can also make tax plans if you know you’re going to spend a significant amount on medical expenses. These can be tax-deductible if they exceed 7.5% of your adjusted gross income. Lump these expenses into one tax year to get the best tax benefits. Check the IRS Web site for a list of currently eligible medical expenses.

Knowing When The Financial Crisis Will End

With the seemingly constant stream of bad economic news, most people want to know when the economy will turn around. Unfortunately, there are so may variables involved in determining the strength of the economy, it’s impossible for anyone … even those who analyze the economy for a living… to predict accurately when things will improve.

One of the factors that remains in the “unknown” column is the impact that Barack Obama’s economic policies will have on the economy. Obama has recently upped his job creation goal to 3 million, in the face of staggering job loss figures released in the month of November 2008. These figures showed that the overall job loss exceeded one-half million compared to joblessness figures recorded in November 2007.

Clearly, the availability of credit is one element of the recovery, and the Federal Reserve Board is working to ensure that credit is available to ordinary Americans as well as the business community. Access to short-term loans is essential for virtually every business, including banks. Without access to short-term loans, many businesses will not be able to take on new work or create new jobs.

Another unknown is the impact of the existing federal programs designed to help homeowners forestall foreclosure, or avoid it altogether. The bulk of these programs were introduced in the last quarter of the year, and only time will tell if they’re successful in reducing the number of foreclosures.

The shrinking economy has also unmasked several significant acts of fraud, and their long-term impact on the economy is as yet unknown. Earlier this month, the arrest of former NASDAQ chair Bernard Madoff made headlines. Madoff, once a trusted financial advisor to the world’s wealthiest clients, is accused of defrauding investors of more than $50 billion. The impact of the fraud is far reaching, and has caused several charities and philanthropic organizations to close their doors. Another multi-million dollar real estate based fraud was revealed earlier this month in California. Investors in that scheme may have lost a combined total of more than $62 million.

When it comes to personal investing, or gauging the potential impact of the economy on your own finances, no one … not even the experts … can predict the low point of the recessionary trough, or whether the recession will have more than one low-point. The beginning and end points of a recession can only be identified in hindsight. Anything else is just someone’s best guess. The best strategies in the current circumstance are to spend and invest cautiously with an eye toward preserving existing capital, rather than trying to realize substantial profits.

Watch Your Identity During The Holiday Season

The holiday shopping season is here, which means that identity theft is on the rise. Credit card usage rises in the weeks leading up to the holiday season, and alert thieves are looking for opportunities to swipe your credit card information.

Most credit card receipts no longer contain the full credit card number, which has cut down on the incidence of “convenient” theft, but receipts that are made from an actual impression of the credit card may still leave consumers vulnerable to theft. Old credit card statements that contain the full account number can also be stolen from household garbage. To eliminate this kind of vulnerability, shred old credit card statements, receipts and other documents that may have your credit card numbers or other identifying information in plain text.

Consumers have reported an increase in the number of credit cards being stolen from restaurants and retail outlets. Cardholders are being victimized by “skimmers” and “scanners” that enable thieves to copy all information from a credit card required to make additional transactions. Dishonest restaurant employees may make an extra credit card impression when they process a credit card. Enterprising thieves have also been known to hack into a restaurant’s credit card network connection to capture unencrypted credit card data.

Thieves hope to hide the added transactions among the holiday statements, so cardholders may not notice the unauthorized activities right away. Credit card companies have developed excellent detection capabilities, but not all credit card fraud is identified right away. Check your statements carefully each month and report any unrecognized transactions immediately. Contact the credit card company using the 800-number on the back of the card, or contact the issuing bank for assistance.

Credit Card Interest Rates On The Rise

Many consumers have received some bad news in the mail recently, and more bad news is on the way. Credit card interest rates are on the way up, even for consumers who have good credit. Many large issuers have to cover the cost of losses and increased expenses due to the tightening credit markets. That translates into significant increases in the interest rate for credit card purchases.

Citigroup recently announced interest rate hikes of about 3 percent for most customers, including those who have established an excellent payment history. While those cardholders who have missed payments or exhausted their credit lines may not have much choice but to accept the new rates, those with higher credit scores aren’t taking the rate hikes lying down.

If you’ve established good credit, and your credit issuer hikes your rates, your first stop should be the telephone. Contact the issuer directly and ask about the rate increase. If you’ve got a good payment history, you may be able to negotiate a better interest rate your credit account. After all, the credit card issuer doesn’t want to lose good customers who pay their bills on time.

If negotiating a better rate on your card doesn’t work, look for options. There are still plenty of cards available that offer low rates. Beware of “introductory rates” and balance transfer fees. Also, check with your regular bank or credit union to see if they issue a card with a better rate. Frequently, cards issued by banks and credit unions come with rates that the institution has negotiated on behalf of its customers, and these rates are often better than those you’ll get from an issuer you have no other relationship with.

Fewer Americans pay off their credit card bills in full each month, but this is also a strategy to consider, if you can manage it. If you go this route, the interest rate on your credit card may have little to no impact on your finances, since even 30% of zero is still zero. If you do carry a balance, consider lowering it in 2009, which would effectively offset the interest rate hikes you may experience.

Preparing For A Happy New Year

By all accounts, 2008 hasn’t been very good to most people, and 2009 doesn’t hold a lot of promise. Economic forecasts indicate that more than 2,000,000 jobs in the US may be at risk in 2009. Although these projects seem bleak, if you’re still working, there are things you can do to prepare yourself for 2009.

A job loss is troubling on many accounts. Aside from the loss of income, which may be difficult to replace, the loss of health insurance may create an additional burden. This can be especially true for older workers, who may receive regular medical treatment for chronic illnesses and conditions. If this describes you, and you are currently covered by an employer-provided insurance plan, you may want to consult with your doctor and pharmacist about the true cost of treating your condition(s). Knowing how much you may need to provide, and whether there are less expensive alternatives, will help you plan for an unexpected job loss.

If you remain employed, but your employer cuts its contribution to your 401(k) account, don’t panic. Continue to make your own contributions, and make up your employer’s “match” if you can. Consider putting any extra contributions into a post-tax retirement account. If nothing else, this will help you diversify your retirement holdings. It’s not wise to have 100% of your retirement income subject to tax.

If you don’t have a monthly budget, resolve to make one in time for the New Year. Tracking your spending can give you a lot of insight into your financial situation, and can help you spot areas in which you can reduce your expenditures. If a job loss or wage cut occurs, you’ll have a pretty good idea of where you can cut your expenses, and a budget will put you back in control of your finances.

Save, save, save. If you’re not a saver, 2009 is a great year to develop this habit. If you’ve resisted the idea of saving because the interest rate on savings accounts is so low, try buying savings bonds, or opening a savings account with INGDirect.com or SmartyPig.com. These savings vehicles are easy to manage, enable you to set up regular monthly withdrawals from an established bank account, and pay much better interest than you’ll get at your neighborhood bank.

Consider your options and create a backup plan in case you really do lose your job or encounter other serious financial problems. A backup plan may include switching careers or moving to a different area. You may need to polish up some skills, and the New Year might be just the right time to tackle that task.

What Will The Holiday Shopping Season Look Like This Year?

Consumers and retailers are already sizing each other up for the 2008 Christmas shopping season, and things aren’t going to be as rosy as they have been in past years. Retailers are genuinely worried about holiday sales this year, but that concern won’t necessarily translate into mind-blowing deals on gifts.

Consumers who are hoping to score a few credit deals to finance their holiday spirit might be in for a shock. The banks that underwrite the “store branded” credit cards have tightened up their credit restrictions. Shoppers who were planning to open a new credit line and take advantage of savings from retailers might leave empty-handed. Banks are now demanding higher credit scores and issuing smaller spending limits on new credit accounts.

Retailers hoping for a little extra spending from consumers are likely to be disappointed, too. Research conducted by the American Research Group shows that consumers plan to spend only about half of what they did in 2007. If consumers deliver on their intentions to scale back their holiday spending, the predicted average of $431 will be the lowest average holiday tally since 1991.

According to ARG, 50% of respondents said they planned to wait for a sale to make a purchase; 14% said they would pay full price, and 36% said their buying habits would depend upon the gift. This represents little change from 2007, but an increase over 2006 levels, when just one-third of shoppers said they planned to wait for a sale to buy gifts.

Forty percent of shoppers say they have already started their gift buying. This is a slight drop from 2007, and a major decline from 2006, when more than 60 percent of shoppers said they’d already started buying gifts. The late start into the holiday shopping season signals that consumers expect to get better deals by waiting later into the shopping season. The strategy could backfire a bit, however. This year, there are only 27 shopping days between Thanksgiving and Christmas. In 2007, shoppers had the luxury of 32 days to get their holiday shopping done.

Who will be the big winners this holiday season? That remains to be seen, but analysts are predicting anemic sales figures for the major retailers. The biggest winners this holiday season may be the discount retailers. Seven of ten US consumers say they plan to do at least some holiday shopping at discount stores.

Tighter Credit Means Longer, Fewer Loan Approvals

Despite the negative news in the press regarding the mortgage industry, mortgages are still available. According to statistics compiled by the National Association of Realtors, nearly five million homes in the US were sold in August, the majority of which were financed with mortgages.

Banks are writing mortgages and refinancing loans, but they’ve changed their lending criteria. Prospective borrowers will find this to be the case on virtually every type of loan, including personal loans, car loans, student loans and home refinancing loans. Only borrowers with very good credit – as evidenced by a score of 720 or better – will be offered the best interest rates.

Prospective homebuyers won’t find zero-down loans. Instead, lenders are requiring down payments of 5% to 10% and are requiring private mortgage insurance (PMI) on loans where borrowers do not have a 20% interest in the property. For refinancers, most lenders aren’t writing re-fi loans for property owners who don’t have at least 10% equity. Some lenders may be applying even more stringent lending requirements.

You’ll need to provide proof of income in most cases. That means you’ll need to produce your tax forms, paystubs or W-2 statements before lenders will consider your application. They’re also likely to pay closer attention to your outstanding debts. In the past, lenders might accept higher-than-standard debt ratios for applicants. These days, if your debt ratio exceeds 43% of your income, or if the loan you’re looking for will put you over that limit, you’re likely to be turned down.

Nonetheless, loans are still available for borrowers with good credit histories, good incomes and good debt ratios. The interest rates on loans aren’t as good as they have been in the past. Currently, they’re around 6.3% on average. Jumbo loans, those in excess of $417,000 are pegged even higher, at about 7.6%. Most banks aren’t writing jumbo loans right now because the principal amount falls outside of their lending guidelines. Jumbo loans are still available through mortgage brokers, however.

If you are in the market for a new home loan or a refinance, be prepared to provide a lot of income-related information and be prepared to wait. Lenders aren’t in a hurry these days to write new mortgage loans.