Having invested $1 trillion into the economy, Chairman Ben Bernanke now faces the daunting task of convincing investors that the Federal Reserve can make up this amount. Bernanke and his colleagues are set to agree, on June 23-24, that the government needs to continue its strategy of buying assets in order to maintain low interest rates. Though this is geared to revive growth, the rising Treasury bond yield are indications that investors are concerned that sustaining such a strategy will lead to a long-term inflationary pressure.

According to Lyle Gramley, an economic adviser from Soleil Securities, “markets don’t understand the Fed’s exit strategy” and this is a cause for concern. This confusion contributed to the higher rates in long-term investments. The risk in having higher rates lies in the fact that it will hinder economic growth by lifting the cost of borrowing for home buyers.

Mounting Mortgage Rates

Earlier this month, the average mortgage rate for a 30-year loan actually rose to 5.59 percent which is the highest since November of last year. Because of this, the number of mortgage applications dropped to 16 percent in the week ending June 12. The Mortgage Bankers Association also revealed that the increase in rates had discouraged refinancing.

How the Fed Plans to Contain the Cost

Fed officials are looking at many options to contain borrowing costs in the market. Right now, it seems that they want to use policy statement to stop speculations that they’re prepared to boost the interest rates this year. According to a the chief economists at the Bank of Tokyo-Mitsubishi UFJ Ltd. located in New York, everyone is thinking of the exit strategy because they are “worried about the future”.

If policy makers intend to restrain rates, they need to explain how they can prevent inflation from growing at an uncontrollable pace. It is not only the US that has to deal with this problem though because there are also talks in the European Central Bank on how they can reverse their stimulus.

Unless the Fed provides clarity on its exit strategy, investors, analysts, and even the public will conclude that the back-up in interest rates will create problems in refinancing and housing in the future. And there is a high chance that it will.

For our first entry in Wednesday’s Washington Weekly, let’s discuss an issue that has been a topic of conversation in almost every American home-the housing crisis.  Millions of Americans are feeling the effects of the subprime mortgage meltdown.  Many have lost their homes or are currently in danger of meeting that same fate, as they cannot afford mortgages that at one time appeared affordable.  No matter where you want to point the finger-at the lenders, at the borrowers, at the brokers-the next step in this discussion needs to focus on the solution.

So what is President Obama’s proposed solution?  How does our new commander-in-chief propose that we dig ourselves out of this crisis?  Obama’s “Making Home Affordable” plan aims to work with lenders to modify loan terms and to create more affordable fixed-rate loans.  Approximately 4 million Americans will benefit from the modified terms, while 5 million Americans will be granted the more affordable fixed-rate loans.  The 9 million Americans who will reap the plan’s benefits must fall in the category of borrowers who owe up to 5 percent more than their home’s current value.  If you fall into this category, you must submit your most recent tax return, two pay stubs, and an “affidavit of financial hardship.”  The conditions of the housing plan dictate that borrowers will only be allowed to have their loans modified once; furthermore, the loans needs to have been granted on or before January 1, 2009, and must either be backed by Fannie Mae or Freddy Mac.

So how is Washington responding to the fact that the “Making Home Affordable” leaves out the rest of homeowners who owe more than 5 percent of their home’s current value?

Secretary Tim Geithner commented:

“Two weeks ago, the President laid out a clear path forward to helping up to nine million families restructure or refinance their mortgages to a payment that is affordable now and into the future.  Today, we are providing servicers with the details they need to begin helping eligible borrowers.”

This is only the beginning of a plan that will, over time, trickle down to help other Americans caught in the midst of the subprime mortgage crisis.  A crisis of this size, with this much money involved, cannot be solved overnight.  For more information regarding the details of President Obama’s housing plan, visit www.financialstability.gov.

With Consumer Protection Week wrapping up today, we wanted to focus our third article in this series on how to protect yourself from financial scammers.  The fact of the matter is there are a lot of crocks out there looking to scam you out of something as sensitive and as serious as your finances.  We feel that the conclusion of consumer protection week is an especially appropriate time to advise you on how you can steer clear of Loan Scams and Fake Lenders.

How do Loan Scams Work?

The scam usually starts with a fake lender sending you an offer in the mail.  The scammers often reference a well-known name of a legitimate lender to reel people in.  After all, if they mention that they are affiliated with a company that you know is legit, they must be for real, right?  WRONG!  Here is how they manipulate victims day after day using their well thought out tactics:

1.      You respond to a letter or email you get that offers you a loan.

2.      Within the email or letter, you are asked to call a “third party consultant” that will get your application started.

3.      During this phone call, you are asked to give your personal information, such as your date of birth and social security number-then suddenly, after quickly assessing your information over the phone (or so you think), your loan is magically approved!

4.      The scammer will then either fax a bogus loan package to the person or will ask them to visit a website, where they will enter their bank account information.

5.      Lastly, the person is asked to wire an advanced payment to the scammer.

6.      Boom-the fake lender disappears into thin air, with all of the person’s personal information-and their advance payment.  They never receive a loan, and are left with nothing but an emptier bank account and a stolen identity.

Signs You are Working with a Fake Lender

There are certain things a legitimate lender will never do.  Below, we list things that should raise a huge red flag:

• They contact you – legitimate lenders will not be harassing you via email or via mail.
• They guarantee your loan will be approved, no matter what – this isn’t realistic! If you hear these words, run for the hills! No legitimate lender will ever make this guarantee up front. The background check legit lenders perform includes checking your credit and contacting your references. It is simply impossible to approve a loan over the phone that quickly!
• They ask for advance payment to an individual – legitimate lenders will not ask for an advance payment, especially not to an individual person.
• They direct you to a website to enter more personal information – these scammers often imitate legitimate loan websites, stealing logos and information. When the window appears, it actually takes you to Microsoft’s website. Be sure to type the correct url into the window yourself to see if the website is legit.

How to Protect Yourself from Loan Fraud

Now that you are aware of the red flags to watch out for when it comes to fake lenders and loan scams, it is important to be aware of the additional things you can do to protect yourself.

• Subscribe to an identity theft protection service: If you believe you may have mistakenly fallen for one of these scams, as many consumers do, it is crucial to subscribe to an identity theft prevention service. If you have handed over personal information, you can be sure these scammers are taking full advantage of possessing your personal information. These identity theft services will run a check to see where your personal information is being used, and will help resolve any issues they may find.
• Do your homework-comparison shop: If you need a loan, do your research. Look online to see what other consumers are saying about the legitimate lenders they have worked with. The time you take to investigate will help you learn about specific experiences other consumers have had with lenders. Talk to your friends, ask people at your work-get a referral from someone you trust. Don’t sell yourself short by responding to an email or letter from a potential fake lender-it will cost you in the end!

I can hear them crawling out of the woodworks again.  Just like a pest, they smell the lure of the quick money.  Just when you thought the days of the sub prime mortgage broker were over, they are beginning to resurface upon hearing about Obama’s new housing plan.  Even before Obama’s housing plan was announced a few days ago, sub prime brokers began planting their seeds in the television and radio ads along with numerous sites on the Internet.  More and more these website are appearing on a daily basis.

When this financial crisis began to escalate last year, I started to see many more debt settlement companies pop up.  Are these former debt settlement agencies now the loan modification brokers?  It appears that these backroom brokers may be back again, ready to prey on the SAME unfortunate individuals whose upside down mortgages they brokered.

In my first post, I mentioned that one my goals for this blog is to help prevent people from falling victim to the same lending practices that put our economy in the situation it is in today.   Well, here is my first attempt to offer protection in the form of knowledge.

When loan modification first revealed itself, it was sort of hush hush.  Congress was slow to wrap its hands fully around loan modification; as a result it continued, while the majority of the public had no idea.  Advertisements offering “Foreclosure Prevention” and “Foreclosure Avoidance” began to gradually appear.  As banks stepped forward and announced their plans to allow certain mortgages to be modified, more loan modification companies started to appear.

Some of these early loan modification brokers had their clients pay up front costs to renegotiate their mortgages, doing little to nothing to help their clients.  Some ended up being scams, robbing the home owner of the fronted cash.  Even though your bank rewrites the loan terms, the bank still has to outsource the work on a loan, as each case can take up to 12 hours to review.

I guess we will have to see how it all plays out as more and more banks announce that they will modify existing mortgage terms.  I am curious to see how Obama’s new housing plan will protect and deal with the loan modification brokers and business as a whole.

How can you protect yourself?

1.  Always request to see all proposals before agreeing to anything.  This will save you in the long run when rates and terms magically “change.”

2.  Know your home value. Being honest and sharing the exact home value with the lender will save you both time. The lender can only provide you an honest solution if you give them an accurate value.

3.  Know your financial situation.  Be honest about your income.  Always know where your credit stands.  Sign up for credit monitoring or for identity theft protection to make sure companies are not pulling your credit without your knowledge or against your will.  Too many hard pulls by the lender can ultimately change and lower your credit score.

4.  As long as you have you have the right numbers, know your financial situation, and are being cautious with your social security number, it is OK to shop around.  Knowing your options is key for getting the best possible deal.  .