After Bankruptcy And Bad Credit And The Economy

Millions of people are dealing with bad credit… and it isn’t getting any better. Worse off, many people have been left in shreds and trying to get back on their feet after bankruptcy.

Looking out into the economic forecast, one question many are asking is, regardless of whether I have bad credit, or went through a bankruptcy, what can I expect with the economic recovery, and what about the fears of a double dip recession?

Federal Reserve policies have greatly increased the amount of reserves that banks have available since the economic crisis began. Banks now have over $1 trillion in excess reserves on their balance sheets and are being paid 25 bps on these reserve balances.

With interest rates on safe treasury bills now near zero, banks are holding large quantities of excess reserves because they wish to show a high level of liquidity to investors and regulators. The Fed should do all it can to encourage banks to lend out these reserves. One way of doing this is to cut back to zero the interest rate that the Fed pays on excess reserves.

The Fed should also engage in open market policies that encourage banks to extend loans to businesses and consumers. This can be done by the Fed buying securitized packages of these loans in the open market.

There is little question that the Federal Reserve’s purchase of more than $1 trillion of conforming mortgages (those under $417,000) has helped keep those rates low. Currently the rate on 30-year fixed rate mortgages has fallen to a modern-day low of 4.69%. For a median priced house of $220,000, this works about to a very affordable payment of $687/month for a mortgage covering 80 percent of home value. These low rates have stabilized the housing market.

But the market for higher priced homes has suffered, as the premiums that lenders have charged for “jumbo loans” has jumped markedly and in some cases these mortgages are not available at any rate. The paralysis of the higher priced housing market hurts the whole industry since it prevents owners of these homes, such as “empty-nesters,” from downsizing. The Fed, by providing a liquid market for jumbo mortgages as well as other high-yielding credit card and auto loans, will encourage banks to lend in these markets.

The most recent Case-Shiller report showed prices rose 2.3% in March, compared with March 2009. The National Association of Realtors recently reported that in April the median existing home price rose 4% in the past year; existing home sales were up 7.6% in April to a seasonally adjusted annual rate of 5.77 million.

• Hurry Up and Close to Get the Home-Buyer Tax Credit

• When Buying a Short Sale, There Are No Easy Answers

• Be Prepared for Bull, Bear or Bust

While it’s too soon to quantify the degree of the effect, the deadline for the home-buyer tax credit likely played into the numbers. Contracts needed to be in place by April 30 to qualify, and some economists say that incentive made buyers move earlier than they would have otherwise. Any bump from a temporary credit is soon over.

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