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The bailout package was signed by Congress, but so far there is no actual plan to apply the cash to any open problem.  The bailout is not a bailout.  It is the collection of an emergency fund and emergency authorities to be given to the Treasury Secretary (who has delegated the $700 billion to his deputy).

Credit Disappearing

In the wake of no action by the government, credit is disappearing.  Sub prime mortgages and later many regular mortgages and home equity lines were the first to go.  Banks that had issued these loans, issued securities backed by these loans and bought or traded in securities from other banks that had issued these loans, rapidly lost their trust in the value of mortgages as an asset. Those banks basically don’t trust the numbers, and now won’t lend to other banks with possibly equally untrustworthy numbers, valuations and balance sheets.

After freezing credit on each other, banks then began to freeze credit on businesses like At&t and Caterpillar.  Simultaneously, major retailers around the country saw their credit lines for purchasing goods to sell during Christmas drop by 40%.  Auto dealers found that they couldn’t sell cars because banks had also frozen credit to car buyers (and now 1 in 5 auto dealers are likely to go bankrupt before next spring.)

College students went off to school this year, paid their tuition with student loan checks issued from major banks that are not in financial trouble, only to be notified several weeks into the semester that those banks had stopped payment on the checks as they ended their own private student loan programs.

What’s Next?  Cutting Up ALL Credit Cards

As we look at the trends, we see that all credit is disappearing across the board unless it is government backed. One of the few areas left is credit cards.  This is a profitable area for banks, but it is also one of the riskiest areas for banks, and banks don’t have the stomach for anything with a hint of risk.  This indicates that banks are going to cancel all those credit cards out there that far too many people in the United States rely on very heavily.

Americans have to prepare for the day when their credit lines will be dropped down to their existing balance and possibly closed or frozen all together.  Many people have already seen their interest rates skyrocket from 4% to 7% to 10% to 25%, and those are people with great credit and no late payment!  If banks can’t get financed, if the biggest companies in the world can’t get financed, if people can’t get a secured loan on a home or a car, its just a matter of time before people can’t get financed on unsecured credit cards. 

Once credit cards are killed off, many areas of the US economy start to break apart from online transactions by all those shopping sites from eBay to Amazon to online auto insurance quotes to identity confirmations based on credit cards to booking travel through major airlines.  We can’t go back to a cash system, because we just don’t have a lot of cash.  So we are going to have to find a different way.

Two day pain interest is a very common and accepted practice.  There are generally two basic types of loans that are offered.  Secured loans where some form of property is still offered as a promise to pay down the debt and the advent that the borrower fails to pay. 

Unsecured loans are also a popular form of loan as no type of property is held in security against the debt.  This means that if a borrower defaults on a loan to a lender, the lender has no recourse to take any of the borrower’s money or property.

Secured loans are typically used for the purchase of real estate while unsecured loans are typically used for relatively small amounts of money on items such as credit card debt, home improvement or furniture loans, some college loans, and even some online auto insurance policies can be funded with a small loan.

US News and World Report offers up a good list to help reduce your borrowing cost that we have paraphrased below.

1) Borrow as little as possible.

2) Check your future salary to see what you can afford in the future.

3) Shop around for the lowest rates.

4) Fill out the FAFSA to qualify for low-cost federal student loans.

5) Don’t charge tuition or other school expenses to your credit card.

6) Consider nonprofits offering access to loans such as MOHELA and NHHEAF have offered lower-cost loans. Graduate Leverage, a cooperative, is also offering competitive terms.

7) See if you can qualify for one of the many loan repayment or loan forgiveness programs, so your employer—not you—pays off your student debts. 

How to Reduce Your Borrowing Costs – US News and World Report

In addition to these tips, its also very wise to do some paid work while you are in school.  It generates income to help keep your debt and borrowing down while building up your experience.  Many companies are having a very difficult time finding students to work for paid coops these days.  The work may not always be glamorous (that’s why its called work) but it can save you a fortune in interest and give you some great work and life experience rather than wasting money on funny t-shirts and concerts.

Three banks pulled out of the Student Loan industry this week citing higher risks and more difficulty in making profits from dropping interest rates.  M&T, HSBC and TCF Financial group, which represented about half a percent of the 2006 100 billion dollar plus student loan market are packing it in.

M&T spokesman Phil Hosmer said two factors drove the Buffalo-based bank’s decision: difficulty in reselling the loans on the securities market, and reduction from $28 billion to $4 billion in the federal subsidy for the loans. Interest rates, set by the federal government, also are set to fall from 6.8 percent to 3.4 percent in 2011.

“It makes it more difficult to make a profit and reduce your risk,” Hosmer said.

3 banks give up on student loans — Page 1 — Times Union – Albany NY

The inability to securitize student loans definitely spells a problem for potential borrowers and students as well as people looking to refinance their existing student loans.  Mix into this the problems with the mortgage industry and if people start defaulting on mortgages, their student loans may not be far behind.  Many people will definitely watching this market for signs of another crisis the early exit of some banks may just be a mattress topper hiding a problems underneath.

When it comes time to get a home loan, lenders will look at all of your outstanding debt.  This includes those student loans that might take years to pay off.  They probably have low monthly payments, but they still are payments and cut away from your ability to pay just a bit.  If you are looking to get financed for a home loan, you should consider trying to speed up the pay off of your student loans. 

If you can not pay off the loans, then refinancing those student loans could help.  If you are not careful it could also hurt.  When you refinance student loans, look at getting the obvious, a lower interest rate.  That will help!

But also look at avoiding any types of financing charges that roll into your total loan amount, this just increases your debt.  If you are struggling to get financed because of ability to pay, then consider refinancing your student loans for a longer term and lower interest rate.  The combination of these two items should also provide you with a lower monthly payment requirement.  This will enable you just a little more financing leverage to get your home loan, but be prepared to continue paying the same amount if not more to pay off those student loans.  The faster you pay them off, the better you are no matter what!

Plus, student loan interest is only deductible for the first 5 years of the loan, so pay those loans off quickly after that 5 years is up!

Quicken Loans offers up a short and somewhat useful article detailing how the recent Federal Reserve’s Rate Cut might impact your mortgage.

Now, I personally do not trust Quicken Loans as they once promised me a rate on my own home refinance.  I locked in at the rate and 2 weeks before the close they called to tell me that it was no longer possible unless I paid a higher interest rate.  They offered up excuses that were unprovable, but the reality was that it was either their way or the highway. 

I chose the highway and refinanced with Wells Fargo instead!

Regardless, their short article Does the Fed rate cut affect your mortgage rate? offers up the examples necessary to understand how the Federal Reserve Rate Cut a can impact your finances ( a little ) both positively and negatively.  The article is not likely to save you a fortune this year or even save your house from foreclosure if you are in trouble, but understand the situation might save you enough money to buy a truck rack on clearance from an after christmas sale.

The key concept to understand is that the Federal Reserve has the ability to impact short term interest rates.  Here are some loans that may be impacted in the short term:

Credit Cards
Adjustable Rate Mortgages (ARMs) – under 7 years, even more if 3 or under
Home Equity Lines
Some (but not all) Student Loans
Your Savings Account rates
New Vehicle Loans – Ergo new loans that you take out as opposed to the loans that you already have.
Other Lines of Credit – such as Overdraft Protection

There is another loan crisis that is brewing rapidly on the heals of the sub prime mortgage crisis.  Like mortgages, this other loan crisis revolves around one of the biggest investments (and possibly the most important) that most people will ever make.  This new crisis is brewing in the Student Loan market.

Many of the same banks and companies that made a killing in mortgages and even fraudulently took advantage of borrowers in the sub prime market as well.  Those same banks and companies used similar tools and marketing vehicles to go after another susceptible group of borrowers, high school and college students. 

This group of people were eager and in some cases desperate to take out money in the form of a loan so that they can go to college and get a good education, or at a minimum a degree.  That sounds very familiar on many levels to borrowers that were eager to consolidate debt, or reduce their interest charges or their total monthly payments or many other things.

At least mortgage borrowers get some sort of free gift maybe even personalized pens when they sign the close documents, but Students are just getting saddled with debt and if the recession does hit, this could definitely sap the vitality out of Generations X, Y, Z and beyond.