A few months ago, President Barack Obama announced a foreclosure prevention plan called Making Home Affordable. The plan included provisions for those who wanted to refinance, but couldn’t because of their loan to value ratio. Refinancing would be encouraged for those who had a loan to value ratio of between 80% and 105%. The idea was to help those whose home values have dropped in response to housing market troubles.

Unfortunately, the program has been seeing limited success. It relies on voluntary help from mortgage lenders, and it excludes those with even higher loan to value ratios. Yesterday Obama made a move to expand the Making Home Affordable program. Now, those with a loan to value ratio of up to 125% are eligible. There are also continuing incentives to encourage mortgage lenders to deal with homeowners.

As far as the housing market is concerned, this new move is unlikely to have a huge impact immediately. It probably won’t even arrest falling home values, or do much in terms of stabilizing the overall housing market. But it does have the potential to help prime borrowers who are looking to refinance to a lower rate. Mortgage interest rates are still relatively low, and refinancing could save folks who made good homebuying decisions a great deal of money.

It even benefits people like me. I bought my home two years ago with 5% down and a 30 year fixed rate. Obviously, I haven’t had time to make up a lot of ground in terms of home equity. My home has lost some value in the last two years, and I have a loan to value ratio of about 94%. (The new rules don’t change my eligibility.) We can easily afford our mortgage payment, but I wouldn’t mind if I got an interest rate that is 1 percentage point lower. Plus, there are places in town offering no-fee refinancing. We could refinance to a 15-year loan and only pay $200 more per month, saving us a great deal over the long haul.

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One of the biggest changes to financial system regulation presented in President Barack Obama’s regulatory reform proposal calls for the creation of an agency devoted to protecting consumers. This new agency could demand any number of reforms from banks and other financial institutions. It could require greater transparency, simpler financial products and even set caps on interest rates that could be charged for certain kinds of loans.

The new standards could also be applied to mortgage lenders, forcing them to provide the option of mortgages with simple terms, and requiring mortgage lenders to offer the best available mortgages. It might even mean that mortgage lenders have to (gasp!) make sure that borrowers can actually afford the home loans that they are getting.

In addition to protecting the run-of-the-mill consumer, Obama also wants to protect investors. His regulatory reform would require that hedge funds engage in greater disclosure and would institute the regulation of derivatives and credit default swaps.

Regulatory reform: What is needed? Or does it go too far?

While some are applauding the consumer protection measures, others are concerned that they go too far. What happens when the government sticks its fingers too much into the regulatory pie? As expected, reactions to the proposed consumer protections pretty much fall along the following lines:

1. Consumer advocates call them a good balance.
2. The banking industry insists they go too far and will ruin business.

I’m inclined to call them a good balance. Consumer protection is badly needed right now. While over-regulation is a stifling influence, prudent regulation can be something that eventually helps everyone. No, the economy won’t boom like it did during the era of de-regulation. But what did a massively growing (and artificially stimulated) economy get us anyway? A massive recession to balance the growth, that’s what.

What do you think of the new consumer protection agency proposed by President Obama?

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While I agree with some of the economic stimulus measures that President Barack Obama is trying to implement, I do not agree with all of them. More specifically, I am not happy with the continued focus on credit as the engine of our economy. I have written several posts about the disconnect between what’s good for the economy (consumer debt) and what’s good for our individual finances.

The policies adopted beginning in the years of Reagonomics, on up through Bush, Clinton, Bush II and now, Obama, are aimed at explosive economic growth that is unstable and unsustainable. Not to mention the “economic stimulus” designed to put off the natural down cycles, lest they happen during a specific president’s term. So it is no real surprise that I agree with a lot of what Peter Schiff said last night on The Daily Show. Do you?

We’ve been programmed to want things fast and snappy. So it’s no surprise that financial types and investors and others are clinging to the idea that if we hit a bottom, we should be prepped for a quick recovery from the recession. Indeed, this idea is often expressed as a V-shaped recession. Look at the V: It illustrates a steep decline, a relatively short stay at a bottom and a rapid recovery. This view of things, no matter how attractive, may not actually come to pass. President Barack Obama has been saying since his campaign that there is no quick fix to our economic woes. And Paul Krugman – just this morning — warned against thinking that we’re going to see an amazing V-shaped recession. Bloomberg has the comments of Nobel Prize winner Krugman:

“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Krugman, 56, said at a forum in Shanghai today. “The market seems to be looking as if this is going to be an average recession, but it’s not.”

What does this mean for your personal finances? Well, it means that you might be struggling for a little longer (if you are struggling right now). While there are signs that we might have reached a bottom, it is far from certain that a meteoric recovery will follow. Our current recession is might have a recovery that looks more like a U with a rather long bottom. Or maybe recovery will look more like this, ⦧,  with a more gradual slope up and a plateau before further growth. At any rate, the idea that things could be improving soon doesn’t mean that you should stop following sound financial principles.

If you have been making changes due to the recession (such as saving more, getting out of debt and spending less), keep with those changes. Don’t let the idea that recovery is imminent trick you into complacency. Especially since rapid economic recovery is probably not very likely. Good financial practices are always worth following. And if you maintain your recession habits during the good times, the next time a recession comes around you will be better prepared.

What shape do you think the recession and recovery is most likely to take?

image source: daylife

One of the things that has impressed my about Barack Obama has been the way he realistically points out that there is no “magic” fix to the economy. That we will have to do some work and wait a little while for the recession to come to an end. I like this because too often we continually look for a “quick fix”, when we should focus instead on long-term stability.

This is also true in our personal finances (even though our leaders don’t want to encourage responsible personal finance behavior). While getting our financial houses in order may lengthen the recession, it is important to make changes to our consumer and personal finance habits.

America’s Research Group finds changes to US consumer and personal finance behavior.

While 48% of consumers say that they had not changed their habits, they did mention that their finances are worse off. And, in spite of a positive national savings rate, many of the respondents said they weren’t able to save effectively because of the economy. Here are some of the other interesting tidbits regarding personal finance behavior from the survey:

• 75% say they are using cash more.
• 51% say they have stopped using credit cards.
• 50.5% say they have reduced their shopping budgets.
• 47% say that they are less likely to purchase an item at regular price.

Of course, one has to be careful of such surveys — especially since there is a certain self-reporting bias that leads people to give answers they think are “right.” But it is still an interesting snapshot of the general mood of the public when it comes to personal finances and consumer habits.

Are you changing your personal finance habits in response to the recession?

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It’s been interesting lately. For some reason pundits have decided that the one measure of the job someone is doing happens to be the Dow. Which is kind of silly. Even as a measure of the economy, I’m not sure how much credence we should lend the Dow. After all, it is a reflection about how Wall Street feels. And, quite frankly, I’m wondering if Wall Street is a little upset that instead of focusing mainly on big firms, Obama seems determined to do something for the middle class as well. Sure, he’s still throwing money at the banks. But in smaller amounts, and he’s tossing a few bones to the rest of us as well.

Another thing the stock market doesn’t like right now: The acknowledgment that things aren’t going to magically get better immediately. Obama has been saying this for quite some time. Perhaps the reason his approval rating is relatively high amongst the rest of us (60%) is due to the fact that the man is actually telling it like it is. There is no quick fix to our economic problems. But Wall Street doesn’t want to hear that. Wall Street wants to hear that government coffers will continue to be open the big guys, and that loads of taxpayer money will be at their disposal to try to turn things around quickly.

Helping forestall foreclosure and putting money into infrastructure and into education will help things in the long term. Sadly, Wall Street is all about the short term. Wall Street doesn’t care about the long term. Obama at least seems to be trying (whether you think he’s right or not) to do what he thinks is best for the long term. So maybe it’s not the end of the world that Wall Street doesn’t approve.

I think Jon Stewart is spot on.

What do you think? Should Obama be judged by the performance of the Dow?

For the first time in years, we are getting a tax refund. A big part of the reason is the itemized deduction that comes from mortgage interest paid for an entire year. In light of this fact, it interested to me to learn that changes are on the way for mortgage interest tax deduction for those in the 33% and 35% tax brackets.

New mortgage interest tax deduction policy

As part of his efforts to cut the annual federal deficit in half by 2013, Barack Obama knows he needs to raise revenues. And one way to do this is to pay less in tax returns to some people. (Cooks and Liars doesn’t feel bad at all for those who will get a smaller return in this case.) One of the least painful ways to do this is an interesting proposal to reduce the mortgage interest rate deduction for the top tier by 20%.

The mortgage interest rate deduction is still there for those with larger incomes; it just isn’t as big. CNN Money points this out about what economic-types at the Center for Economic and Policy Research and the Tax Foundation have to say about the policy:

Dean Baker, co-director of the Center for Economic and Policy Research, a D.C. think tank, said he was impressed with this part of the budget plan.

“It’s a no-brainer for economists,” he said. “Why have taxpayers been [in effect] subsidizing home payments for the highest income people in the country?”

The overwhelming majority of low and middle income people take the standardized deduction when they file their taxes [and] they receive no benefit at all from the mortgage interest deduction, said Patrick Fleenor, chief economist for the Tax Foundation.

Even though I enjoyed my tax deduction for mortgage interest, I don’t think I’ll be upset if I get a diminishing amount. After all, if I make it to the 35% bracket, at which point I’d be making more than $357,700 a year, I think I’ll have enough money that 28 cents back (instead of the current 35 cents back) on my mortgage interest dollar is just fine.

Tomorrow, President Obama will address Congress. He will talk about the economy. But what I’m really looking forward to is Thursday’s preview of the 2010 budget. This is his first budget as president, and Barack Obama insists that what he puts into place starting in 2010 will result in cutting the deficit in half by 2013. (But it’s still a $500 billion a year deficit.)

It’s a laudable goal. But is it possible?

While full details of the budget won’t actually be hammered out and released until April, there is still a lot of interest in the possiblities. On the heels of a massive economic stimulus spending and tax cut package, what sorts of things can be done in order to curb spending and raise revenues. I think you know what’s coming. I expect some of the following to be addressed on Thursday (and maybe even tomorrow):

• Pulling back on the Iraq War.
• Allowing the Bush tax cuts to expire.
• Making small increases to the capital gains tax.
• Cutting some “wasteful” government spending (however that is defined).

I’d like to think that this could work out. After all, I voted for Obama in part because I believe that focusing more on the middle class, providing a new method of health care, and focusing on job creation through improved infrastructure and a greener energy economy, are important measures and ultimately more beneficial to a prosperous economy than policy that is based almost entirely on tax cuts — and those mainly for the wealthiest. The bottom line is that Obama largely inherited this mess. And while I don’t agree with everything his administration is doing to try and fix it, I do think that those involved are on a slightly better track than the previous administration.

It’ll be interesting to see what happens in the next few days, weeks, months and years. And it will be interesting to see whether Obama’s “fiscal responsibility” promises end up being more believable than conservative “fiscal responsibility” actions that we’ve seen a great deal of since the 1980s. (After all, it was the Reagan Administration that popularized the practice of “acceptable” deficit spending.)

Do you think Barack Obama can really cut the annual deficit in half by the end of the current presidential term?

image credit: U.S. government.

Yesterday, President Barack Obama signed the economic stimulus plan into law. Whether or not you agree with it, it’s pretty much a done deal. And whether it works or not, two main things will be remembered about the politics of the economic stimulus bill:

1. Obama forced the Democrats to make concessions to the Republicans, even though they didn’t actually have to.
2. Almost no Republican (none in the House) voted for the bill even after the concessions.

This means that GOP partisans will either be remembered as stubborn obstructionist fools or visionary principled heroes — depending on whether the American public thinks that this economic stimulus bill did the trick. You can start making your own assessment for your personal finances today. Here are some of the things that are most likely to affect you personally:

• Starting in June, most people will start to see around $13 a week in their paychecks as part of the new tax credit. This might help you buy a few more things. But, in terms of meaningful spending or debt reduction, it really won’t be all that helpful. I, however, would save or invest it. That $13 a week, in the right place, will add up big time and yield substantial returns down the road.
• Child tax credit ($1,000) will now be offered to more families that don’t make enough to pay income taxes, and the EIC will be expanded to included more low-income families with three children or more. If you are struggling — especially because job loss may have changed your situation — this might be helpful to you.
• Those of us subject to the Alternative Minimum Tax (don’t get me started on this silliness) in the middle-class and in the upper-income class will not have to worry about it for now. But I’m sure that it’ll be back.
• $8,000 tax credit for first-time homebuyers who buy between January 1, 2009 and December 1, 2009.
• If you bought a new car this year, sales tax is written off. (Too bad I bought a used car.)
• If you have a child in college, you could see tax credits of up to $2,500 for 2009 and 2010 to help pay education-related expenses.
• For those who make green changes to their homes — energy efficient air conditioners, furnaces and windows — there is a 30% tax credit up to $1,500.
• Unemployed folks get help with COBRA premiums for nine months, as well as not being taxed on the first $2,400 received in unemployment benefits.

And, of course, there are a number of measures in the economic stimulus bill designed to help the poorest Americans, bring aid to higher education, benefit scientific research, improve infrastructure (”shovel ready” projects that could provide jobs), encourage more alternative energy development (which could make energy efficiency more affordable for more people in the long run), and education spending for elementary and secondary schools. More funding for police departments and work in the environmental sector will also be given. All of the above has the potential to help with job creation, as well as lay a foundation for a more innovative economy down the road.

Now, of course, it is time to see whether this all works well enough to make up for the tremendous amounts of debt our government is racking up (most of it going to China as debt holder) in order to pay for all of this economic stimulus spending.

Today, Barack Obama will be sworn in as the 44th president of the United States. More people have more expectations of him than perhaps any other president. And he will doubtless be judged almost exclusively on one thing: Whether he manages to “save” the U.S. economy from complete and total ruin. Perhaps it’s not fair to judge him on something that, really, no president has much control over. But Obama appears to be making plans and laying the groundwork for (potential) economic recovery. Here are the challenges that he faces:

• Combat rising unemployment.
• Stave off more foreclosures.
• Keep the financial system afloat.
• Spur more consumer spending.
• Help Americans meet ends meet in an effort to arrest the decline of the middle class.
• Prepare our national finances for the future.

That’s a pretty tall order, and I don’t think that it can all be done — at least not by one person. I don’t even think all of it should be done. I’m hopeful that Obama’s plans to improve infrastructure and develop renewable energy will both provide jobs and prepare us for the future. However, I’m not overly fond of the idea of encouraging a return to consumer spending. I’d rather see our economy overhauled so that it is less dependent on debt-fueled consumerism.

What do you think are the challenges Barack Obama faces on the economy? And can he overcome them?