
U.S. Government Looks to Stimulate Consumer Lending
The Washington Post reported that the Federal Reserve and Treasury Department are “creating a $200 billion program that will lend against highly rated securities backed by auto loans, student loans, credit card lending and small-business loans backed by the Small Business Administration.”
This is part of a larger $800 billion plan to help homeowners. The Federal Reserve will also be purchasing up to $500 billion in mortgage backed securities. It was also be buying up to $100 billion in direct debt from Fannie Mae, Freddie Mac, and Ginnie Mae.
The goal of the Federal Reserve is to reduce the cost of lending to help stimulate demand for mortgages, credit cards, and other consumer loans. Increased borrowing should lead to more consumer spending which, in theory, will help the dragging U.S. economy.
This may spell good news for people looking to obtain debt consolidation loans. Banks and credit card companies have been reluctant to lend money and have been increasing the interest rates they have been making available to consumers. Proponents of the new plan expect that it will result in greater availability of credit for consumers at improved terms. Consumers may be able to improve their cash-flow and reduce their interest expense through debt consolidation.
Critics of the plan are not confident that the Federal Reserve’s investment will flow through directly to the consumer as planned. Although banks and lenders will have access to more capital through this plan, it is unclear if they will make that money available to consumers. There is also a fair amount of confusion over whether lenders will lower their underwriting requirements to include a larger segment of borrowers.
Critics also believe that even if more credit becomes available to consumers, many will choose not to borrow due to low consumer confidence. Escalating unemployment with the promise of future lay offs has many consumers reducing consumption and decreasing their reliance on credit.
“I wish, and I know everybody wishes, that one piece of legislation, and then magically the credit markets would unfreeze,” said Treasury Secretary Henry Paulson. “That’s not the type of situation we’re dealing with.”
The plan does little to help those homeowners who currently owe more on their homes than they are worth and are facing foreclosure. Banks and mortgage lenders will still be unwilling to lend money to those whose collateral is worth less than the amount they want to borrow.
Critics and proponents of the plan do agree that it is the first with the intended goal of making credit more available and less expensive for the U.S. consumer. Previous bailouts have been aimed at helping shore up the large banks and lending institutions and have done little to help the average American.
About the Author:
Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges. He can be contacted by visiting his personal site, GoodCreditLiving.com.
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Chris Rocks is the Regional Director of the National Credit Federation (NCF). NCF is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score. Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management. He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others. He can be contacted by visiting his personal site, GoodCreditLiving.com.
Francine L. Huff is the Publisher and Editorial Director of Super Savvy Publishing, LLC, which provides editorial and publishing services. She is a gifted author, freelance journalist, and motivational speaker who has entertained and motivated a variety of audiences through workshops, panels and keynote addresses. Francine is the author of The 25-Day Money Makeover for Women, which has inspired and motivated many readers to rein in poor financial habits, become good stewards over their money and work toward a debt-free life. She has appeared on a variety of TV and radio shows. Francine previously worked for the Wall Street Journal, where she was the spot news bureau chief, a news editor and a copy editor. She has interviewed a variety of financial professionals about financial issues and strives to present information about managing money in an easy-to-understand format that is accessible to people of all backgrounds and income levels.
Karen Lawson is a freelance writer with more than 15 years of experience working in mortgage banking and loan servicing. She holds BA and MA degrees in English from the University of Nevada, Reno. She enjoys writing informative articles about debt management and personal finance.
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