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How Market Jitters Could Affect You

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RISMEDIA, August 20, 2007—(MCT)—The Federal Reserve last Friday tried to ease investor concerns by pumping $38 billion into the financial system. Banks have become averse to taking risks following the meltdown of so-called subprime loans, which were given to borrowers with weaker credit histories.

But Wall Street is still jittery. Does this mean it will be harder for consumers to get loans for mortgages and cars? Only if the situation gets significantly worse, economists and financial analysts say.

Mortgage-seekers with a poor credit rating or those looking for unusually large loans may find rate increases, the experts said. But most consumers will see little impact on the market for other types of credit, such as car loans and credit cards.

However, if the situation worsens, “and it turns from a credit reduction to a credit crunch,” then it will affect the average person, said Joel Naroff, chief economist for Cherry Hill-based Commerce Bank. That would mean people won’t be able to get loans to buy homes or cars or start businesses, which would hurt an economy whose growth is slowing.

Here are some questions consumers might have:

QUESTION: What action did the Federal Reserve take this week?

ANSWER: The Fed put $38 billion into credit markets to make cash more available to be borrowed. Its benchmark federal funds rate, which influences consumer and business loans, is set by market forces and had risen to 6% Friday morning. That was above the 5.25% target the Fed set Tuesday. Friday’s action brought the funds rate back to that target level.

The $38 billion cash infusion from the Fed was the largest since the days following the Sept. 11, 2001, terror attacks.

Q: Will it be more difficult to find a mortgage?

A: Those with a poor credit rating who have no choice but to get a subprime mortgage will have difficulty finding one — and if they do, it will be expensive, experts said. Those with good credit shouldn’t have problems, Naroff said.

Borrowers seeking certain types of mortgages may see higher-than-expected rates, said Holden Lewis, senior reporter at Florida-based Bankrate.com, which provides rate quotes for bank products. Such loans include so-called jumbo mortgages — those that exceed $417,000. Rates for these loans have risen to 7.35% for a 30-year fixed-rate loan from 7.03% two weeks ago, Lewis said.

Holders of mortgages with an adjustable rate that changes month to month may also see a hike, he said.

Scott Hoyt, director of consumer economics at West Chester, Pa.-based Moody’s Economy.com, said adjustable-rate mortgage holders could benefit from a rate reduction if the Fed cuts interest rates to put more money in the system.

Q: Will the rate change on my credit card debt?

A: Hoyt said credit-card rates are generally set by the lending institution, which makes them more likely to move than rates that are tied to benchmarks such as the prime rate.
“If you borrow money off of the credit card and you have got a risky profile, the credit-card companies may do something,” such as raising the rate, Naroff said.

Q: How will it affect the chance of getting a car loan?

A: “Each financial institution looks at these things differently,” said Naroff. “If you have a financial institution that took a lot of losses, that financial institution may not be willing to lend money to certain borrowers, because they are not good credit. Or they may raise the rates.”

Hoyt said that although car-loan rates are set by the lender, such loans are often funded by the big car makers that could be reluctant to raise rates because it might hurt car sales.

Q: What will be the impact on my stock portfolio or 401(k) retirement plan?

A: The Standard & Poor’s 500 Index has fallen 6.6% since reaching its 2007 high on July 17 as the sub-prime crisis spread. Yet the stock-market benchmark is still up 2.5% for the year and the widely followed Dow Jones industrial average has gained 6.2%. However, most analysts predict more volatility in the weeks to come and economists don’t forecast the housing market to begin to recover until at least next year.

Copyright © 2007, The Record, Hackensack, N.J.
Distributed by McClatchy-Tribune Information Services.

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