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Fed Consensus Goes AWOL As Monetary Policy Reinforcements Are Ordered

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(Source: Federal Reserve, caption by the Author)

The Fed has tried to downplay expectations for the November FOMC meeting, as being too early for any action to be taken under its new monetary policy framework. Unfortunately for the Fed, economic and political events are conspiring to force the FOMC’s hand. This could not have come at a worse time for the Fed, as there are signals that all its members are not on the same page when it comes to interpreting how the new monetary policy framework should be applied.

The recently released minutes of the last FOMC meeting revealed that opinion is widely dispersed on what exactly to do, although there is consensus to let inflation overshoot target and employment to be the best that it can be under the circumstances. This dispersion suggests that the Fed hasn’t quite come to grips with how to execute its new monetary policy framework.

Whilst the Fed fumbles around, for the right process and procedure, to finesse its new monetary policy framework, the US economy is showing signs of decelerating. A further headwind is being created by political uncertainty and the specific antics involved in the Presidential election campaign. This political headwind has also become economic as talks over a new fiscal stimulus have broken down.

The Fed’s time and space to get to grips with its new monetary policy framework are, thus, compressed and challenged respectively. Usually, these hurdles end in a volatile market event that then forces the Fed to react, rather than to act with foresight and prescience. This modus operandi seems to be happening again. The November FOMC meeting is, thus, becoming more significant than the Fed would like it to be in an election year. The FOMC would have liked to sit out the election, but events may conspire to force its hand against such better judgment.

(Source: Federal Reserve Board)

The latest Fed study of US Family Finances, from 2016 to 2019, showed that broadly measured, income and wealth disparities were narrowing before the COVID-19 pandemic struck.

(Source: Federal Reserve Board, caption Mathew 22:21)

Whatever may be said, about his current behavior and performance, President Trump can and surely will take credit for this pre-COVID narrowing of wealth disparities. The Democrats will claim that they are a trailing moving average from the Obama era. Since then, the disparities have widened. This widening is not just driven by the health impact of the COVID-19virus. It is also driven by the Fed’s own monetary policy response. The Fed is both a part of the problem and the solution.

(Source: the Author)

The Fed is clearly aware of its specific role in the widening of divisions in society and is keen to adopt a make-up strategy solution in line with the other make-up strategies in its new monetary policy framework. This remedial solution has been termed the Inclusivity Mandate by this author.

(Source: Federal Reserve Board, caption by the Author)

This author has characterized the US Economy as a “tale of two cities”, that are inhabited by the asset-rich and the asset-poor. The Fed’s response to the COVID-19 pandemic has been generally helpful to the asset-rich but has not really touched the asset-poor.

(Source: Reuters)

Evidently, Cleveland Fed president Loretta Mester also believes in this “tale of two cities”, since she has used the same analogy in her recent commentary. Her nuanced guidance suggests that the Fed will be more focused on the asset-poor going forward.

(Source: Atlanta Fed, caption by the Author)

A recent study of the labor market, from the Atlanta Fed, suggests that the employment situation is complex and far away from healing. The report also finds a “tale of two cities”, in essence. Temporary unemployment was hit the hardest, by the pandemic, but is recovering swiftly; even though it is a long-way off pre-pandemic level. Temporary layoff unemployment rose in the order of ten times that of the GFC experience. By contrast, permanent layoff unemployment did not get hit as hard, but neither is it recovering. Indeed, permanent layoff employment continues to deteriorate and is now about halfway back to the GFC peak.

The weak contractual safety in temporary work is clearly visible in the data. These workers didn’t get furloughed, they just got laid off the first because it was easy to do so for their employers. Temporary workers were not touched by the emergency support programs from the Fed. The strong recovery in temporary work may also be a symptom of the fact that it is cheaper to employ and easier to fire if things don’t play out well. The Gig Economy is clearly making quantum-leap progress in the economic recovery. The growth of the Gig Economy is a mixed blessing, that is better for the employer than the employee.

The weak contractual safety in temporary work is clearly visible in the data. These workers didn’t get furloughed, they just got laid off the first because it was easy to do so for their employers. Temporary workers were not touched by the emergency support programs from the Fed. The strong recovery in temporary work may also be a symptom of the fact that it is cheaper to employ and easier to fire if things don’t play out well. The Gig Economy is clearly making quantum-leap progress in the economic recovery. The growth of the Gig Economy is a mixed blessing, that is better for the employer than the employee.

The Fed’s pretensions, to be aiming for maximum permanent employment, could be in place for a decade.

It remains to be seen if the Gig Economy style improvement, in maximum temporary employment, can be achieved at the current pace.

The Fed cannot be happy with the ill-health of the permanent layoff unemployment data. Even if the Gig Economy gets temporary layoff employment back, to pre-pandemic levels, this will not be a cause for celebration; nor will it be a likely cause for the normalization of monetary by the Fed.

America’s labor market is inextricably broken and the returns to labor are under further erosion. This bodes ill for consumption. It also shows why the Fed is so keen to get the Federal Government to throw some more fiscal stimulus at the problem.

(Source: Boston Fed, caption by the Clash)

The temporary layoff workers are the basis of the asset-poor. They will also be joined by those who are getting permanently laid off on the rising trendline. To make things worse, since these folks are a bad credit risk, they are also punished by the credit creation process according to the Boston Fed.

The asset-poor is thus denied leverage and the chance to get out of the hole. The market has failed them and politicians, on both sides of the House, have abused them in order to get elected. The Fed now feels that it is time that they got a break before the US polity is divided further into something that can never be made whole again. This asset-poor cohort, who make up the growing contingent of the weak pricing power of labor, are the intended recipients of support under the Fed’s Inclusivity Mandate.

To frame the issue in terms of behavioral economics, the New York Fed has also found that, whilst both groups over-estimate their ability to avoid the COVID-19 virus, the asset-rich are over-confident relative to the asset-poor. Thus, whilst it is believed by both groups that the virus is someone else’s problem, the asset-poor do not believe this to be the case as strongly as the asset-rich. The real-life experience of the virus seems to have modified confidence. The virus has had a diverse impact on physical health, and the perception of physical health that is determined from the position of economic status.

This author believes that the focus on the asset-poor will come from the Fed’s positioning of the Community Reinvestment Act (CRA) as an unconventional monetary policy tool for its semi-official Inclusivity Mandate. This mandate was defined by Chairman Powell, in the Fed’s new monetary policy framework, as a commitment to “Inclusive” maximum employment.

The Fed’s focus on inclusivity is initially appearing as an abandonment of the asset-rich. This appearance has come as a great shock to Mr. Market since the Fed has fluffed its guidance in communicating this new emphasis. This garbled message, from the Fed, is in part due to its unwillingness to admit that it is part of the problem. Consequently, a risk-off sentiment from the asset-rich is threatening to become an economic headwind, that will also negatively impact the asset-poor, since it is being interpreted as a premature normalization of monetary policy per see.

(Source: bertrandrussellquotes)

The Fed may find that going forward, it will have to conflate the fortunes of the asset-poor and asset-rich more closely. Consequently, economic inequality will continue to widen. This is why the Fed Chairman is so insistent that a fiscal policy aimed at inequality is so critical. Unfortunately, for the Fed, the US presidential election is polarizing the debate between the asset-rich and asset-poor, which is negatively feeding back into the Fed’s ability to exclusively follow its Inclusivity Mandate.

Simply put, the Fed has too many, sometimes, conflicting missions. The US central bank is, thus, set-up for mediocre performance in achieving all its objectives. The new monetary policy framework is, therefore, inherently flawed from its inception. Elected policymakers’ failure to be inclusive, at the national level, just makes the situation worse. This is the curse of democracy in its present form. COVID-19 has simply put this dialectic into much sharper relief. As Churchill noted, however, this system is viewed as better than the alternatives; at least by some of those who make the rules and some of those who vote!

(Source: Gallup)

It should be noted that Churchill also said that Americans will always do the right thing after exhausting all the alternatives. The Fed and the American people, therefore, have to trust the democratic process and their Constitution, to deliver in the long run, maybe ultimately via the Supreme Court. But, as Keynes observed, in the long run, we are all dead anyway!

The last report discussed the growing disquiet amongst some Fed officials about the perceptions that it was stepping back from its commitment to provide further monetary policy stimulus to push inflation and employment to their targets. Boston Fed president Eric Rosengren was particularly concerned to correct this misconception. His concern has strengthened. In recent enhanced forward guidance, he admitted that “I’m (Rosengren) very worried that we’re pretty far away from what we think is maximum employment and I think there are going to be significant headwinds to getting there quickly.”

St. Louis Fed president James Bullard continues to be a thorn in the side of Chairman Powell and those others concerned about the growing perceptions that the Fed is stepping back. To be fair, Bullard has toned it down a little from his initial outburst that the economy may not need a further fiscal stimulus. Now he opines that ceteris paribus, GDP could return to 2019 levels quickly. Bullard resolutely continues to be a communication headache for Chairman Powell. His latest guidance continues to question whether another fiscal stimulus is needed this year.

(Source: the Author)

After Fed Governor Lael Brainard’s earlier signal, New York Fed president John Williams has recently re-confirmed that the Fed will pursue its Inclusivity Mandate, via the Community Reinvestment Act (CRA), whilst also re-affirming his commitment to the Black Lives Matter cause.

(Source and caption by the Author)

The last report discussed the general shocker of collective Fed guidance, post-recent FOMC meeting, specifically the howlers emitted by Chicago Fed president Charles Evans. So poor was Evans’ communication, that he felt or was physically compelled to redact it. His redaction was even more comical than his initial boo-boo. Apparently, when he first spoke, he thought that he was reading verbatim from the last FOMC statement, rather than any signal that the Fed would start normalizing monetary policy prematurely as initially understood. This answer is just not plausible, which is making Evans’ tenure on the FOMC untenable without some serious remedial guidance schooling. Evans is still in recovery mode, hastily trying to dovetail his own commentary with that of the new monetary policy framework’s overshooting bias themes. Apparently, now, Evans is “in it to win it”! In this monetary policy contortion, he confidently expects inflation to hit 2% and will then allow it to overshoot as far as 2.5%.

(Source and caption by the Author)

This Evans mess only serves to underline the observation that Chairman Powell should have changed the communication framework in addition to the monetary policy framework since extended forward guidance is an unconventional monetary policy tool after all. It also suggests that, as this author reasons, the Fed may still not yet understand how to translate the new monetary policy framework into guidance and words. Vae Mr. Market! Thus, the Fed and the next administration may have to overcompensate with monetary and fiscal policy vade mecum.

Although clearer than Evans, Philadelphia Fed president Patrick T. Harker’s guidance is riddled with plot-holes relating to assumptions and conditions. He remains cautiously optimistic. His optimism, however, assumes strict observance of COVID-19 healthcare protocols, a new vaccine by the spring, and also a fiscal stimulus well before then.

Somewhere, in the middle of the guidance spectrum, is to be found Philadelphia Fed president Patrick T. Harker. In this broad middle ground, Harker is able to support the Inclusivity Mandate, not just on moral grounds, but also because it boosts economic activity.

New York Fed president John Williams’s recent guidance was almost so vague that it almost had no practical value, other than to confirm that the Fed is committed to “purposefully” letting inflation overshoot “for some time”. To be fair, he did put a figure of three years on the time taken to reach full recovery that provided an indication as to how long “for some time” maybe. To give him the benefit of the doubt, he probably does not want to lock the Fed into any pre-commitments at this stage, which is fair enough. This view scans with Robert Kaplan’s reprise of his reason for dissenting at the last FOMC meeting.

For those who missed his previous explanation, Kaplan recently repeated that he wishes to give his colleagues some flexibility in the future; by allowing scope for a rate increase into the lexicon of guidance. Kaplan also showed that he is a good team player, by affirming his commitment to the Inclusivity Mandate in support of those who have been left behind by the Fed’s actions to date.

In an attempt to draw a line under the matter, Kaplan has changed the debate. He believes that Mr. Market should question his own faculties rather than the quality of Fed guidance. Apparently, the Fed has been very clear about where interest rates will be over the medium-term. Mr. Market should focus on this clear signal rather than waste his energies on second-guessing what he thought that he might have also heard.

At the other end of the dissenting guidance spectrum, Minneapolis Fed president Neel Kashkari is brandishing a “double-edged sword”. He foresees a “grinding recovery”, that is in need of further fiscal stimulus. His “double-edged sword” is derived from the fact that the healthcare protocols, which have been relaxed to boost the economic recovery, will deliver a blowback in the form of a pandemic spike. Kashkari, skillfully, used the weaker points in the latest Employment Situation report to underline his case and to loose the fateful lightning from his terrible “double-edged sword”. His truth and guidance are marching on!

To compound the Fed’s guidance misery, there is now evidence that its Main Street Lending Program (MLP) is not working either. The latest Senior Loan Officers Survey found that approximately half of the group had not used the MLP. Furthermore, the bankers claim that the program has not been utilized because its terms and conditions, set by the Fed, are too restrictive. This clearly explains while most Fed speakers (sans-Bullard) are crying out for more fiscal stimulus. Their cries will also, hopefully, distract observers from observing that the MLP has failed. Such an observation would not reflect well on the program’s administrator Boston Fed Governor Eric Rosengren. It is becoming clear that the program should be scrapped in its current form and replaced with something more impactful. Unfortunately, impactful means riskier lending. Only a central bank or Federal agency can take this increased risk.

Kansas City Fed president Esther George anticipated the bad news on the MLP. She presciently warned that the banking sector is still at risk from further poor loan performance. In such a weak state, it is no surprise that senior loan officers have not embraced the MLP wholeheartedly.

The banking sector which, in effect, is a stakeholder in the Fed is increasingly becoming an obstacle to monetary policy for the US central bank. The Fed’s restrictive terms for the MLP are in essence an attempt to preserve the stability of the banking sector so that it can continue to be a transmission mechanism for monetary policy. In this instance, the banks won’t lend and actually blame the Fed’s restrictive terms for not lending. Allegedly, the Fed is not trying to protect them but to put them (and the US Economy) out of business!

(Source: Cleveland Fed, caption by the Author)

A similar banking system obstacle can be found in the case of negative interest rates. The last report noted that, by many Fed rules of thumb, negative interest rates should have happened in America by now.

(Source: San Francisco Fed, caption by the Author)

A recent report by the San Francisco Fed sheds some light on why they have not seen NIRP. The researchers conclude that the compression of lending margins, by failure to pass on negative interest rates, undermines the banks’ ability to create credit and weakens their operations. If the Fed has not attempted negative interest rate policy, this is in part due to the power of the banking sector within the ownership and governance structure of the central bank. The banks don’t want NIRP and will do anything that they can to suppress it.

(Source: San Francisco Fed, caption by the Author)

The San Francisco Fed’s first report was supported with a more detailed technical exposition on the transition mechanism and the impacts on it from negative interest rate policy by central banks.

Negative interest rates are, clearly, a conundrum that the Fed and the US commercial banks have not yet come to terms with. Nor does it seem that they have any intention of positively coming to terms with negative interest rates any time in the foreseeable future. Clearly, also, the San Francisco Fed is interested in the matter and (clearly) its concern is a signal that the Fed and the banks too are concerned.

It is becoming clear that the banks want the Fed to continue its current policies, which favor the asset-rich and hence the banks’ loan portfolios. The banks are one of the biggest obstacles to the Fed’s Inclusivity Mandate by their aversion to the MLP. They have increased the obstacle in size, by refusing to even practically test if NIRP is the headwind that they say it is. They may, thus, be one of the biggest obstacles to the monetary policy transmission mechanism.

(Source: Federal Reserve Board, caption by the Author)

The Fed is toughening its stance, with the banks, however. Most recently, the cap on bank dividend payments has been extended to year-end.

Firstly, this dividend cap extension stops the banks from using the Fed’s emergency liquidity to enrich their shareholders rather than transmitting it to the real economy. This may nudge the banks into reconsidering their attitude towards the MLP, but this is unlikely.

Secondly, the Fed has hinted to the banks that low interest rate pressure, perhaps even negative interest rate pressure despite what the San Francisco Fed says, is here to stay for much longer. US banks are, thus, being nudged to change their cozy parochial business models and cozy relationship with the Fed, in order to adjust to the new economic normal. The BOJ did the same thing after it had unleashed NIRP. The Fed is giving the banks a heads up and support in preparing for NIRP. The entitled banks are pushing back.

Bowman’s commentary bigged-up the Community Banking sector for doing the heavy lifting in the, so far, unspectacular performance of the MLP. Fed Governor Brainard then followed up on Bowman, with her own explanation of how the Fed is engineering a greater focus on the Community Reinvestment Act (CRA) and its delivery, via the community banks, to execute its Inclusivity Mandate. It is, therefore, logical to conclude that any further modifications and expansion of the MLP will be aimed at the Community Banks. In fact, it may be reasonable to say that the Community Banks will be the main mechanism for the MLP and Inclusivity Mandate. It would be ironic, but not entirely surprising if they were also chosen and supported in transmitting NIRP in the future.

(Source: Atlanta Fed, caption by the Author)

As expectations of a 25 basis point rate cut, by mid- December, fall towards a steady lower probability of a rate hike by the same amount, one should not, however, exclusively blame the commercial banks for obstructing NIRP.

The Fed’s own inflation mandated inertial guidance is, perhaps, the greatest obstruction to NIRP. It is, also, fair to say that this obstruction is reasonably based on empirical evidence. A recent report from the Cleveland Fed sheds some light on this subject matter. It also helps, in some way, to explain why the Cleveland Fed president Loretta Mester has been a historic monetary policy Hawk who has been forced to embrace the seemingly bizarre Dickensian guidance, about a “tale of two cities”, of late. It all comes down to how one measures inflation, it transpires.

(Source: Cleveland Fed, caption by the Author)

The Fed’s own inflation measure of the PCE has a headline and a median sub-measure. According to the report, the Headline PCE is volatile and overly influenced by energy and electronics goods prices. Currently, in the pandemic, these components have pushed the Headline PCE well below both the Median PCE and the Fed’s average inflation target.

Consequently, the Headline PCE is saying NIRP and the Median PCE is saying prepare to normalize. Who is right?

For the record, the Median PCE has been a more accurate historic measure of inflation than Headline PCE. This track record was, however, before COVID-19. It is not clear to anybody how much COVID-19 has changed things.

In the meantime, Fed judgment and guidance must span the divergent gap, between Headline and Median PCE, and try to remain credible at the same time. Failure to credibly span this gap can be reasonably expected. It does not mean that the Fed is doing anything wrong. It simply means that the Fed doesn’t really have a firm handle on where inflation is headed. Under such conditions, approving a new monetary policy framework, that has an innate inflation overshooting bias, is a risky thing to do. Faced with the COVID-19 reality, the Fed has been forced to throw a great deal of caution to the wind. Having, thus, gambled it is reasonable to expect the Fed to be circumspect about doubling down on the wager. It is, therefore, now clear why Robert Kaplan dissented and tried to give the FOMC some optionality to normalize swiftly.

All this being said, the Fed’s pandemic response has provided a great amount of liquidity upon which inflation can converge towards and overshoot its target. It is, therefore, no surprise that the Fed wishes to drag its heels and leave Congress to do the heavy lifting on economic stimulus. It will be no surprise, either, to see the Fed refraining from easing further and increasing the pressure for fiscal stimulus going forward. A tantalizing (and destructive) prospect of a game of bluff is, thus, being set-up between the Fed and Congress.

Under these conditions, it is also fair to say that bonds are very richly priced unless one believes in a total COVID-19 related disaster that calls for NIRP. Low bond yields are currently being capped by Fed buying. Any relaxation, of the pace of Fed-buying, would cause a sharp spike in yields. Barbell bond investing strategies, which involve TIPS, may become the best way to play out this divergence, between Headline and Median PCE, until the real path of inflation becomes clearer.

(Source: Federal Reserve Board, Morse Code signal by the Author)

Chairman Powell did his level best to avoid committing to a new round of bond-buying with his eloquent request for additional fiscal stimulus. This plaintive speech was consistent, with the overshooting monetary policy framework theme, that the threat of over-doing it with a fiscal stimulus is well worth the risk against doing nothing. Philadelphia Fed president Patrick T. Harker then underlined the request for the fiscal cavalry to come to the rescue. They needn’t have bothered after the Lazarus halo-effect, from the recuperating POTUS, shredded their guidance.

(Source: forexlive, caption by the Author)

COVID-19 Positive POTUS recalcitrantly ruled out any new fiscal stimulus until he wins the election. Even if he does not win, this means that there will be no new fiscal stimulus until a new administration is sworn in. All the recent Fed speakers’ baseline scenarios and guidance, which assume a fiscal stimulus, are, therefore, meaningless. The balance of risks is, thus, tilted to the downside and the pressure is on the Fed to gamble even further against its current better judgment. If the Fed gambles, and eases further, then the next fiscal stimulus is potentially the event that will stimulate the inflation rebound that the Fed says it wants to let overshoot but, in practice, is totally scared of.

Loretta Mester’s initial reaction to the fiscal stimulus news, clearly, showed that the Fed does not want to be drawn into easing again without the markets and/or the economy experiencing some pain. Her initial take is that the recovery is still on, but it will take longer without a fiscal stimulus. This would all have been well and good had not Chairman Powell been so plaintive about the need for stimulus and so brazen about being tolerant of economic overheating risks.

Since Chairman Powell nailed his colors to the wall, by saying that the risk of overheating is worth taking, he is, therefore, obliged to ease again; or risk looking like a hypocrite and thereby undermining the new monetary policy framework from inception.

Dissenting Minneapolis Fed president Neel Kashkari smells blood in the water and is circling for the kill at the November FOMC meeting. He sees “enormous consequences if we (the Fed) just let things go, and the downturn will end up being much, much worse.” The failure to enact a fiscal stimulus is his baseline, from which to wreak havoc at the meeting. Just to add to the pressure, on Chairman Powell, Kashkari has also opined that further monetary and fiscal policy stimulus, under current circumstances, does not add up to an increase in moral hazard risk per se. Bold words indeed.

New York Fed president John Williams can foresee trouble at the November FOMC meeting and is trying to provide a contingency with some remedial guidance. Rather than get tied down on method, indicators, and targets Williams has created the notional concept of a “guardrail” to define the nebulous concept of inflation target overshooting. He hopes that this is acceptable to his colleagues and Mr. Market so that the Fed retains the luxury and the option, to shoot from the hip, whilst it wrestles with its new monetary policy framework doctrine. Hope has never been a monetary policy tool. In the current environment, it is unlikely that Williams’s “guardrail” will hold against a strong market and/or economic impact.

Chicago Fed president Charles Evans is already procrastinating again; his default-setting when he wishes to put off the inevitable. For now, he believes that the FOMC can stand pat and hopes that this will still be the case come the November FOMC meeting. His procrastination signals that he is more worried that this will not be the case.

Robert Kaplan and Eric Rosengren have appeared to blink, although Kaplan is still far from happy about being arm-wrestled into easing again.

Kaplan stuttered that the Fed is capable of doing more, but that fiscal policy would deliver more bang for the buck. He also intimated that he will be “skeptical” about doing more QE, and hence that he will dissent if and when this decision is taken at the next FOMC meeting. His FOMC dissent may also be qualified with his insistence that language incorporating a taper, when the economic situation allows, accompanies further easing.

Eric Rosengren opined that it will be “tragic” if another fiscal stimulus is not agreed upon. In addition, Rosengren noted that most firms went into the pandemic with greater leverage which is now acting as a headwind. They both were resigned to the fate that another fiscal stimulus may have to wait until the new administration is sworn-in. The inference is that they would agree to a monetary policy stop-gap expansion to fill the void until the fiscal stimulus comes.

The November FOMC meeting is a long way away. Getting there is going to be volatile and tortuous.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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Red-hot market: Tips for first-time homebuyers 

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With Long Island’s housing market sizzling hot, the process of buying a new home can seem like a daunting one. It doesn’t have to be.

To help first-time homebuyers chart the waters of buying in this market, Newsday Live hosted a question-and-answer session Tuesday with local housing experts as part of its web series “Hot Tips for a Hot Market.”

The virtual session, moderated by Newsday anchor Faith Jesse and residential real estate reporter Maura McDermott, included Tricia Gleaton, vice president of the Homeownership Center at the Community Development Corp. of Long Island, and Quentin Hardy, branch leader with Movement Mortgage in Huntington.

Responses have been edited for length and clarity.

Where should buyers get started? And what first steps should they take?

Gleaton: For somebody who’s looking to buy a home for the first time, a great place to start is by seeking out homebuyer education and counseling. A lot of people aren’t aware they exist. And part of that process will be to help establish a budget, understand what’s affordable and what’s going to be [financially] comfortable long term … and then getting access to loan programs, down payment assistance and closing costs, and grants that are out there that may be leveraged in the home purchase.

Many first-time homebuyers don’t have the standard 20% down payment. What tip can you give them on saving up? And what options do buyers who don’t have 20% to buy their first home have?

Hardy: There are lots of options. I think the phrase “the standard 20%,” that’s not the standard. It’s sort of a myth and a belief that’s been propagated but I bought my first home back in the late 1990s with 3% down. Fannie Mae, Freddie Mac, FHA … there are lots of 3%, 3.5% down payment programs so you do not need 20% as a first-time homebuyer. There are lots of low down payment options buyers should look into. I know for my first home, we had to sacrifice. I lived at my parents’ house as an adult, married with a child because that’s what we needed to do to save up to buy our first home.

Gleaton: Many lenders offer down payment and closing cost assistance as well as state [and municipal] grants. There are programs available where someone can rent with the plan that they’re moving forward with the purchase of the home. And there are unique programs. One of the programs CDC of Long Island offers may help [people who are] Housing Choice Voucher holders, commonly known as Section 8.

A lot of people have blemishes on their credit report. So what can people do if they have bad credit, but they still want to get a home?

Hardy: I think where we have to start is with that word bad. How bad is bad? You can have credit that’s so poor that you cannot get a home loan. But there are banks that will do loans at 580. There are situations where you can get loans as a first-time homebuyer even if you have bad credit. It can be low enough that you’ve got to work on the credit first, though it would probably be a great start to have a conversation with a professional about how bad bad is.

The market is hot right now. Should buyers try to wait it out in hopes that it’ll cool down?

Gleaton: It is a very competitive market right now but that hasn’t necessarily dampened people’s desires to become first-time homeowners. One of the things that we tell people is you don’t have to rush … it doesn’t necessarily mean you don’t want to continue your search. Continue to save, continue to work toward your purchase, but be patient recognizing that you want to make an informed decision that’s not emotional. Be careful with bidding wars. Take your time to do your search and research in a methodical way. Be patient. The right home is out there for you.

Hardy: The general rule is it’s not the timing of the market, it’s time in the market … so that now is a good time to buy.

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Car Leasing Guide: Everything You Need to Know

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Car Leasing Guide

At first blush, car leasing seems like a grand idea. After all, you can get more car for the same monthly financing payment. Who wouldn’t want that? Well, there’s a lot more to weigh between financing and leasing than simply getting more car for your buck. Although, that is the primary reason people lease.

Numbered among the other reasons people lease is the thrill of that new car smell. Some folks simply like the idea of driving a new car every two or three years. Leasing also streamlines writing off your vehicle as a business expense at tax time.

Another reason to lease is that sometimes the carmakers offer really sweet leasing deals that aren’t available to those financing a car purchase. Repeat leasers also always have a car that’s usually under a factory warranty. And finally, when the lease expires, you don’t have to negotiate a trade-in value or go through the selling process. You just hand over the keys and walk away. Easy peasy, right? Well, usually. Read on.

What is a Car Lease?

A car lease is basically a long-term rental for a contracted number of months. Unlike financing a car purchase based on you eventually owning the car, leasing is like a long-term rental. You are still locked into the deal for a contracted number of months and a monthly payment.

However, instead of paying down a loan and building equity, you are paying for the car’s estimated lost value (depreciation) during the term (length) of the lease. You are paying for that and the interest on the money borrowed to underwrite the lease.

What Do You Need to Know Before Leasing?

Arguably the key concern when considering car leasing is, on average, how many miles you drive yearly. According to the United States Department of Transportation, most Americans drive a total of 13,476 miles per year.

Signing a lease binds you contractually not to exceed an established mileage limit. That limit, or mileage cap, is averaged out over the number of years in the agreement.

Depending on the lease, agreements range from 10,000 miles per year to as many as 15,000 miles per year. Whatever the limit might be, the leasing company will penalize you for every mile above the limit. Generally, that penalty can be between $0.12 to $0.30 per excess mile. At $0.30, that works out to $300 for every 1,000 miles over the limit. It can add up.

Can I Negotiate the Price of a Leased Car?

Yes. As with a financing deal, you can save yourself money by negotiating down the car’s selling price you are going to lease.

What is the Money Factor in Leasing?

When you finance a car, you must also pay for the money you are borrowing. What you pay is called interest, and it’s displayed as a percentage (2.5%, 3.0%, and so forth). You need to know the rate of interest you will be paying. The higher the interest rate, the higher your monthly payment.

When you lease, you must also pay for the money the lessor used to buy the car. In leasing, however, the interest is called the money factor. It’s calculated and displayed differently (0.0010, 0.0023, and so forth). How in the world do you know what the interest rate is on a lease, right?

To translate the money factor into a form more easily understood, just multiply it by 2,400. So, 0.0023 x 2,400 = 5.5%. We know: Why don’t they just say that?

Who is Responsible for Maintaining a Leased Car?

The leasing company expects you to maintain your leased car carefully. That means following the maintenance schedule outlined in the owner’s manual. The good news is, many new vehicles come with some sort of free maintenance plan.

At the end of the leasing period, an agent of the leasing company will inspect the vehicle for any damage beyond “normal” wear and tear. Determining what is normal is entirely up to the inspector. If the inspector decides any damage is beyond normal wear and tear, you will be charged for it.

Who is Responsible for Insuring a Leased Car?

You are responsible for insuring your leased car. The leasing company dictates the amount of coverage you must have for the vehicle. Determine what those amounts will be and contact your automobile insurance agent to establish the annual premium before you lease.

What if I Want Out of My Lease Early?

It bears repeating: A car lease is a binding contract. The leasing company sets the monthly payments based on the length of the lease established in the agreement. If for some reason — any reason — you want or need to bail on the lease early, there will be a penalty for doing so.

At worst, that penalty may require a balloon payment to cover the remaining outstanding payments. You can’t just return the leased car or sell it to pay off the leasing company. It’s not your car, and you have no equity in it.

Market conditions these days make it possible to negotiate with a dealership if you’re planning to buy a car. Or, because the used car supply is tight, dealerships may be more willing to make a deal to get you out of your lease early.

Brokers with auto lease transfer companies like swapalease.com can also attempt to connect you with a deal that lets you sign over the lease to someone else.

Before you make any choices, weigh all your options to determine the best option for you.

How Does My Credit Affect Car Leasing?

Credit score information for leasing

As with financing a car purchase, a leasing company will use your credit score and history to determine whether or not it will lease to you. Roughly 83% of new car leasing during the first three months of 2021 was to borrowers with a credit score above 660. This is according to the national credit bureau Experian. It also found that the average credit score for leasing during that period was 734.

If your credit score is 501 to 660, you may be able to find a lender willing to lease to you, but expect to put down a hefty down payment. Also, you can expect to be tagged with a higher-than-average interest rate.

It has always been true that leasing generally requires better credit than financing. When leasing, you have little or no skin in the game. All you stand to lose if you stop making your lease payments is whatever down payment you made.

You don’t now and never will have any equity in a leased vehicle. You are really renting it, remember? Leasing companies know you have little to lose. Consequently, they tend to be pickier when evaluating lessees rather than buyers.

RELATED STORY: Can I Buy a Car with Poor Credit History?

Car Leasing vs. Buying

Whether you lease or buy and finance your next car, you will be obligated to make a monthly payment. In most cases, both will also require some amount of money upfront. When financing, it’s usually a down payment of some sort.

With leasing, you may have to put up a security deposit, the first month’s lease payment, a fee for arranging the lease (acquisition fee), a down payment, or some combination of those. In either case, there are also car title and registration fees.

Pros of Leasing

Because you are only paying for the estimated depreciation while driving the car and not the entire purchase price, monthly leasing payments tend to be lower than financing payments. It simply means your money will go farther leasing a car than financing one. A lower monthly payment is the top reason people give for leasing. It isn’t the best reason, but it is the most common.

Another perk of leasing is the freedom to drive a new car every two or three years with no strings attached. A side benefit of having a new car every few years is, you probably will always have a vehicle protected by the factory new car warranty. There may even be a free maintenance warranty for a portion, if not all, of the lease. And, every couple of years, you can have a car with the most up-to-date technological advances.

At lease end, you don’t need to worry about the hassle of selling the car or negotiating its value as a trade-in. You drop the keys on the lessor’s desk and walk away.

Leasing is better geared to writing off the cost of driving on your taxes if you can deduct business expenses.

Here’s some excellent news: If you still like the car at the end of the lease, you can buy it. Because the leasing company estimated what the car would be worth at the end of the lease (the residual value or residual), they may have guessed wrong.

If they underestimated the car’s worth at the end of the lease, you could cash in by buying that car for less than the current market value. It’s the smart thing to do in a tight market when supply struggles to meet demand.

RELATED STORY: How to Profit from an Off-lease Car

Cons of Leasing

Yes, the idea of driving a new car every few years with the benefit of always being under warranty is tempting, as is that lower monthly payment. Sadly, though, it means you will never build any equity. What you pay for with a lease is the depreciation. A car will lose roughly 35% to 40% of its value in the first three years. At the end of the lease, you won’t have a thing to show for those two or three years of payments.

Typically consumers sign a closed-end lease. There are also open-end leases. The difference is discussed in What Are the Types of Leases? in the section below. Closed-end is the type of lease covered here.

Driving a leased car is like counting calories to lose weight — every mile driven counts. Every lease comes with a mileage limit. It may average out as low as 10,000 miles per year, although 12,000 miles is more likely. You may be able to find a lease with a yearly cap of 15,000 miles. There are even some more expensive high-mileage leases on the market.

You’ll pay more per month but may avoid getting slapped with a mileage penalty at the end of the lease. That penalty is usually about $0.25 per excess mile. If you do a lot of driving, that can really add up.

The leasing company will hold you accountable for anything beyond its definition of normal wear and tear. You will be on the hook for any repairs the lessor deems over and above normal. Suddenly, with the excess mileage fee and damage fee, returning that leased car isn’t the easy-peasy experience expected.

Leasing is also like joining a street gang. Once you’re in, you’re in. Suppose some change in your life creates the need to get out of the lease early? Good luck. You may find yourself faced with owing a balloon payment equal to the outstanding payments on the lease. At the very least, you will have to pay some sort of stiff penalty. There are online companies like swapalease.com, brokering deals between people who want out of a lease and people willing to pick up a lease. But, such brokered deals will cost you, too.

Pros of Buying

The top advantage to buying versus leasing is that the vehicle is yours when the loan is paid off in five or six years. There will be the value you can cash in by selling or trading it in as a down payment on another car. It’s an asset. Of course, you can always decide to drive it until the wheels fall off. No payments for another five years or more is a pretty good perk. Especially when you consider by year four, the repeat lessee is paying for the depreciation on a second new car and still gaining zero equity.

Getting out from under your car loan is much easier than breaking a lease. As long as the lienholder is paid off, you can sell or trade in your car at any time.

Cons of Buying

Particularly if your credit is a bit sketchy, you may want to put down a larger down payment of around 20% if you want better odds of getting approved. That would be $5,000 on a $25,000 car. Leasing would allow you to keep at least some of that up-front cash.

Depending on the length of the loan, depreciation, and the way interest is calculated, you may owe more than the vehicle is worth until the last year or so of the loan. By that time, the car warranty may well have expired, too. Not only do you have to continue making payments on a 5- or 6-year-old car, but you may have to pay for any repairs out of your own pocket.

The Differences of Leasing a Car vs. Buying a Car

You can draw some fairly strong contrasts between leasing and financing. Both have advantages and disadvantages. Short term, a lease will cost less. In the long run, however, two leases will cost more than buying one car. And, at the end of five or six years, the loan will be paid off, and whatever value the car retains will be yours.

Here are some other stark differences.

Leasing

  1. Monthly payments: Leasing payments are almost always lower than financing payments on the same vehicle.
  2. Early Termination: You will pay a hefty fee if you want to end a lease early.
  3. End of term: Although you may owe some penalties, you can just hand the car back to the lessor at the end of the lease.
  4. Mileage: A lease restricts the annual mileage. Exceeding that mileage will cost you big.
  5. After-market: A leased vehicle is not yours to do with as you wish. Any alteration will cost you.
  6. Taxes: Leasing a vehicle allows you to write off the monthly payments as a business expense if you’re eligible.
  7. Warranty: Most leased vehicles come with a warranty that will likely cover your car for the duration of the leasing period, saving you money should something happen to it.

Buying

  1. Monthly payments: For the same vehicle, financing payments will almost always be more than leasing.
  2. Early Termination: You can sell or trade in a financed vehicle at any time, as long as you satisfy the loan balance.
  3. End of term: When the loan is paid off, the car is yours to keep, sell, or trade in.
  4. Mileage: There are no mileage limits with a financed car.
  5. After-market: Financing a car allows you to make it yours. Take care not to void the warranty. Otherwise, customize it to your heart’s content.
  6. Credit: If you have bad credit, you will most likely have to put down a bigger down payment to get approved.

What Are the Types of Leases?

Leases aren’t one size fits all. The leasing concept doesn’t vary, but the contract details do.

What is a Closed-End Lease?

A closed-end lease is the most common form of leasing. Sometimes called a “walk-away” lease, it sets firm terms, allowing the lessee to walk away at the end of the lease. All variables like the length of the lease, monthly payments, and the mileage cap are established in the leasing contract. As long as the contract terms get met, the lessee can just drop off the car at the end of the lease. The lessee also has an option to buy the vehicle at a pre-determined value.

What is an Open-End Lease?

An open-end lease is a bigger gamble for the lessee, who is accepting more of the risk. Typically that lessee is a commercial enterprise or business. The leasing company still sets a residual value and the monthly payments. Luckily, open-ended leases usually have more flexible mileage options than their closed-ended lease counterparts. However, unlike a closed-end lease, it’s the lessee taking the hit if the residual value at the end of the lease is less than the vehicle’s actual market value. The lessee must pay the difference.

What is a Single-Pay Lease?

Also called a one-pay lease, this is a lease in which you pay the entire run of monthly payments upfront. There are two primary reasons for going this route. One, it usually reduces the interest or money factor rate. You wind up paying hundreds less than if you were to pay monthly. Two, if your credit is questionable, a single, up-front payment may motivate a leasing company to take a chance on you.

How Long is a Car Lease?

You may find carmakers offering leasing specials of odd durations, 39 months, for instance. But, generally, leases are for 24 or 36 months. You can, however, find leases out there for longer terms. As with financing, the longer the term of the lease, the lower the monthly payment. That difference, though, may not be much.

What is a Leasing Mileage Cap?

Even when you finance a car, the higher the mileage when you sell it or trade it in, the less it’s worth. The difference with leasing, the lessor factors in a specific number of miles when estimating depreciation. Over the course of a lease, the allowable mileage or mileage cap might average out to 10,000, 12,000, or 15,000 miles per year. Exceeding the mileage cap reduces the car’s value at the end of the lease. This is why a leasing company will charge you a predetermined penalty for each mile over the cap. Be sure you know the per-mile penalty before signing the lease.

Can a Car Lease Be Extended?

Say you haven’t found a replacement vehicle, and you are at the end of your lease. Is there a way out? Yes, most lessors will gladly extend the lease on a month-to-month basis or for a fixed number of months. You will have to continue making the monthly payment. Also, in the case of a multi-month extension, you may have to sign another contract.

What Are the Key Leasing Terms I Need to Know?

We have been using some reader-friendly shorthand in this guide, but here are the formal leasing terms you should understand.

  • Acquisition Fee: This is a fee a lessor charges for setting up the lease. This fee varies greatly and can be as much as $1,000. Ask before signing any lease what fees get included in the acquisition fee. Fees you might see could include destination charges and documentation fees for processing the lease title, license plates, and car registration. It is firm and can’t be negotiated away. However, it can be folded into monthly payments.
  • Allowable Mileage: Also called the “mileage cap,” it is the average number of miles per year you can drive the car. The lessor will penalize you for every mile above that number.
  • Capitalized Cost: This is the agreed-on selling price of the vehicle plus any fees to be included in the monthly payments.
  • Capitalized Cost Reduction: Also called cap reduction, it is any element lowering the capitalized cost. It usually takes the form of a down payment or trade-in allowance.
  • Depreciation: The lost value of the vehicle over the course of the lease is the depreciation.
  • Disposition Charge: This is a charge to clean and dispose of your car at the end of the lease. You may be able to negotiate it away if you buy the car or lease another from the same agency.
  • Drive-Off Fees: Any fees and deposits due to begin the lease. Don’t forget that sales tax will be due for your lease transaction. Ask the lessor what fees are included in the drive-off fees. You may be able to negotiate some of the lessor’s tacked-on fees.
  • Early Termination: Breaking a lease contract before the end of the leasing period. If you want out of your lease early, it will cost you dearly. You may need to come up with a sum of money equal to the remaining payments.
  • Gap Insurance: Some leases automatically include gap insurance in the capitalized cost. If the car is a total loss through theft or collision, your insurance may not cover the entire loss. Gap insurance pays for what your car insurance doesn’t pay.
  • Lessee: The party leasing the car.
  • Lessor: The entity financing the lease. It could be a bank, credit union, or a carmaker’s financial division.
  • Money Factor: In financing, this is called the interest rate, but it looks markedly different. As with financing, though, the higher the money factor, the larger the monthly payment.
  • Payoff Amount: This is what it will cost you to buy the car at the end of the lease. It should be roughly the residual amount minus any security deposit.
  • Term: The length of the lease.

Is it Possible to Lease a Car for One Year?

It is possible to lease a car for one year. But, why would you? A car depreciates as much as 30% by the end of the first year. Because your monthly payment is based on depreciation, that one year will be wildly expensive. You might do better with a long-term rental car. It’s worth checking out. Another idea you could try is a club. These are offered by luxury car club leasing companies and sometimes by manufacturers. The clubs allow members to drive new models for short periods of time. They usually include insurance and don’t require a long-term contract.

Can I Lease a Used Car?

Yes, you can lease a used car. In fact, most dealerships offer leasing incentives on their certified pre-owned (CPO) vehicles. These are gently used, newer model cars with factory warranties and other CPO benefits.

How to Lease Your Car

For the most part, the process of shopping for a leased car is about the same as shopping for a vehicle you plan to buy. Research is the key. Other steps to take include:

  1. Check your credit score. A credit score under 600 will be a very tough sell. When your credit score is low, the down payment is typically larger to get approved. The higher your credit score, the lower the money factor.
  2. Crunch the numbers. Figure out how much cash you can pay upfront. Some deposits and fees must be paid when you sign a lease, and many are not negotiable. The lessor may also demand a down payment.
  3. Determine the average annual mileage you drive. Your lease will have an average annual mileage cap of 10,000 to 15,000 miles. Be realistic about your driving habits. You will pay a penalty for every mile over the cap.

What to Look For in a Vehicle to Lease?

Find a model that retains its value. Some brands of vehicles simply retain more value as they grow older. Brands like Subaru, Lexus, Jeep, and Ram tend to retain much of their value through the years. When you buy a vehicle, value retention is important, but not until you sell it or trade it in. Value retention in a leased vehicle is important because the more value a leased vehicle is expected to retain, the lower the monthly payment.

What Questions to Ask Before Signing a Car Lease?

Here’s a list of questions to consider asking the dealership or other lessor before you leap.

  1. What is the residual value for the car I’m leasing?
  2. Once the lease ends, what is the price I can buy the car for?
  3. What is the money factor? If you don’t want to do the math, ask for it in percentage form.
  4. What is the monthly payment grace period?
  5. What is the delinquent fee for late payment?
  6. Will I be charged any other fees at the end of the lease?
  7. What are the penalties for early lease termination?
  8. What is normal wear and tear?
  9. How much do you charge per extra mile driven?

How Can I Reduce a Monthly Lease Payment?

  • Reduce the capital cost by negotiating a lower vehicle purchase price.
  • Ask for a lower money factor. Particularly if your credit score is over 750, go for a lower rate.
  • Put additional money down or, if there’s a trade-in, negotiate for a higher trade-in value.
  • Shop other dealers for a better deal.

What Are the Negotiating Points in a Lease?

  • The vehicle purchase price is framed as the capital cost.
  • The down payment.
  • The trade-in value.
  • The money factor.
  • The disposition fee.

What Can’t You Negotiate in a Lease?

  • Residual value is generally set in stone. You can give it a try, but don’t expect much.
  • Acquisition fee. This is a charge that lessors rarely budge on.

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