Posts Tagged ‘banks’

Foreclosures Are Dragging Down The Economy

Typically, construction jobs and more specifically, new home construction jobs spur economic growth and herald the end of recessions past. This is not happening today, and for very good reason. A recent Huffington Post article cited that thirty percent of home sales were of foreclosed properties. To put it another way, close to a third of all home sales taking place today involve foreclosures. That’s huge, and until foreclosures stop driving the housing market and until the huge inventory of available homes is reduced, home values will continue to decline and developers will not be inclined to build new housing developments.

The foreclosure crisis is a national emergency and clearly, none of the government programs designed to help families in foreclosure are helping enough people to make a difference. The problem is that all of the programs currently available remain voluntary on the part of the banks and are designed to ensure that the banks continue to profit, even if the underlying loan is so poorly underwritten and so poorly constructed as to be ultimately designed to fail.

Priority number one has got to be to stabilize the housing market, and that means stopping foreclosures. I don’t just mean delaying them, because all that does is kick the can down the road, I mean actually doing something that will stop them and keep families in their homes. To do that, the banks are going to have to lump it and a mass loan modification program needs to be implemented.

This will definitely mean that some banks are going to go under. Some banks are so seriously over-leveraged that it is only through governmental efforts to aid them in concealing the true state of their balance sheets that they remain open and profitable. Yes, profitable. The worst banks (Bank of America, Wells Fargo, Chase) remain open and profitable while drowning in a sea of foreclosures. How is that? Because current efforts to staunch the foreclosure crisis have resulted in massive delays that have allowed the banks to essentially ignore “mark to market” rules and over-report their assets and diminish their liabilities. Let’s face it, a thousand homes for which the value has dropped by hundreds of thousands of dollars are not assets. No, they are  huge liabilities, and the banks get to hide this fact. Banks like this deserve to go under.

Now, we’ve heard the arguments against mass modifications: it will create a moral hazard; it will keep people in homes they shouldn’t have been able to buy anyway, it will reward deadbeats, etc. The time for recriminations and blame has passed. The foreclosure crisis is crippling the economy and is in large part the reason why unemployment remains so high and why growth is stagnating.  So what, if a few people get to keep homes that they shouldn’t have been able to buy. Let’s weigh that against the certainty that the United States is falling into a depression the likes of which has not been seen since the 1930’s.

Elizabeth Warren Predicted The Financial Collapse Back In 2004

 

Elizabeth Warren,  a Harvard Law Professor and the current chairwoman of the Congressional Oversight Committee in charge of overseeing usage of the TARP bailout funds, predicted the financial collapse long before anyone else was talking about it.

In this 2004 interview with Dean Lawrence R. Velvel where she discusses her book, The Two Income Trap,  she reveals the instability that pervades the lives of most middle class Americans and why so many end up in Bankruptcy court. She says that in order to keep up with the expenses, people with median incomes have been forced to borrow and borrow. Why? Because the median income in the United States is increasingly not enough to keep up with the cost of living. She talks about the fixed expenses that families have, such as the mortgage payment, health insurance, and educational expenses as having grown dramatically in the last generation. It is important to understand, here, that, these fixed expenses can’t be cut back.  That’s why they’re called “fixed expenses.”

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Strategic Default Is Only Ok If You’re Rich

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A recent article in the New York Times discussed how the rich are defaulting on their mortgage loans at an increased rate as compared to the rest of the population.  From the article:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

In fact, the delinquency rate on investment homes with mortgages of a million dollars is more than double the rate of homes where the mortgage was less. For the million dollar homes, the rate is 23% as opposed to 10% for less expensive properties.

Yet, Fannie Mae and Freddie Mac, the largest lenders of residential mortgage loans under $500,000, are stepping up the rhetoric against strategic defaulters and taking steps to penalize them. 

Since Fannie Mae and Freddie Mac cannot take loans of greater than $729k, the result is quite obvious: to penalize the working and middle class for making the same smart money moves that rich people do and take for granted all the time.

Recently, the Republicans added an amendment to a bill that would forbid strategic defaulters from getting FHA financed loans, ever. Who gets FHA loans? Not the rich…these are solidly middle and working class financial instruments. 

Despite all of the moralizing about “keeping your word…you signed on the dotted line that you would pay…” and “foreclosures damage the community,” the real motivator for lenders here is fending off damage to the bottom line.  Let’s be clear:  if a high percentage of mortgage holders with loans under $500K were to default, this would really damage the financial health of the  banks.  It has nothing to do with morality or a sense of community and everything to do with profit. If these banks gave a fig about community or morality, they never would have created the incredible mortgage casino that brought us to this point.

ING Direct’s Overdraft Line Of Credit Saves Money

ingdirect_logo

 

Normally, I am pretty hard on banks and the financial services industry in general. However, when I read a story about the Internet bank, ING Direct and its overdraft policies, I had to give kudos where kudos are certainly due. It turns out that ING Direct won’t have to change one thing about how it does business in the wake of the new law effective July 1 of this year requiring banks to specifically get permission via an opt-in request for overdraft protection.

ING Direct has always offered overdraft protection on the basis of opt-in only, and only in the form of a low interest line of credit. To make people aware of the high cost of conventional overdraft protection, ING now offers up its overdraft  calculator.

Using the calculator, overdrawing your account by $100 for a ten day period will cost you $30, which is 20 cents of interest per day.  With ING Direct’s method via an overdraft line of credit, you would be charged 20 cents in total for that same $100 overdraft.

As ING Direct’s CEO, Jim Kelly puts it:

That’s $30 for 10 days equates to an interest rate somewhere north of 1000%. That doesn’t seem right. The way those transactions get stacked up — in terms of clearing checks, debit card transactions — you get three or four of those for a few dollars and end up paying $100 or $200 in fees in a day or a month.

That doesn’t seem like the value is in the hands of the consumer. It seems like all the value is going to go to the bank.

Read the complete story here.

Most Banks Lending Standards Remain Unchanged, Federal Reserve Report Shows

hand with credit card

 

The most recent Federal Reserve  quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices shows that most banks are maintaining the lending standards they have in place currently, while some banks have tightened these standards even further.

Banks tightened lending standards as a response to the economic downturn and the financial crisis that occurred in 2008. Banks appear to be maintaining these standards. Today, banks are requiring a higher minimum credit score  and are in general keeping credit limits lower than in the pre-crisis years.  The full report is available here.

Credit Card Reform In Action

After I made the post about credit card companies charging for paper bills, I happened on this cartoon by Mark Fiore and it is so apt, I had to post it here:  Enjoy:

 

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