Banks are returning to a practice they abandoned after the financial crisis: taking Americans’ credit-card debt, slicing and dicing it, and selling it off as bonds.
Believe it or not, that’s a good thing.
So far this year, banks and other companies that issue credit cards have sold $21 billion in bonds backed by those accounts’ debt, Bloomberg News reported on Aug. 29—up from $4.8 billion in the same period the year prior. Broadly, it’s a bet that consumers have their finances in order and will continue to be able to pay their monthly bills on time.
Bonds thrive when there’s predictability, and the credit-card business has become more stable since the crisis. The number of accounts 30 days past due peaked in March 2009 and again in November 2009, and has been declining ever since. Spenders are reining in their charging habits. Card issuers have cut off their least creditworthy customers, and reforms such as the CARD Act have forced them to be more careful about the riskiness of new customers. While all of this has put a crimp in credit-card companies’ growth, it has made for fat, steady revenue streams. In 2012, that’s not a bad position to be in.
“You may have to go back to the 1980s to see credit losses and delinquencies as low as they are right now,” says Bob Napoli, an analyst with William Blair. “It’s a sign that consumers are much more concerned about having good credit today, and a sign that the credit-card companies have been very disciplined in their underwriting.” The result, Napoli says, is a credit-card market that’s “Goldilocks healthy.”
With Europe’s future a giant question mark, and Treasuries offering meager returns, buyers such as mutual funds view credit-card-backed bonds as an attractive investment. For credit-card companies, this creates an opportunity to lower their own borrowing costs. Yields on top-ranked, five-year credit-card securities are the lowest in five years relative to a common benchmark, according to the Bloomberg report.
Might credit-card companies perhaps be grateful for the 2009 CARD Act, which they fiercely lobbied against? “I think so,” says Scott Valentin, an analyst with FBR Capital Markets. “The key has been the discipline coming out of the CARD Act.” Issuers are being more honest about their upfront pricing, Valentin says, and are restricted from the old industry practice of revising rates at any time for any reason. As Bloomberg Businessweek’s Karen Weise reported in July, the legislation has instilled a “forced rationality” in credit-card companies.
The New York Fed, in a report published yesterday, offered more data about the country’s credit-card habits. The number of open credit-card accounts has fallen 23 percent from its 2008 peak, to 383 million. And balances on those accounts are 22 percent down from their peak in the same year, from $866 billion to $672 billion. (Delinquency rates for student loans and home equity lines of credit rose.) That’s part of a general decline in household debt, which fell 0.5 percent in the second quarter of this year, to $11.38 trillion.
Fans of plastic still have plenty to curse credit-card companies about. This $20 billion-and-growing bonds trend, though, is a rare signal of a saner industry.
Summers covers Wall Street and finance for Bloomberg Businessweek. By Nick Summers
The summer of 2007 was a run-of-the-mill affair. Tony Blair had stepped down as prime minister in late June and his successor Gordon Brown was enjoying a honeymoon period. It was a year without a football World Cup or an Olympics, while Roger Federer won the men’s singles at Wimbledon, and the cricket involved series against the West Indies and India.
Then, on 9 August, came reports that central banks had been active in the markets. The Guardian said the action involved pumping billions of pounds into the financial system to calm nerves amid fears of a credit crunch. The trigger for the panic was the decision by BNP Paribas to block withdrawals from three hedge funds because of what it called a complete evaporation of liquidity. A spokesman for the bank described the move as a technical issue and said he hoped it would be temporary.
Technical? Temporary? Within six weeks, it was clear the meltdown of August 2007 was no short-term blip when investors queued outside branches of Northern Rock for three days in the first run on a leading UK bank since the mid-19th century. Five years on, the global economy has yet to recover from the deep trauma caused by the hubris of the bankers.
Back then, though, there were few who imagined that 9 August 2007 would prove to be such a milestone in financial history. The Guardian carried the story on page 29 because there seemed to be no reason to believe this was any different from previous bouts of jitters in the markets. It took a few days to work out what the bankers had been up to, because the “masters of the universe” had their own esoteric language the rest of us were not supposed to understand. Talk of mortgage-backed securities, credit default swaps and over-the-counter derivatives was the equivalent of 12th century monks writing bibles in medieval Latin for peasants who only spoke English.
Stripped of the jargon, it is now quite easy to see what happened. Banks were taking large gambles with precious little capital in reserve if the bets went wrong. Individuals were borrowing at levels only sustainable if the value of their share portfolios and homes continued to rise year after year. Governments assumed that booming tax receipts were permanent and increased public spending.
In August 2007, the air started to escape from this gigantic bubble. It happened in three stages. The financial sector was the first to feel the impact, because while it was evident that almost every bank had been up to its eyeballs in investments linked to the American housing market, nobody knew for sure just how much money each institution stood to lose. The financial system grinds to a halt if banks refuse to lend to each other, as they did in August 2007.
It took more than a year for the second stage of the crisis to unfold. During that period there were a number of developments: the crisis in finance deepened, house and share prices fell, and inflationary pressures increased as a result of sharp jump in the cost of fuel. When Lehman Brothers went bankrupt in September 2008, the global economy was ready to blow and the next six months saw the biggest slump in output since the Great Depression.
Governments arrested the slide into a 1930s-style slump by concerted and co-ordinated action, but wrecked their own finances in the process. Bailing out the banks was expensive, particularly since much lower levels of output reduced tax revenues. Banks felt they had too much debt. Consumers felt they had too much debt. By mid-2009, most governments also felt they had too much debt. It was not a comfortable place to be.
Central banks tried to help out by making credit cheap and plentiful. They cut interest rates and used unconventional methods – such as buying bonds in exchange for cash – to boost the money supply. The hope was this would stimulate a private sector recovery and so provide a breathing space in which governments could repair their finances.
The attempt to solve a crisis caused by credit with even more credit has, predictably enough, proved a failure. It has been a bit like the motorist desperately pumping air into a tyre with a slow puncture: it works for a while, but eventually the tyre goes flat again.
Some countries have fared better than others. Australia, for example, was one of the few developed nations to escape recession, because it had well regulated banks and is a big supplier of raw materials to China.
Britain, by contrast, was more exposed than most. Lax regulation cultivated an “anything goes” culture in the City; equity withdrawal from rising house prices underpinned consumer spending; inflationary pressures were stronger than elsewhere. The level of activity in the economy is close to 15% below where it would have been had growth continued at just over 2% a year since output peaked in early 2008.
For the global economy as a whole, things may get worse before they get better. The summer of 2012 has seen signs of a generalised slowdown, with knock-on effects from Europe’s sovereign debt problems felt in North America and Asia. The eurozone is heading for a nasty, double-dip recession, the US is growing far less slowly than has been the norm after previous downturns, while China’s economy is feeling the impact of previous policy tightening deemed necessary to curb the inflationary effects of the stimulus injected in 2008-09.
There is no real comparison between the events of the past five years and the half-decade that followed the Wall Street Crash in October 1929. In the 1930s, a quarter of the American workforce was out of work and industrial production fell by 50%. A better historical parallel may be the Great Depression of the 19th century, a broad-based slowdown in growth coupled with deflationary pressure that lasted from 1873 to 1896.
The reason the crisis has been so long lasting comes down to three myths. The Anglo-Saxon myth is that big finance is essentially a force for good, rather than dangerous, rent-seeking and – in too many cases – corrupt. The German myth is that you can solve a problem of demand deficiency through universal belt tightening and export growth. The right policy mix involves putting tough curbs on the banks, international co-operation so that creditor countries increase domestic demand to help out debtor countries, and a more measured pace of deficit reduction governed by the pace of growth rather than arbitrary targets.
The chances of this happening appear slim. Why? Because there is a third myth – namely that there was not much wrong with the global economy in 2007. But the old model was financially flawed in that it operated with excessively high levels of debt, socially flawed in that the spoils of growth were increasingly captured by a small elite, and environmentally flawed in its assumption that all that mattered was ever-higher levels of growth. It is possible to move on, but only when it is recognised that the genie will not go back into the bottle.
A lot from Lehman Brothers: sale of artwork and ephemera from the failed investment bank at Christie’s of London in September 2010, on the second anniversary of the bankruptcy. Photograph: Linda Nylind for the Guardian
Mortgage interest rates hit a new record low last week, and they appear to be on the same trajectory this week.
The yield on the ten-year Treasury note touched a new low Monday, 1.396 percent, before coming up slightly, and mortgage rates track that yield. Money flooded into Treasuries amid new concern surrounding debt in Greece and Spain.
“Now it’s like 1.4 [percent] is commonplace, and we’re probably going to see one and a quarter before too long,” said Holly Liss, ABN Amro’s Global Future’s Director in an interview on CNBC’s “Squawk on the Street.”
Mortgage rates are a full percentage point below where they were one year ago, and that recently sparked yet another spike in mortgage refinance applications, according to the Mortgage Bankers Association. It did not, however, do the same for applications to purchase a home.
“If the 30 year fixed were to drop to 3 percent, that would open up yet another wave of refi’s, perhaps more than the industry can handle,” says mortgage lender Craig Strent of Rockville, Maryland-based Apex Home Loans. “Certainly a 3 percent 30-year fixed would make home buying more affordable for some people that may not qualify at 3.5 percent, but if people are not entering the market at 3.5 percent, which is already insanely low, then they may not enter at 3 percent, as they may simply prefer to rent or may not have the down payment needed to buy.”
Strent is reluctant to predict where the 30-year fixed will end up, but Dan Green, loan officer and mortgage blogger with Waterstone Mortgage in Cincinnati expects the rate to hit 3 percent.
“There’s a case for them to be at 3 percent now. It’s just that lenders are overworked with new applications, so there’s little reason to get price competitive,” says Green. He agrees that 3 percent would just push more borrowers to refinance, even if they already did so recently.
Despite a spring surge in home buying this year, especially in new construction, these lower rates should make the surge bigger and continue it throughout the summer, but that does not appear to be the case. The National Association of Realtors reported a surprise drop in home sales in June, due to low inventory on the low end of the market, which is not as dependent on mortgage rates.
While the housing market needs more home purchases, the overall economy would get a boost from a new surge in refinances, giving more Americans more spending power. Remember, however, those rock-bottom rates don’t apply to homeowners cashing equity out of their homes.
Is the 30 Year Fixed Headed to 3 Percent? By: Diana Olick CNBC Real Estate Reporter
If you are left high and dry by the sheer burden of debt, it is always advisable to go for a debt conciliation strategy. There is no use carrying such a wearisome weight of loan on your shoulders. It does nothing but adds to your worries and tensions. Therefore, you must ensure that you get rid of it as soon as possible.
The internet is the safest place to gather all information related to settlement and Debt Conciliation Strategies. Therefore, if you do not have a clear idea about how the various settlement programs work, you do not need to worry. The internet will load you with a wealth of options and an array of choice. They will give you a comprehensive account of how to negotiate with the credit card companies.
You can then start negotiating with the credit card company and express your idea of going for conciliation or settlement program. In the present economy, the credit card companies will be more than eager to go for such a program since it is always better for them to recover some amount of money than none at all. Here, you must ensure whether you want to pay in monthly installments or the whole amount at a time. Though it is the duty of the debt conciliation program to arrange everything for you, you must also take an active interest in it. If you have a huge amount to pay, it is advisable to settle all your dues at once instead of going for monthly payments.
Once you have settled on a particular amount, you should insist the credit manager for a written agreement. The concerned agreement should state everything right from the exact amount you are required to pay to the payment process. It should mention that you will owe no more money to your creditors once the process of settlement is complete. Once that is done, you can be rest assured that you have cleared all your dues and finally overcome your financial crunch.
Debt Settlement Programs – A Safer Option Than Filing Bankruptcy
Have you reached a decision regarding the method that you are going to employ in order to be debt free? If you are still in two minds, you need to seek advice from some reliable quarters so that this problem can be solved soon. In all probability, debt settlement programs would emerge as the common solution from all.
There are some pertinent reasons for that. The fact that you have fallen in the trap of dues is ample proof of the fact that your financial condition is at its worst. You are not in a financial state to repay the amount that is owed by you to others and that is why you have become a victim of dues. In such a state, you must be in search of a program that enables you to make minimum payments and yet help you to come out of the mess. This criterion is fulfilled by debt settlement programs.
You might be tempted to file bankruptcy because it apparently eliminates all you dues at one go. You might argue why would you agree to pay even half of the total balance when you are getting an opportunity to escape from the total amount of dues? However, there are some important reasons why you should think twice before treading this path. Bankruptcy is something that looks very convenient at the beginning but as you go deeper, you realize and discover the trappings that come with it.
To start with, filing bankruptcy itself is a Herculean task by itself. It is not at all easy like a settlement program where everything is taken care of by the professionals. Here, you have to make sure you select the right chapter so that your prospects of getting approved are increased.
Why do you need to get into so much trouble when debt settlement programs can easily solve your financial problems? It is true that your credit report can suffer a setback but it would not cause as much harm to it as bankruptcy. In bankruptcy, the damage is often permanent and that is why you need to stay away from it and go for the bankable option of negotiation programs.
(Reuters) – Half a decade into the deepest U.S. housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.
But a painful part two of the slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.
“We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,” said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.
“Last year was an anomaly, and not in a good way,” he said.
In 2011, the “robo-signing” scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.
Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.
Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.
More conclusive national data is not yet available. But watchdog group, 4closurefraud.org which helped uncover the “robo-signing” scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash
Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.
Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.
Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).
RealtyTrac CEO Brandon Moore said the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”
One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.
“The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”
“HARD TO CATCH UP”
Until December 2010, Daniel Burns, 52, had spent his working life in the trucking industry as a long-haul driver and manager. When daily loads at the small family business where he worked tailed off, he lost his job.
Unable to cover his mortgage, Burns received a grant from a government fund using money repaid from the 2008 bank bailout. That grant is due to expire in early 2013 and Burns is holding out on hopeful comments from his former employer that he might get his job back if the economy recovers.
“If things don’t pick up, I will be out on the street,” he said, staring from his living room window at two abandoned houses over the road in the middle-class Cleveland suburb of Garfield Heights, the noise of traffic from a nearby Interstate highway filling the street.
Underscoring the uncertainty of his situation, Burns’ cell phone rings and a pre-recorded message announces that his unemployment benefits are due to be cut off in April.
A bit further up the shore of Lake Erie, Cristal Fell, who works night shifts entering data for a trucking company in Toledo, has fallen behind on her mortgage a second time because her ex-husband lost his job and her overtime was cut.
“Once you get behind it’s so hard to catch up,” she said.
Fell, a mother of four, hopes the economy will gather enough speed to help her avoid any risk of losing her home. Her ex-husband has found a new job and she is getting more overtime, so she hopes she can catch up on her mortgage by the fall.
Burns and Fell are the new face of the U.S. housing crisis: Middle class, suburban or rural with a conventional 30-year fixed mortgage at a reasonable interest rate, but unemployed or underemployed. Although the national unemployment rate has fallen to 8.3 percent from its peak of 10 percent in October 2009, nearly 13 million Americans remain jobless, meaning many are struggling to keep up with their mortgage payments.
Real estate company Zillow Inc says more than one in four American homeowners were “under water” or owed more than their homes were worth in the fourth quarter of 2011. The crisis has wiped out some $7 trillion in U.S. household wealth.
“We’re seeing more people coming through who have good loans with reasonable interest rates,” said Ed Jacob, executive director of non-profit lender Neighborhood Housing Services of Chicago Inc, which provides foreclosure counseling. “But in many households only one person works now instead of two, or they had their hours cut.”
“The answer to the housing crisis now is job creation.”
EARLY SIGNS OF UPTICK?
Zillow expects the resurgence in foreclosures this year, combined with excess inventory of unsold, bank-owned homes will contribute to a 3.7 percent national decline in prices before the market hits bottom in 2013 and stays there until 2016.
“The hangover from this crisis will far outlast the party of the boom years,” said Zillow chief economist Stan Humphries.
Getting through the remaining foreclosures and dealing with the resulting flood of homes on the market in the wake of the bank settlement is a necessary part of the healing process for the U.S. housing market, he added.
According to leading broker dealer Amherst Securities, some 9.5 million homes are still at risk of default and in February it said it expected to see the uptick in foreclosures start to hit in March and April.
There is other evidence that many of the foreclosures that did not happen in 2011 will happen this year.
A January report by the Neighborhood Economic Development Advocacy Project in New York found that in the first half of 2011 the number of 90-day pre-foreclosure notices in New York City outnumbered court foreclosure actions by a ratio of 14 to one, indicating that while proceedings were initiated against many homeowners, they were left incomplete.
“Now the banks have a settlement, foreclosure numbers for 2012 are going to be high,” said NEDAP co-director Josh Zinner.
A recent survey by the California Reinvestment Coalition, an umbrella group of nearly 300 non-profit groups in the state, of member agencies found 75 percent of respondents expected increased demand for their foreclosure prevention services in 2012 but more than a third had to scale back services because of funding cuts.
“Funding is a major concern given what our members expect for this year,” said associate director Kevin Stein.
All this has non-profits intensifying calls for the Federal Housing Finance Agency to drop its opposition to allowing the government-backed mortgage giants Fannie Mae and Freddie Mac it regulates to reduce principal for underwater homeowners.
Principal reduction involves reducing the amount borrowers owe in order to make a loan modification affordable for struggling homeowners. Republicans and the FHFA oppose principal reduction because of the risk of “moral hazard”- that homeowners who do not need help will seek to abuse largesse and have their mortgages reduced too.
ESOP in Ohio engages in “hits” on Chase branches — they say Chase is the least accommodating major bank when it comes to working with struggling homeowners — where they try to hand letters to bank mangers calling on chief executive Jamie Dimon to lobby FHFA head Edward DeMarco for principal reductions. A Chase spokeswoman said the bank has made “extensive efforts” to work with homeowners, helping 775,000 borrowers stay in their homes since early 2009, avoiding foreclosure “more than twice as often as we have had to foreclose.” Housing groups like ESOP maintain, as they have throughout the housing crisis, that unless the FHFA embraces widespread principal reduction, many more under water borrowers face losing their homes.
“Until banks engage in meaningful principal reduction as a matter of course,” ESOP’s Seifert said after a recent protest at a Chase branch in Cleveland, “this crisis will not end.”
(Reporting By Nick Carey; Editing by Martin Howell and William Schomberg; Desking by Andrew Hay)