The government faces many complications in helping struggling homeowners get affordable loans.
The Bush administration wants to help beleaguered financial institutions - and prevent the financial crisis from getting worse - by spending $700 billion to buy up troubled mortgage securities.
But many struggling homeowners are asking: "Where's my bailout?"
Democratic lawmakers have taken up their battle and say they will include more help for homeowners as part of the proposal, according to Rep. Barney Frank, D-Mass, who heads the House Financial Services Committee. Final details are still being hammered out, but it appears that the idea is gaining traction.
Here's how the bailout could work: Once the Treasury Department takes hold of the securities, it can review the terms of the underlying loans and the financial shape of each homeowner. The department then could opt to modify the loans - by reducing the interest rate or principal balance - to affordable terms for borrowers.
The problem, experts said, is that the mortgages will be bundled into investments and sold. Therefore, the ownership of each loan is divided among all the investors who purchased the security.
And that complicates the process of helping individual homeowners.
"The No. 1 barrier to keeping people in their homes has been the challenge of these loans being in mortgage-backed securities," said Ken Wade, chief executive of NeighborWorks America, a national community revitalization group chartered by Congress whose board is made up of bank regulators. "Counselors across the board say that is the major hurdle they are facing."
Unless the government scoops up all the securities associated with a specific mortgage, they'll run into the same problems in trying to modify the loans as the banks did, experts said. Often it depends on the terms in the securities contracts.
"Mortgages of questionable value have been sold into highly-complex securities, which have been carved up and sold to thousands of investors around the world," said Kathleen Day, spokeswoman for the Center for Responsible Lending. "The government can't put these Humpty Dumpty slices back together again because it won't own or even control them all."
And unless all stakeholders agree to the change in terms, other investors could take the government to court over the modifications, said Chris Mayer, real estate professor at Columbia Business School.
Another complication is that some borrowers just can't afford to keep their homes. The government can't do much for them.
"They key question here is, we want to help homeowners that want to stay in their homes and have the financial capability to stay in their home," Treasury Secretary Henry Paulson said on Sunday. "And the vast majority of foreclosures in this country...are coming from people who either don't want to stay in their home, took out loans they couldn't afford as the result of irresponsible lending practices."
IndyMac Example
Many community activists, however, point to IndyMac Bank as an example of how government-led modifications could work.
When the Federal Deposit Insurance Corp. took over IndyMac in July, it quickly suspended foreclosure proceedings on any delinquent loans within the $15 billion portfolio owned by the failed institution. The next month, regulators announced the implementation of a systematic loan modification program available to about 25,000 borrowers.
The loans owned by IndyMac can be changed without too much trouble, experts said. But the agency itself acknowledged that some mortgages serviced by IndyMac are subject to additional terms, forcing regulators to take extra steps to comply with the contracts. The loan servicing portfolio totals about $185 billion.
"IndyMac is really the model," said Kurt Eggert, law professor at the Chapman University School of Law. "I would hope the government only buys loans where they can institute that model."
Reviving Economy Depends on Helping Borrowers
Bailing out the banks will only have a limited impact on boosting the economy, experts said. The key is to stabilize the housing market, which can only be done by stemming the onslaught of foreclosures, which hit a record 1.2 million filings in the second quarter.
The Center for Responsible Lending, along with more than 30 other community groups, is pushing for changes to the bankruptcy law that would allow judges to modify mortgages. Congressional Democrats support this measure, as well as a systematic approach to modifying troubled loans.
Once foreclosures subside, home values will stabilize and banks will be more likely to resume lending. This will lift up the economy, experts said.
"The focus should be more on relieving the stress on households rather than bailing out banks," said Christian Menegatti, lead analyst at economic research firm RGE Monitor.
LA Broker's Blog
Friday, December 26, 2008
Crisis is coming: Who's Next? - It's Credit Cards
First came the mortgage crisis. Now comes the credit card crisis.
After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.
"If unemployment continues to increase, credit card net charge-offs could exceed historical norms," Gary L. Crittenden, Citigroup's chief financial officer, said.
Faced with sobering conditions, companies that issue MasterCard, Visa and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.
Big lenders -- like American Express, Bank of America, Citigroup and even the retailer Target -- have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.
Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.
While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.
The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the "Bad Credit Hotel," an online game that teaches the basics of maintaining good credit.
At the same time, the fear factor among lenders has deepened just as the crisis makes it harder for some financially stretched consumers to wean themselves from credit cards for even basic needs, like gas and food.
"We are not going to say, 'Yahoo, this is over,' and extend credit like we did without fear," Jamie Dimon, JPMorgan Chase's chief executive, said in a recent conference call. "If you're not fearful, you're crazy."
Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders -- a move that could, for example, push a 15 percent rate up to 18 percent.
"We think it's prudent given the nature of those products and the economic environment we face," Daniel Henry, its chief financial officer, said in a recent conference call.
Some reward programs have also gotten stingier as lenders cut corners to save money. Card companies, for example, have taken to substituting cheaper brands for a Sony big-screen television as a way of lowering the cost of their redemption prizes.
For less creditworthy customers, issuers are pulling back on promotional offers that allowed borrowers to pay no interest for months as they try to get ahead of stiffer lending rules that have been proposed by federal banking regulators and Congress.
The regulations, while beneficial to consumers, will curb profits on card issuers' riskiest customers. JPMorgan said that it was withdrawing some teaser-rate loans that were only marginally profitable. Discover Financial shortened the duration of its zero-balance offers.
And lenders, over all, are slowing the flood of mail offers to a trickle with moves that would translate for the average American household into about 13 fewer pieces of credit card junk mail a year than its peak in 2005. Mail offers to new and existing customers are on pace to drop below 8.4 billion pieces, the lowest level since 2004, according to Mintel Comperemedia, a direct marketing research firm.
Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that drive them to the Web, according to data from comScore, an Internet marketing research firm.
"We used to get a couple of offers a week, but I haven't seen a credit card offer in over a year," said Brett Barry, who owns a real estate agency outside Phoenix and described his credit record as strong. "What blows me away is these companies are in the business of extending credit, but they don't want to do it for me."
Mr. Barry said that, without any notice, American Express had reduced the credit limit on his business and personal credit card at least four times in the last year, which he said had lowered his credit score. The moves have also made it difficult for him to manage his payroll and budget, he said.
"Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back," said Lisa Hronek, a research analyst at Mintel. "People are completely maxed out with mortgages, home equity lines and credit card debt."
At the same time, credit card profit margins have been narrowing, largely because lenders' own financing costs remain elevated as investors spurn credit card bonds, just as they did mortgages. Another factor is that the interest rates banks charge even creditworthy borrowers have come down after the emergency actions taken by the Federal Reserve to ease the credit crisis.
Meanwhile, bank executives say consumers are starting to curb their spending, to an extent that may become clearer Wednesday when Visa reports its third-quarter results.
In previous downturns, banks could make up the missing profits by raising fees. This time, there may be less room to maneuver.
"The last time credit costs spiked, the late fees were much lower, so card issuers could turn to that and reprice more nimbly," a Morgan Stanley analyst, Betsy Graseck, said. "There is just more scrutiny now, and coming after the subprime mortgage crisis, the world is more sensitive to the way lenders behave."
After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.
"If unemployment continues to increase, credit card net charge-offs could exceed historical norms," Gary L. Crittenden, Citigroup's chief financial officer, said.
Faced with sobering conditions, companies that issue MasterCard, Visa and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.
Big lenders -- like American Express, Bank of America, Citigroup and even the retailer Target -- have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.
Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.
While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.
The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the "Bad Credit Hotel," an online game that teaches the basics of maintaining good credit.
At the same time, the fear factor among lenders has deepened just as the crisis makes it harder for some financially stretched consumers to wean themselves from credit cards for even basic needs, like gas and food.
"We are not going to say, 'Yahoo, this is over,' and extend credit like we did without fear," Jamie Dimon, JPMorgan Chase's chief executive, said in a recent conference call. "If you're not fearful, you're crazy."
Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders -- a move that could, for example, push a 15 percent rate up to 18 percent.
"We think it's prudent given the nature of those products and the economic environment we face," Daniel Henry, its chief financial officer, said in a recent conference call.
Some reward programs have also gotten stingier as lenders cut corners to save money. Card companies, for example, have taken to substituting cheaper brands for a Sony big-screen television as a way of lowering the cost of their redemption prizes.
For less creditworthy customers, issuers are pulling back on promotional offers that allowed borrowers to pay no interest for months as they try to get ahead of stiffer lending rules that have been proposed by federal banking regulators and Congress.
The regulations, while beneficial to consumers, will curb profits on card issuers' riskiest customers. JPMorgan said that it was withdrawing some teaser-rate loans that were only marginally profitable. Discover Financial shortened the duration of its zero-balance offers.
And lenders, over all, are slowing the flood of mail offers to a trickle with moves that would translate for the average American household into about 13 fewer pieces of credit card junk mail a year than its peak in 2005. Mail offers to new and existing customers are on pace to drop below 8.4 billion pieces, the lowest level since 2004, according to Mintel Comperemedia, a direct marketing research firm.
Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that drive them to the Web, according to data from comScore, an Internet marketing research firm.
"We used to get a couple of offers a week, but I haven't seen a credit card offer in over a year," said Brett Barry, who owns a real estate agency outside Phoenix and described his credit record as strong. "What blows me away is these companies are in the business of extending credit, but they don't want to do it for me."
Mr. Barry said that, without any notice, American Express had reduced the credit limit on his business and personal credit card at least four times in the last year, which he said had lowered his credit score. The moves have also made it difficult for him to manage his payroll and budget, he said.
"Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back," said Lisa Hronek, a research analyst at Mintel. "People are completely maxed out with mortgages, home equity lines and credit card debt."
At the same time, credit card profit margins have been narrowing, largely because lenders' own financing costs remain elevated as investors spurn credit card bonds, just as they did mortgages. Another factor is that the interest rates banks charge even creditworthy borrowers have come down after the emergency actions taken by the Federal Reserve to ease the credit crisis.
Meanwhile, bank executives say consumers are starting to curb their spending, to an extent that may become clearer Wednesday when Visa reports its third-quarter results.
In previous downturns, banks could make up the missing profits by raising fees. This time, there may be less room to maneuver.
"The last time credit costs spiked, the late fees were much lower, so card issuers could turn to that and reprice more nimbly," a Morgan Stanley analyst, Betsy Graseck, said. "There is just more scrutiny now, and coming after the subprime mortgage crisis, the world is more sensitive to the way lenders behave."
Labels:
finance crisis
Governor's Lawyer Wants Obama Staff Subpoenaed
CHICAGO — In a move intended to force public testimony from President-elect Barack Obama's inner circle, a lawyer for Gov. Rod Blagojevich has asked the legislative panel considering impeachment of the governor to subpoena more than a dozen witnesses, including Obama's incoming chief of staff.
State Rep. Barbara Flynn Currie told The Associated Press on Thursday that the House committee received a letter from Blagojevich attorney Ed Genson asking it to subpoena Rep. Rahm Emanuel, Valerie Jarrett and more than a dozen others, including Rep. Jesse Jackson Jr.
Currie, the head of the committee, said she didn't yet know what the committee's response to Genson's request would be.
However, she noted that the U.S. Attorney's office has already denied the panel's request to interview a list of people named in the criminal complaint against Blagojevich.
U.S. Attorney Patrick Fitzgerald said earlier this week that lawmakers' interviews of current or former members of Blagojevich's staff might jeopardize his criminal investigation.
Currie said the House panel's next meeting is set for Monday. U.S. Attorney's office spokesman Randall Samborn declined to comment Thursday.
Messages left Thursday for Genson, Jackson and attorneys for Jarrett and Emanuel were not immediately returned Thursday. The Obama transition team declined to comment.
Members of Obama's transition team declined to comment.
Blagojevich was arrested Dec. 9 on charges alleging he tried to sell Obama's vacant Senate seat to the highest bidder. He has denied any wrongdoing and is ignoring scores of calls to step down, including one from Obama.
None of the possible candidates for Obama's Senate seat _ said to include Jarrett and Jackson _ are identified by name in the complaint, but Jackson has said he is the individual dubbed "Senate Candidate 5." The congressman has said federal prosecutors told him he is not a target of their investigation.
Genson told the Chicago Sun-Times that testimony from Emanuel, Jarrett and Jackson would help prove the governor's claim that he didn't do anything wrong in his handling of Obama's Senate seat, the newspaper said Thursday.
On Tuesday, Obama revealed that he, Emanuel and Jarrett had met with federal investigators about Blagojevich. He also released an internal review that found no inappropriate contact with the governor's office by him or his staff.
Emanuel was the only Obama transition team member who discussed the Senate appointment with Blagojevich, and those conversations were "totally appropriate and acceptable," according to incoming White House attorney Greg Craig.
State Rep. Barbara Flynn Currie told The Associated Press on Thursday that the House committee received a letter from Blagojevich attorney Ed Genson asking it to subpoena Rep. Rahm Emanuel, Valerie Jarrett and more than a dozen others, including Rep. Jesse Jackson Jr.
Currie, the head of the committee, said she didn't yet know what the committee's response to Genson's request would be.
However, she noted that the U.S. Attorney's office has already denied the panel's request to interview a list of people named in the criminal complaint against Blagojevich.
U.S. Attorney Patrick Fitzgerald said earlier this week that lawmakers' interviews of current or former members of Blagojevich's staff might jeopardize his criminal investigation.
Currie said the House panel's next meeting is set for Monday. U.S. Attorney's office spokesman Randall Samborn declined to comment Thursday.
Messages left Thursday for Genson, Jackson and attorneys for Jarrett and Emanuel were not immediately returned Thursday. The Obama transition team declined to comment.
Members of Obama's transition team declined to comment.
Blagojevich was arrested Dec. 9 on charges alleging he tried to sell Obama's vacant Senate seat to the highest bidder. He has denied any wrongdoing and is ignoring scores of calls to step down, including one from Obama.
None of the possible candidates for Obama's Senate seat _ said to include Jarrett and Jackson _ are identified by name in the complaint, but Jackson has said he is the individual dubbed "Senate Candidate 5." The congressman has said federal prosecutors told him he is not a target of their investigation.
Genson told the Chicago Sun-Times that testimony from Emanuel, Jarrett and Jackson would help prove the governor's claim that he didn't do anything wrong in his handling of Obama's Senate seat, the newspaper said Thursday.
On Tuesday, Obama revealed that he, Emanuel and Jarrett had met with federal investigators about Blagojevich. He also released an internal review that found no inappropriate contact with the governor's office by him or his staff.
Emanuel was the only Obama transition team member who discussed the Senate appointment with Blagojevich, and those conversations were "totally appropriate and acceptable," according to incoming White House attorney Greg Craig.
Is Retirement Different for Females?
Some strides have been made toward gender equality since women won the right to vote in 1920. But men and women aren't exactly equal when it comes to retirement.
Women are more likely than men to spend their golden years in poverty. According to a report from the Women's Institute for a Secure Retirement, more than one in 10 women in retirement live on less than $10,000 a year.
The reason is attributable to financial physics: Women earn less than men over their lifetimes and live longer.
"This is not a complicated picture. And it's not a pretty picture," says Jim Toedtman, editor of the AARP Bulletin.Women Are Risk Averse
It's not that women don't worry about retirement. A recent study from the Society of Actuaries, "Risks and Processes of Retirement Survey Report," found that women are more anxious than men about that time of their lives.
"The actuaries found that women are more concerned about the risks," says Anna Rappaport, consulting actuary and chair of the Society of Actuaries' Committee on Post-Retirement Needs and Risks. "Fifty-seven percent of women are concerned about being able to afford long-term health care compared to 47 percent of men."
"In general, the male clients I see a lot of times just think that whatever it is that they want to achieve, they can do it. When I'm dealing with women, they don't have the self confidence to think that they can actually do it," she says.
Her experiences may be generationally biased though, she says. "The clients that I see this in are a little bit older -- maybe in their 60s or 70s."
Women Are Too Giving
In many respects, retirement planning for women looks the same as retirement planning for men.
"There are no special mutual funds for women. There is no insurance policy for women.
"The difference is the need," says Patrick Astre, Certified Financial Planner and author of "This is Not Your Parents' Retirement." "We find that women have a greater need to engage in financial planning than men."
Certain characteristics endemic in the female population conspire against them when it comes to investing. For instance, they tend to take care of everyone else in the family before considering their own needs.
As an example, says PNC's Silverman, "Women are more likely to feel like it's more important to save for their children's college."
Rappaport concurs. "When they are taking care of kids or parents, they are probably quicker to say, 'I will use the money for someone else and not use it for myself.'
"We are not saying that women should think about going to the beauty salon, but saying, 'Think about your long-term security and retirement and make sure you have resources for your retirement,'" she says.
Women Are Disadvantaged at Work
Cultural forces don't favor women in the retirement savings arena either.
"Women make less money than men. It's unpleasant, but a fact of life," says Astre. "There is also a glass ceiling; women often don't get as many promotions as men."
Whether women are paid less than men due to poor salary negotiating, career choices or institutional biases, the end result is that they not only have less to save but their Social Security payout is less. They put in fewer years at work and lose out on years of paying into a pension or defined contribution plan.
On top of everything else, most women have children during vital career-development years.
"If you drop out of the work force to take care of children, that is probably going to be a time in your late 20s or early to mid-30s, when your male colleagues who stay in the work force are getting promotions and climbing the ladder," says Ginita Wall, CPA, CFP and co-founder of WIFE.org, a nonprofit organization dedicated to providing financial education to women.
For women who choose to take time out to raise children, losing those working years means that they return to the work force at the same level they were at years before, maybe even with obsolete skills -- putting them further behind in their careers and savings.
Also, in investment matters, women are risk-averse by nature.
"That means you'll be earning less and will have lost crucial years that you could have been adding to your 401(k) and earning years of service that would get you a higher return," Wall says.
Women Are Stuck With More Chores
Women who continue to work while caring for children often find themselves in the unenviable position of being the babysitter, house cleaner, cook and laundress in addition to their full-time jobs. And that leaves less time to contemplate investments or retirement planning.
Astre had a couple as clients who had differing levels of involvement in their workplace retirement plans. The husband was very involved in his, while the wife had no idea where her contributions were going.
"In my office, she turned to her husband and said, 'You get home from work, you sit on the couch, open a beer and that's the end of your day. I've got to make dinner, do the laundry, take care of the kids and go shopping,'" says Astre.
"And it's true. Meanwhile I felt guilty -- that's what I do at home."
Women Are Short on Savings
Even though women today have more opportunities to guide their own financial ships, not all are taking the helm. Research and anecdotal reports from financial planners report that many women, whether single or married, are not adequately preparing for their own retirements.
A study from the Retirement Security Project, "Retirement Security for Women: Progress to Date and Policies for Tomorrow," compared the retirement accounts of men and women and found that women's accounts reflect about half or less of the balance of men's accounts on average.
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