20 July 2009
Federal Fiscal Policy Discounts Greed
Congress failed to help the public, their constituents, to have the means to acquire more control over their debt management and, as a result, to improve their ability to access consumer credit, apartment rental units, jobs, and sense of self-worth. Indeed, the recent legislation has had the effect of making retail credit less attractive to consumers.
Congress failed to address the shrinking of real estate market values for property owners whose property is near to a foreclosure sale, a short sale, or an auction. Reality check: If all homes in a particularly wealthy neighborhood have an average market value of $1.3 million (determined from the prior six months' sales prices), the entire neighborhood's market value can fall several percentage points if a small number of sellers have lost their jobs and can no longer pay their mortgage loans, or if a small number of repossessed homes go on the market at prices over 50% lower than the market value of homes in proximity, the entire real estate market in that area will experience a reduction in home equity value and in sellers' asking prices. Given the lower market value of competing homes in an area, buyers can take advantage of this price cutting, negotiate still lower home prices and the purchase prices negotiated will establish the new average market value for like homes in that neighborhood, perhaps around $675-700,000 or 52% lower.
The banks also have changed their underwritiing standards for mortgage loans. No longer can a mortgagor expect to find a lender using the 20% down/80% loan criterion for taking a new mortgage loan. More emphasis is being placed on the applicant's LTV (loan-to-value) as determined by the appraiser. An equivalent ratio of retail credit-debt-used to available-limits also affects the underwriter's criteria for mortgage loan approval.
There are no steps I can take to increase my credit score, other than to pay down my debts on time and with at least the minimum amount due. I have never had a mark on my payment record, I have owed more than now and I am paying, with exceptions, more each month than the min. amt. due. A year ago, my debt to available credit ratio was 47%. This ratio makes up approximately one-third of my credit score. Another one-third is affected by my debt and payment history. I used to not worry about this latter portion because of my cash available from my home's equity and my IRA. Lenders kept raising my available credit limits because of my access to liquid assets (i.e., to cash). Special rate offers enabled me to transfer a debt at 13.25% to a 0% debt rate for one year, thereafter at an 8.9% rate or to transfer a debt to an account with a 4.99% rate until the entire amount transferred was paid off. I used both, depending on which gave me the better cash flow in the future. Because of my excellent credit score and report, I could refinance my property and pay off all retail credit debt in escrow, and still keep my mortgage payments at almost the same amount as prior to refinancing. Refinancing is no longer an option, because there is no longer any equity in my home's value. TARP and other federal stimulus funding did not directly address the mortgage loan market's dependence on LTV, compounding the error of not addressing the shrinking values or credit card charge limits.
On their own, with nothing other than their ability to do so, all but one of my creditors have lowered my available credit by several thousand dollars. Now, my debt to available credit exceeds 85%. Nothing has changed on my end. How will this 47% to 85+% affect my credit score? I don't know and the credit bureaus are not talking.
In addition, with no constraints or sanctions for the card issuers, and despite the infusion of cash by the Treasury Department and new legislation, creditors still can raise the interest rates on retail credit balances whenever it makes business sense to them. When this has happened to me, I have seen the minimum amount due, as posted for my monthly statement, double my monthly payment.
Because of our "free market" economy, Bank A could care less about Bank B's change of the minimum amount due on Bank A's credit card balances. I put quotation marks around 'free market' because we have never in this country, since the Whiskey Rebellion, had our financial markets unfettered of federal and state regulations and rules for operating. Thus, if Bank B finds out about Bank A's increasing interest rate or minimum amounts due, Bank B can do the same thing. It every bank adopts this method for its revolving credit accounts (credit cards) this action becomes an industry standard way of doing business, not anti-competitive.
This ability to raise or lower interest rates does not stop per se the entry of a new bank into the retail credit market nor does it lead to a monopoly, so our existing anti-trust laws do not offer the consumer any basis for complaint. It seems to me that collusion among bankers or establishing a new industry standard for doing business in the retail credit market should be wrong. After all, the banks' actions have harmed the public at large, especially those persons living on fixed incomes or those persons whose household income is no longer sufficient to pay off existing loans plus provide for day-to-day living expenses.
I wrote in an earlier post about the curious behavior of banks' offering extremely low interest on savings accounts and certificates of deposit (CDs). The cost of cash to a bank, or the federal funds rate, has held constant for the past six months at 0.25 or $ 99.75 per $100 bought. This same bank will lend this $99.75 through a variety of loans and credit card accounts. To attract private capital, a bank today will pay an average interest rate of 1.311 to 1.321% on an average minimum deposit of $10,252, dependent upon the number of days up to 365 days those deposits remain in a money market account or a savings account. Banks will sell CDs of various time periods at an average yield of from a 3-month CD at 0.923 for an average purchase of $8, 547 to a 5-yr. Jumbo CA at 2.728 for an average purchase of $100,000.
In other words, a bank can pay 0.25 % (federal fund rate) up to 2.728% (to depositors) for the bank's operating cash. For an idea of how profitable this capital is, compare the following rates charged for different loans and consumer credit accounts:
- WSJ Prime Rate 3.25%
- Mortgages 5.372 APR for FHA 30-yr. fixed
- Credit Cards:
- Balance Transfer Cards 13.77%
- Cash Back Cards 14.35%
- All Variable 11.14%
- Low interest cards 9.17% [Source: www.bankrate.com, 20 July 2009]
On the other hand, there is nothing to interfere with a new lender coming into the consumer credit market offering completely different, more customer friendly and less costly terms for their customers. Any enterprise can go against an industry practice and such an ability can change the market practices completely.
With an abundance of Stimulus Money available today, perhaps some entrepreneur could have access to the minimum capital required, by regulation, to start a new consumer credit card business as a bank. A strong, perhaps using a different business model, competitor is something that we all need now that the banking industry standard practice for retail credit accounts is stifling small business owners and retail customers from buying and rebuilding our economy with more jobs to handle increased production and sales.
The next Reform stage should start at the local level, incorporate the Enterprise Zone incentives for small business and tax bank revenues from consumer loans and credit card accounts, including all associated fees, for the rate amounts above 10 percent. Residual TARP and Stimulus funds should be used to establish reserve levels before being remitted to the federal government.
Labels: banks, cost of money, credit cards, FICO scores, loans, reform legislation
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