In a recent statement, Citigroup Inc announced that, “We have adjusted pricing and card terms for some customers as part of our regular account reviews. These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit.” This statement comes just before new, stricter credit card regulation goes into effect.

These rate increases will affect roughly 15 million credit card holders, especially those who have cards that are co-branded with businesses like Sears and Macy’s. One report has found that during the months January through April, Citi raised rates by an average of 24 percent or 3 percentage points on customers who paid less than their full balance during those months.

According to the Financial Times,  Carolyn Maloney, a Democratic representative from New York and the author of the new lending rules, had sharp words for Citi’s actions:

“It’s hard to tell if rate hikes on existing balances being put in place now are the result of prior bad business decisions or getting in under the wire of the new law.”

Oh really, Ms. Maloney, what did you expect the credit card companies to do? Take the new restrictions and profit-reducing laws laying down?

As Douglas McIntyre on the 247wallstreet blog  says:

“It is hard to blame Citi for the move …Unemployment is likely to rise above 10%, and with part-time workers looking for full-time work and the chronically unemployed factored in the number is closer to 15%. Banks cannot afford to support what are likely to be tens of billions of dollars in losses as overleveraged customers walk away from obligations. The government has no programs to assist these consumers, nothing similar to its plan to make mortgages more affordable.

Citi has raised its credit card rates. Other financial firms will have to follow suit. The recession has taken too large a bite out of the consumer’s pocketbook for there to be another alternative.”

I think it is foolhardy to think that big, profit-seeking companies are going to eat the costs of tighter regulation. They ALWAYS pass on the costs to the consumer. Why don’t legislators face up to that fact and make laws that harness and redirect this corporate self-interest for the good of all, perhaps with incentives?

Recently, the Department of Housing and Urban Development (HUD) released its 2010 budget.  In their budget, they asked for a $798 million credit subsidy for the reverse mortgage program that is handled by the FHA.  HUD has never requested a subsidy of any kind.  It begs the question is the Home Equity Conversion Mortgage (HECM) actually working as it should?  In a report by ReverseMortgageDaily.com, the author consulted  the Congressional Justification Report to determine the reasoning behind the request.

According to this report, HUD estimates that 121,000 new mortgage loans will be endorsed in 2010.  In 2009, HUD estimates that this number will be slightly under 120,000.

The reasoning for this plan is this - reverse mortgage guarantee programs are sensitive to future home appreciation.  The FHA is looking for lower house prices in upcoming years.  The FHA has also made considerable improvements in the HECM structure.

The author of the article feels that the most interesting part of the report was that HUD is requesting $15 million for HECM counseling.  This counseling is required by law, and HUD states that funding for this counseling has never been enough.  HUD is also looking for $8 million to train housing counselors.  Currently, there are 7,100 counselors that service approximately 2,600 HUD-approved agencies.

In the current economy, and with all the money pouring out of governmental coffers, it is hard to justify $798 million.  Even though HUD estimates that $30 billion will be generated in reverse mortgages in the fiscal year 2010, HUD requesting this amount of money will only put the taxpayers under increased pressure.  At some point in time, this hemorrhaging of money needs to come to an end.

With the ever soaring cost of higher education, student loans have been an almost indispensable tool when trying to put the kiddies through college.  Tuition has reached a level of $50,000 a year in some private colleges and universities.  At that rate, a graduate can expect to be in debt for a quarter of a million dollars.

Over the years there have been three kinds of loans available.  Federally guaranteed loans are made by private lenders and guaranteed by the government, Direct loans are made by the federal government and of course there are unsubsidized private loans.  Guaranteed loans have been the most popular way for students to go.  The government guarantees the loan, and pays the lender a subsidy.  With the government backing these loans, the lender is almost completely assured that there will be no loss.

Up till now, the government had provided tens of billions of dollars every year for financing the student’s education.  An article in the New York Times indicates that this may soon come to a screeching halt.  The Obama administration wishes to scrap the guaranteed loan program, and simply make the federal loans currently available directly from the government.  Certainly, it would save billions of dollars, because the federal government would be no longer paying subsidy payments to lenders. The Obama administration would like to see that extra money they save go towards grants for needy students.

The private loan industry of course wants nothing to do with the sweeping change.  It’s understandable, when you consider that they will suffer a huge loss of revenues on loans that they know won’t go bad on them.  There isn’t any default when the government guarantees the loan.

Personally, I think that this is an excellent idea.  In a previous post, I talked about Sallie Mae, the huge student loan lender.  In 2008, Sallie Mae lost $213 million.  Yet they still paid their chief executive more than $4.6 million in cash and stock.  That isn’t the half of it.  Sallie Mae’s vice chairman got a whopping $13.2 million in cash and stock and the use of a company plane.  I’m no socialist by any means, but to see this kind of excess in a company that has lost $213 million in the past year tends to tick me off.  I don’t know how many times I hear on the news that the banks and lenders “just don’t get it.”  Obviously, they don’t.

The president’s plan would help to increase Pell grants and make them mandatory.  This is good news for students in need.  It would also wrest control by Congress over these grants which a lot of politicians are not too happy about.

Before an aspiring student gets all excited about these changes to government loans, New York Times reports that the increase in dollar amounts available under the new proposal would only be a few hundred dollars more in available funds.  Every little bit helps, and as far as I’m concerned, if the federal government can save billions of dollars in subsidy payments, this can only be a good thing.

Where is the government’s promised help for small businesses, some of the hardest hit entities of this economic downturn? According to the Small Business Administration, the newly created “America’s Recovery Capital Loan Program” went into effect on June 15, offering interest-free loans for as much as $35,000 to qualified businesses.

This new loan program, made possible as part of the original stimulus billed passed by Congress in February, seems doomed to failure, however, from the very beginning. First, only a limited number of loans will be offered – 10,000 to be exact. Try to match that up with the more than 30 million small businesses in the country.

Second, these loans are to be made by private lenders but guaranteed by the government. Lenders are not allowed to charge any fees for loan origination and while the government will be paying the interest on the loan, the specified is only prime plus 2, a pretty minimal rate compared to most private lending loans.

Also, not only will banks not get a ton of interest on these loans, but they will also have to wait an entire year without compensation as borrowers have 12-months of deferred payments in order to pay down their debts. 
As Catherine Lyons posted on the Los Angeles Times blog,

“Banks are being offered next to nothing by the government to make what most lenders regard as puny loans. SBA lenders want bigger loans that make banks more money, and a higher interest rate.The SBA is dangling a few carrots in front of lenders, but it doesn’t seem to be enough to persuade them there’s a benefit for more than just the borrowers and Washington.”

And with very few major banks signed on at this point, any real benefit to the economy from this program is likely to be very limited.

According to the Wall Street Journal, Fannie Mae, in efforts to provide some stability in the mortgage market, have said that they will no longer guarantee mortgages on condominiums that are in buildings where fewer than 70% of the units have been sold.  Representatives Barney Frank, D., MA and Anthony Weiner, D., NY, have written a letter to the chief executives of Fannie and Freddie, warning them that the 70% sales threshold is detrimental to the market and could lead people interested in buying a condo away from new developments.

In all truthfulness, you must look at both sides of the coin.  Officials from Fannie Mae claim that these tougher rules aren’t causing as many problems as many claim.  For one thing the 70% rule doesn’t apply to loan applications that are submitted through underwriting programs used by most major lenders.  Fannie Mae claims that hundreds of applications have been approved since their new ruling took effect on March 1.  Housing developers can also apply for exemptions on loans that are manually underwritten.

Opponents to the ruling have reminded Fannie that the FHA requires 51% of the units to be sold before developers can secure approval for mortgages that are backed by FHA.  Allegedly the FHA has considered dropping the threshold, saying that tighter standards and regulations may delay any recovery efforts.  The FHA points out that its traditional role is to provide stability in a troubled housing market.

Fannie and Freddie also boosted fees for mortgages on condos.  A potential buyer must have a minimum 25% down payment to secure a loan.  If not, fees equal to 0.75% of their loan is charged.  Even those with good credit must pay the fees without the minimum 25% down payment.  The new rule took place in April.

People attempting to sell a condo are having a tough time.  Supposedly the new rules are making it tough for prospective buyers to secure financing.

In my opinion, Fannie and Freddie are doing the right thing.  We must remember that Fannie and Freddie are still under the watchful eyes of the government.  I have no idea what the break-even point would be for a new development of condominiums, but I think it would be safe to say that the 70 %  rule is a good bet.  It’s no secret that instability in the housing market has led to a lot of difficulties in this country.  I think it’s time for creative financing to take a backseat to market stability.  Leveling the playing field will certainly help to see that happen.

Sallie Mae, formerly known as SLM Corp., makes student loans.  Recent news from Forbes indicates that the Obama administration unveiled on Thursday a new budget proposal that would make the government the sole provider of federally backed loans for students.  This spells bad news for Sallie Mae, whose shares tanked on the news.

According to Forbes, the fiscal budget for 2010, which goes in place on October 1, should save the government more than $4 billion by slicing entitlements for companies like Sallie Mae.  Beginning in 2010, new student loans would be originated through the direct student loan program.

If this budget proposal goes through, Sallie Mae would be adversely affected.  The company has suffered financially because of the financial crisis we are seeing today.  Sallie Mae lost 77.3% of its market value in the past year, and since July 2007, has seen its market value drop by 91.6%.

Matt Snowling, an analyst at Friedman, Billings, Ramsey, says that legislation would kill The Federal Family Education Loan Program.  He feels that Sallie Mae will face many threats to its financial stability during the Obama administration.  Even if this legislation does not pass Congress, its implications would still make things tough for Sallie Mae.

Reports from the Internet show that many people are fearful of too much government control in the industry, and feel that the government is stepping in to places it shouldn’t go.  My thoughts are that if something isn’t done to stabilize and regulate financial institutions, then the economy will always be in jeopardy in one way or another.  I am curious to see how this plays out.

In order to make sure all financial industries are behaving well, President Obama announced plans today for a new regulatory commission – the Consumer Financial Protection Agency or CFPA. This body would be in charge of overseeing the practices of mortgage lenders, credit card companies, and insurance and investment banking corporations.

Here’s why Obama thinks this is a good idea:

 “This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want — and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You’ll be able to compare products and see what’s best for you.”

Here’s why consumer advocate groups are happy:

“By setting up a single consumer financial protection agency, the administration is ensuring that the same rules will apply to similar products across all financial institutions,” said Kathleen Day, spokesperson for the Center for Responsible Lending, as quoted in a CNN article.

Here’s why others, like the American Bankers Association are opposed to this commission:

It would force mortgage lenders to offer specific products, restrict them from including prepayment penalties,  and change the way brokers are paid – from one big payment at closing, to spread out payments over time based on how well each home loan does. 
In a nut shell, the new agency would have a lot more power and authority to tell lending institutions how to run their businesses. Good or bad? Depends on whether you think protecting consumers from any risk is more important than letting markets be free to find the most effective and profitable business plans.

A recent article in Newsweek tells us that it’s a known fact that the Federal Reserve has been working to keep a mortgage rates down.  They have been buying treasury debt in an effort to keep mortgage rates low.  Although that has seen some light at the end of the tunnel, many economists are warning that now rising mortgage rates will put a stop to any rebound that the Fed had worked hard for.

Moody’s, in its weekly  credit outlook released on June 8 said that The Economic Cycle Research Institute’s (ECRI) leading index showed that although the recession may be near an end, higher mortgage yields will stymie any recovery efforts.

Freddie Mac’s Primary Mortgage Market Survey shows that 30-year fixed mortgage rates have jumped to an average of 5.29%.  A week prior to this, there stood at 4.91%.  Now, with treasury yields ever higher, 30-year mortgage rates have been quoted as high as 5.50% on bank websites.

Because of a greater risk, mortgage rates should trade at a premium over 10-year treasury notes.  Analysts say that because the government is fully backing Fannie and Freddie in their purchases, rates have remained low.  John Burns, a real estate consultant in Irvine, California, tells  us that banks would be charging homebuyers a much higher rate if not for Fannie and Freddie because they would have to keep these loans on their own books.

This rise in interest rates could not come at a worse time.  Not only will prospective homeowners hesitate on making a purchase, but the rise in rates will dilute the benefits of the tax credit to first-time homebuyers.  Mark Zandi, chief economist at Moody’s, believes the housing market is the biggest current threat to the economy.  If the Fed must juggle both mortgage rates and treasury yields to keep the economy stable, then there is no real solution.

The ideal situation would be for the Fed to determine how to put an end to mortgage rates being affected by changes in yields through treasury purchases.  Figuring out how to do that would be a monumental task.

Ivy Zelman, chief executive of Zelman and Associates, says that the current rise in 30-year fixed-rate mortgages to its current level had hurt refinancing activity. For one thing, the huge loss in home values has wiped out any equity to a point where the homebuyer would have positive equity with a refi rate between 4.5% or 4.875%. Good news or bad?

There is no easy solution.  No matter how you juggle the figures, someone is bound to end up getting burned one way or another.  The Obama administration has its hands full trying to sort everything out.  It is not an easy task by any means, and we can only hope that someone, somewhere, makes the right decisions.

If there is one thing I learned, it is that you cannot make any assumption without the proper data.  One of my favorite websites is  Doctor Housing Bubble.com.  His data is so good that I follow him on Twitter.  Although most of the data is centered around Southern California, he often shows the bigger picture.  I read his post from yesterday on his blog, where he addressed nationwide distressed property information.  I wasn’t surprised to learn that only four states make up 50% of all foreclosures and distressed properties action.

The four states are of course California, Florida, Arizona and Nevada.  Dr. Housing Bubble’ s data comes from Realtytrac, a California-based business, and is a good source of trusted data.

In the course of one year, notices of default have doubled.  Trustee sales have doubled.  Real estate owned has gone from a low of 2000 to an enormous 15,557.  In the first quarter of 2008 alone,DataQuick listed 113,676 notices of default.  The median price of California property is down 84% in the period of one year.

Dr. Housing Bubble sees no bottom in the market at the time.  He places much of the blame on Alt-A and the Pay Option ARM’s that were so popular in California at one time for the hemorrhaging in that market.  The average balance at present on an Alt-A mortgage is $442,000.  If home prices are down by 84%, it doesn’t take a mathematician to figure out that there are a lot of homeowners in deep trouble.

I find a lot of truth in what Dr. Housing Bubble has to say about foreclosures.  Foreclosures are not increasing because home prices are falling.  They are increasing because home prices were too high to begin with.  The real estate mantra telling us that it is all about location may have some merit.  Tell that to the guy that spent the last 20 years working for General Motors and is now working at Wal-Mart.  I think that gives us a much better picture.

If there is one thing I learned, it is that you cannot make any assumption without the proper data.  One of my favorite websites is  Doctor Housing Bubble.com.  His data is so good that I follow him on Twitter.  Although most of the data is centered around Southern California, he often shows the bigger picture.  I read his post from yesterday on his blog, where he addressed nationwide distressed property information.  I wasn’t surprised to learn that only four states make up 50% of all foreclosures and distressed properties action.

The four states are of course California, Florida, Arizona and Nevada.  Dr. Housing Bubble’ s data comes from Realtytrac, a California-based business, and is a good source of trusted data.

In the course of one year, notices of default have doubled.  Trustee sales have doubled.  Real estate owned has gone from a low of 2000 to an enormous 15,557.  In the first quarter of 2008 alone,DataQuick listed 113,676 notices of default.  The median price of California property is down 84% in the period of one year.

Dr. Housing Bubble seesno bottom in the market at the time.  He places much of the blame on Alt-A and the Pay Option ARM’s that were so popular in California at one time for the hemorrhaging in that market.  The average balance at present on an Alt-A mortgage is $442,000.  If home prices are down by 84%, it doesn’t take a mathematician to figure out that there are a lot of homeowners in deep trouble.

I find a lot of truth in what Dr. Housing Bubble has to say about foreclosures.  Foreclosures are not increasing because home prices are falling.  They are increasing because home prices were too high to begin with.  The real estate mantra telling us that it is all about location may have some merit.  Tell that to the guy that spent the last 20 years working for General Motors and is now working at Wal-Mart.  I think that gives us a much better picture.

Even though many banks receiving federal bailout money promised to make more money available for auto loans, it appears that not much has changed lately in terms of how hard it is to get car financing.

For example, a recent CNN article reported that GMAC bank announced plans last December to earmark $5 billion for new car loans that could be offered to even to those with low credit ratings. So far, the company has only made $3.4 billion in loans during the first quarter and many auto dealers say very few of those are being made to those with average to low credit scores.

Those claims have confirmed by recent figures showing that last month only 20 percent of subprime or poor credit borrower applications were approved for financing in May, while 89 percent of prime or good credit applications were approved.

Apparently rising default rates are to blame for lender stinginess.The risks of loss are greater the promise of potential profit.

Here’s how Steve Cypher on the autocreditexpress.com  blog summarized the situation:

Even though the U.S. economy is showing signs of a possible recovery later on this year, car loans for all but the most creditworthy customers (whose numbers are also on the decline) continue to be difficult to obtain. For those customers looking for bad credit car loans, the landscape continues to be bleak. Higher interest rates, shorter terms and larger down payments continue to be the rule, rather than the exception.

So basically, he’s saying if you have bad credit, good luck! Purchasing new or even used cars may simply be out of the picture for many people before they save up for a sizeable down payment.