House Of Cards

In tough times, businesses will do nearly anything to get new customers—look at the big markdowns at retailers and the cheap financing at auto dealerships. But there is an exception to the rule: these days, credit-card companies are trying to get rid of customers. They’re shutting down accounts, shrinking credit lines, and, in some cases, actually paying customers to go away. American Express recently offered some of its customers three hundred dollars if they would pay off their balance and close their account.

This is a pretty startling change of direction for the lords of plastic. For decades, they’ve been deluging Americans with come-ons (in 2007, 5.2 billion offers for new cards were sent out), so much so that, as of 2006, there were nearly 1.5 billion charge cards in circulation. And these cards did not go unused: between 2000 and 2006, even as Americans’ real income was essentially stagnant and their savings rate negligible, credit-card borrowing rose by about thirty per cent. Our willingness to spend beyond our means served the credit-card companies well: their profits jumped forty-five per cent between 2003 and 2008. But while making borrowing easier boosted the companies’ profits, it also increased the risks they faced, risks that started to hit home once the economic slowdown began. According to Fitch Ratings, credit-card chargeoffs—debts that companies determine they will not be able to collect—rose to almost 7.5 per cent in December, up forty per cent from a year earlier. And, as unemployment continues to rise, so, too, will the number of people who are unable to pay their bills. Posted by Canadian Funding Corp. Read more HERE

With Defaults Rising, Is a Credit-Card Crisis Looming?

Posted by Canadian Funding Corp


We're not nearly out from under the subprime mortgage meltdown and already analysts are speculating about the next industry crisis, relate rel="nofollow"d to the little plastic cards in your wallet. With American Express becoming a bank-holding company this week in order to get low-cost funds and share in the $700 billion bailout pool, it's clear that even traditionally resilient industries like credit cards are feeling pressured. "Credit cards are in line to fall," says Adam Levitin, associate law professor at Georgetown University. "The question is whether they will beat out the auto industry — they're racing for the honors." Read more HERE

The Credit Card Debt Crisis: The Next Economic Domino

Posted by Canadian Funding Corp

Hot on the heels of the banking crisis, the employment crisis, and the mortgage/foreclosure crisis, the country is on the verge of experiencing a credit card crisis.

According to the Federal Reserve, the total outstanding credit card debt carried by Americans reached a record $951 billion in 2008 -- a number that will only climb higher as more and more people reach for the plastic to make ends meet. What's more, roughly a third of that is debt held by risky borrowers with low credit ratings.

Credit card defaults are on the rise and are expected to hit 10 percent this year. This will obviously drive many banks closer to failing their stress tests -- but it will have an even greater impact on the lives of people who find themselves sinking deeper and deeper into debt.

It's a particularly vicious economic circle: every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials like food, housing, and medical care -- the costs of which continue to escalate. But as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, then turn around and hike interest rates and impose all manner of fees and penalties... all of which makes it even less likely consumers will be able to pay off their mounting debts.

And that's not the end of the economic downward spiral. As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street "creativity," credit card debt is routinely bundled together into "credit-card receivables" and sold to investors -- often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.

As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. And how are the credit card companies trying to offset the rise in bad debts? By raising rates on the rest of their customers -- making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.

And such is the paradoxical nature of the meltdown that Americans keep being encouraged to go back to spending in order to get the economy rolling again. But the problem is, more and more Americans are broke. So the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off.

Getting dizzy yet?

For years, credit card companies have been fattening their bottom lines with an ever-widening array of fees. Late fees, cash-advance fees, over-the-limit fees. In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation's top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time -- that's on top of the interest they are already collecting on those balances.

And interest rates are escalating. Earlier this month, Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent (so nice of them to shave off the .01 to keep it from being 30 percent, isn't it?). The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.

Sen. Chris Dodd, chairman of the Senate Banking Committee, accuses the banks of "gouging," saying, "the list of questionable actions credit card companies are engaged in is lengthy and disturbing."

Perhaps he should send the bankers a Bible bookmarked to Deuteronomy 23:19: "thou shalt not lend upon usury to thy brother." Indeed, Sen. Bernie Sanders told me last week that he is working on "anti-usury" legislation.

For their part, the bankers have tried to cloak their behavior with corporatespeak. A Citibank spokesman called the rate hikes the result of "severe funding dislocation," and said, "Citi is repricing a group of customers in our Citi-branded consumer credit card business in the U.S. to appropriately manage these risks." An AmEx spokeswoman chalked up its rate hike to "the cost of doing business."

Making such pronouncements particularly galling is the fact that many of the banks summarily raising interest rates and piling on the penalties have received billions in bailout money. Our money. We gave Citi $45 billion, Bank of America $45 billion, JPMorgan $25 billion, AmEx $3.4 billion, Capital One $3.6 billion, and Discover $1.2 billion. In fact, American Express and Discover converted to bank holding companies to make themselves eligible for bailout funds.*

Yet that money seems to have been delivered with no strings attached. Banks cash their bailout checks, then turn around and gouge their most vulnerable customers. Priceless.

One of the ironies of the credit card crisis is that the financial industry laid the foundation for much of the trouble we are seeing with its full-throated -- and deep-pocketed -- support of the cynically named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a truly loathsome piece of legislation that opened the door to many of the banking abuses we are witnessing. It made it much tougher for Americans to file for bankruptcy -- even the millions of hardworking Americans whose bankruptcy is the result of a serious illness (fully half of all bankruptcies are the result of crushing medical expenses). It also did nothing to rein in the kinds of lending abuses that frequently turn manageable debt into unmanageable personal financial catastrophes.

More here

Background and causes of Credit crunch

There are a number of reasons why banks may suddenly stop or slow lending activity. This may be due to an anticipated decline in the value of the collateral used by the banks to secure the loans; an exogenous change in monetary conditions (for example, where the central bank suddenly and unexpectedly raises reserve requirements or imposes new regulatory constraints on lending); the central government imposing direct credit controls on the banking system; or even an increased perception of risk regarding the solvency of other banks within the banking system.

A credit crunch is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known. These institutions may then reduce the availability of credit, and increase the cost of accessing credit by raising interest rates. In some cases lenders may be unable to lend further, even if they wish, as a result of earlier losses.

The crunch is generally caused by a reduction in the market prices of previously "overinflated" assets and refers to the financial crisis that results from the price collapseThis can result in widespread foreclosure or bankruptcy for those investors and entrepeneurs who came in late to the market, as the prices of previously inflated assets generally drop precipitously. In contrast, a liquidity crisis is triggered when an otherwise sound business finds itself temporarily incapable of accessing the bridge finance it needs to expand its business or smooth its cash flow payments. In this case, accessing additional credit lines and "trading through" the crisis can allow the business to navigate its way through the problem and ensure its continued solvency and viability. It is often difficult to know, in the midst of a crisis, whether distressed businesses are experiencing a crisis of solvency or a temporary liquidity crisis.

In the case of a credit crunch, it may be preferable to "mark to market" - and if necessary, sell or go into liquidation if the capital of the business affected is insufficient to survive the post-boom phase of the credit cycle. In the case of a liquidity crisis on the other hand, it may be preferable to attempt to access additional lines of credit, as opportunities for growth may exist once the liquidity crisis is overcome. more info from Canadian funding corp click here

Credit Companies caught in own trap

In tough times, businesses will do nearly anything to get new customers—look at the big markdowns at retailers and the cheap financing at auto dealerships. But there is an exception to the rule: these days, credit-card companies are trying to get rid of customers. They’re shutting down accounts, shrinking credit lines, and, in some cases, actually paying customers to go away. American Express recently offered some of its customers three hundred dollars if they would pay off their balance and close their account.

This is a pretty startling change of direction for the lords of plastic. For decades, they’ve been deluging Americans with come-ons (in 2007, 5.2 billion offers for new cards were sent out), so much so that, as of 2006, there were nearly 1.5 billion charge cards in circulation. And these cards did not go unused: between 2000 and 2006, even as Americans’ real income was essentially stagnant and their savings rate negligible, credit-card borrowing rose by about thirty per cent. Our willingness to spend beyond our means served the credit-card companies well: their profits jumped forty-five per cent between 2003 and 2008. But while making borrowing easier boosted the companies’ profits, it also increased the risks they faced, risks that started to hit home once the economic slowdown began. According to Fitch Ratings, credit-card chargeoffs—debts that companies determine they will not be able to collect—rose to almost 7.5 per cent in December, up forty per cent from a year earlier. And, as unemployment continues to rise, so, too, will the number of people who are unable to pay their bills.

It’s little wonder, notes Moishe Alexander, that credit-card companies are now scrambling to shed the customers they think are most likely to default, and to limit the amount that others can spend. In effect, they’re trying to follow the advice given by Larry Selden and Geoffrey Colvin in a book called “Angel Customers & Demon Customers.” Not all customers are equal, it turns out: some are tremendously profitable, while others, like the guy who calls customer service six times a day to check his account balance, cost more than they’re worth. To boost profits, you must cultivate the angels and protect yourself against the demons.

That sounds easy enough. But credit-card companies have created a strange business, in which there’s a fine line between good and bad customers. Their best customers aren’t those who dutifully pay off their balance every month; instead, they’re the ones who charge a lot and pay only a little every month, carrying a sizable balance and racking up interest charges and late fees. These are the “revolvers,” and the credit-card business feeds on them. Credit-card companies don’t necessarily want revolvers to pay off their debts; if they did, there’d be no interest or fees to collect. They want their loans to be, in the words of a banking regulator, “a perpetual earning asset.” And they’ve thought a lot about how to keep those interest payments coming. For instance, they used to keep minimum payments relatively high. But, over time, companies started lowering minimum payments, sometimes to just two per cent of the balance. The lower the minimum payment the less people pay off each month and the longer they stay on the hook.

The catch is that while revolvers are the companies’ best customers, they’re also more likely to default, which would make them the worst. That’s why credit-card companies have had to rein in their lending and shed accounts. Since that risks shrinking profits, they’re also trying to get as much as they can out of their existing customers, by doing things like sharply increasing their interest rates. This increase is partly a response to the greater risk of default, but it also takes advantage of the recession. Many cardholders don’t have enough money to pay off their balance in full, so when interest rates rise they aren’t able to just close their account and get a different card. Effectively, they’re captive customers. And since credit-card companies, unlike most lenders, are allowed to change the terms of their loans at any time, people who borrowed a big chunk of money at, say, nine per cent may now be paying seventeen per cent on the loan.

These tactics are not going to improve the credit-card industry’s dismal reputation. They’re also not going to help an economy in recession, since reduced credit lines take away an important cushion for consumer spending, and higher interest rates and increased fees are likely to drive more people to default. But the odd thing is that while less access to revolving credit is a bad thing for us in the short run, having people rely less on credit cards is a good thing in the long run. The easy availability of credit cards encouraged people to live beyond their means—studies suggest that people really do spend more when they can pay with a credit card, and that big credit lines further encourage extravagance. And the high price of credit-card debt meant that billions of dollars in interest and late fees went to credit-card companies instead of to more productive uses. Smaller credit lines and less borrowing make sense. But in the short run they’re going to throw a lot of sand into the economy’s gears.

This is the paradox of deleveraging, says Moishe Alexander, it’s good for borrowers to reduce their debt, and good for lenders to be more rigorous in their standards, but when everyone deleverages at once it does real damage. It’s like a drug addict whose dealer cuts him off: it’s good to stop using, but withdrawal is painful. The end of the credit-card boom isn’t going to wreak as much havoc as the end of the housing boom. But it is helping to put a brake on our spending. And, at this point, every little bit hurts.

Canadian Funding Corporation’s Review of the Credit Card Crisis By: Moishe Alexander

Canadian Funding Corp Review and Comments by Moishe Alexander On the Regulatory Plans by The Canadian Government

December 9, 2008

Canadian Funding Corporation’s Review on the Canadian Government’s New Regulatory Plans for Interest Rates and Fees Charged to Credit Card Users

As reported in the Toronto Star on December 9, 2008 by Tony Wong, the housing starts in November 2008 are down 19% from the month of October 2008. This is the biggest reduction in the Toronto market, which was down almost 30% from the previous month.

It appears that the condominium market is having the biggest effect on housing starts since condo development is included in all housing start figures. However in a stunning development, the actual new home starts are up by 24% compared to the same period last year. This figure will start to be reduced and fade away over the next couple of years as the recession takes hold.

As a result of the impact of the condominium market and its freefall, it’s expected that the 5 big banks will not actively support mortgage funding for this type of real estate property.

There are signs that the affordability of homes is starting to turn around as a result of lower interest rates starting with the Bank of Canada. The average consumer is now benefitting by approximately 1% of their pre-tax income towards the affordability of a home.

However the problem with that is that it still takes 53.3% of a person’s pretax income to afford the average $437,000.00 home in Toronto. This is about 21% above the financial institution guidelines in terms of the pre-tax disposable income, which has a maximum of 32% in order to comfortably afford a home.

The good news is that with interest rates continuing to fall and Toronto resale home prices dropping, the pre-tax income thresholds should start to decline, edging closer to the 32% guideline set by the banking institutions and credit unions.

For Canadians, we still have banking institutions and credit unions who will lend money, even in this economy and even given the sub-prime mortgage crisis which has subdued lending south of the border.

Since in Canada speculative purchasing is relatively insignificant, the losses by the Canadian banks will be minimal unlike south of the border where speculative buying and the sub-prime mortgage crises caused banks south of the border to not be in a position today to lend money on mortgages for the regular consumer.

Some additional good news for Torontonians is that the affordability of homes is significantly better than in places like Vancouver where it takes 74.8% of pre-tax income to afford the same home. Even that figure in Vancouver is down 4% from the previous quarter.

We highly recommend that you sit down and determine what percentage of your pre-tax income you can comfortably dedicate to your home using the 32% guideline as instituted by the chartered banks and credit unions.

We strongly suggest that you wait to purchase that home until the Fall of 2009, when home prices should be at the bottom.

The Toronto Star article can be read below or viewed in its entirety by clicking here http://www.thestar.com/article/548718

House prices to keep falling

'A correction is now upon us,' economist says as home building hits slowest pace since '01

December 09, 2008

TONY WONG

BUSINESS REPORTER

The real estate market may be cooling, but the upside is that Canadian homes are getting more affordable even as the nation "no longer appears to be immune to a generalized housing downturn," says a report.

"The souring of economic conditions, eroding consumer confidence and, in several instances, past excesses are creating a glacial downdraft that the majority of Canada's housing markets will be hard-pressed to resist," RBC senior economist Robert Hogue stated in the report released yesterday.

Housing start figures also released yesterday support the bank's view.

The seasonally adjusted rate of starts was a much weaker than expected 172,000 units in November, down 19 per cent from the 211,800 units recorded in October and the slowest pace of residential construction activity since 2001.

The Toronto market took the biggest hit, with starts down by almost 30 per cent from a month earlier, mostly due to the volatile condominium building sector. This may be a taste of things to come: the condo market has seemed particularly vulnerable to the downturn as developers shy away from starting new projects while trying to complete current developments in a falling market.

Year-to-date starts are actually up by 24 per cent compared with last year, as foundations are poured on projects that were sold last year. But analysts expect next year to be less buoyant as sales start to fade.

"With sales falling, credit conditions tight and fading support from condos, a correction is now upon us," BMO Capital Markets economist Robert Kavcic said.

A cooling market coupled with pressure to lower interest rates at the Bank of Canada – including a decision today that is expected to lower key rates by another 50 basis points – means homes are becoming modestly more affordable.

In the third quarter of 2008, it took 53.3 per cent of pre-tax income to afford a $436,400 bungalow in Toronto, compared with 54.3 per cent in the second quarter.

While that's a step in the right direction for those looking to buy a home, it's still a steep price of entry for many, since most financial institutions use 32 per cent of pre-tax income as a guide in determining whether someone can afford to buy a home. That figure would include mortgage expenses, property taxes, heating costs and other maintenance.

Still, results should be more dramatic in the fourth quarter, with prices in the Toronto market falling further, along with interest rates.

"For Toronto, market sentiment turned on a dime this fall," Hogue said. "Until the end of the summer, the feeling was that local housing markets were successfully negotiating landing to a slower, more sustainable pace of activity. However, notable declines in home prices and activity in many communities suddenly raised eyebrows and heightened concerns."

Hogue cautioned that "while there is no cause to panic at this stage, the GTA market has undoubtedly entered a period of consolidation. The area's economy is facing serious headwinds."

Hogue stressed the economy is in better shape in Canada than in other countries because of a host of mitigating factors, including a sub-prime mortgage market that was far more subdued than in the U.S. Canadian banks are also stable and still lending, while households are generally not as stretched financially, Hogue said. Also, speculative buying has not been as rampant in the Canadian market.

"These factors should provide enough of a foundation to prevent housing markets from spiraling down even as the Canadian economy slips into recession."

The Toronto area's affordability issues also appear a lot better when compared with places such as Vancouver, where it takes 74.8 per cent of pre-tax income to afford a bungalow – making it the most unaffordable city in Canada.

The good news is that's down from 78.8 per cent in the second quarter.

The Financial Post also ran an in-depth article on the housing start crisis and affordability on December 9, 2008. The Financial Post article can be viewed in its entirety by clicking here http://www.financialpost.com/story.html?id=1049974