Personal Finance Blog By MoneyRates - December 2011
December 14, 2011
Last week protesters in two dozen cities across the U.S. disrupted foreclosure proceedings as part of a movement called Occupy Our Homes, an offshoot of the Occupy Wall Street movement. Their actions included interrupting evictions, occupying previously vacant homes in foreclosure, and disrupting bankruptcy auctions.
While this protest is well meaning, some unintended consequences could result. These protests could negatively impact your ability to get a mortgage in the future, or even to refinance your current mortgage.
Emotionally, the Occupy Our Homes movement is very satisfying. After all, no one wants to see a family evicted from its home, especially for the sake of some faceless bank's profits.
However, once you get past the emotion of any specific situation and think of the bigger picture, some rational questions arise:
- Where do you draw the line between lending that was predatory, and that which was prompted by a popular movement to make home loans available as widely as possible?
- Is the Occupy Our Homes movement making a distinction between homes that were foreclosed on due to questionable practices such as balloon mortgages, and those which had conventional mortgages on which the homeowner simply failed to make the payments?
- What responsibility do individuals who borrow money have for meeting their obligations?
It doesn't help that one of the examples the Occupy Our Homes movement highlights is a Vietnam Veteran who is now facing eviction after being in his home since 1968. It's a sad story, but you have to wonder why a person still owes a mortgage balance after 43 years. Clearly, there's more to the story than just banks victimizing homeowners.
To really understand the unintended consequences of the Occupy Our Homes movement, you have to think of the people on the other side of the issue. After all, it's not just banks that are hurt when people fail to meet mortgage obligations. Other victims could include:
- Future mortgage borrowers. Especially at current mortgage rates, banks have little enough incentive to make new loans these days. If they are blocked from collecting on their loans, future borrowers can expect mortgages to be more expensive and/or harder to obtain.
- Current homeowners. For the same reason as the above, the actions of Occupy Our Homes may make it tougher for current homeowners to refinance their homes. Ironically, the more homeowners can take advantage of current mortgage rates, the fewer would have to face foreclosure.
- Depositors. Low interest rates on savings accounts and other deposits are partly the result of weak profits in the lending business. Erode those profits even more, and you can forget about seeing those interest rates rise anytime soon.
- Bank shareholders. No, don't think about rich one-percenters. More likely, bank shareholders are pensions and 401k plans, whose participants are ordinary people. When borrowers don't meet loan obligations, those ordinary shareholders can take the hit.
In short, the Occupy Our Homes movement seems to demonstrate that good intentions don't always make for a good cause.
December 7, 2011
If you've ever been turned down for a loan, or taken a hit to your credit score, you may get a kick out of this: seven of the eight largest banks in the U.S. had their credit ratings downgraded last week.
Standard & Poor's (S&P), a prominent credit rating agency, made the announcement on November 29. While the action was the result of updated credit standards rather than any sudden change in the financial conditions of these banks, the situation does reflect the tougher environment facing banks these days.
Whatever the reason, the banks will have to live with those downgrades, just as millions of Americans have had to learn to live with lower credit scores. However, the bank downgrades could have broader effects on the economy as a whole.
The S&P downgrades
S&P applied new credit rating standards to 37 banks, resulting in downgrades of 15 of those banks. The victims included seven of the eight largest U.S. banks.
The new standards take a broader view of the economic environment, in an attempt to identify the type of systematic risk that plagued the industry during the financial crisis. In any case, the downgraded banks will be just like anyone with a reduced credit rating--they can now expect borrowing money to be more expensive.
These bank downgrades could have broader implications for the economy. While some of these implications are likely to be negative, there could also be some positives--beyond the immediate feeling of schadenfreude many will get from hearing that banks are having credit problems.
Here are some of the possible economic impacts--two negative ones, and two positive ones.
- Layoffs. Bank of America had already announced that it would lay off as many as 30,000 workers; higher borrowing costs could touch off another wave of cost-cutting among banks, dumping more laid-off workers into an already weak job market.
- The threat of failure. At worst, higher borrowing costs could contribute to the risk of large bank failure, setting the industry back to the dark days of 2008.
- A greater emphasis on deposits. Having to pay more to borrow might refocus banks on the fact that they already have a cheap source of capital at their disposal--savings accounts and other deposits. Having to pay more to borrow might encourage banks to offer better CD, savings, and money market rates to attract more capital through deposits.
- A return to core banking businesses. Cost-cutting can only help so much. To regain their health, banks may be forced to seek growth by reviving core business lines, such as lending. This in turn would provide a boost to the economy.
These possibilities will play out over the months ahead. For now, the S&P's downgrade of bank credit ratings is a reminder that the global economy is battling for survival, and that banks, being on the front lines of that battle, are especially vulnerable.
December 6, 2011
The failure of the so-called Super Committee, a congressional group assembled to make bi-partisan deficit reduction recommendations, wasn't much of a shocker. Its performance was on par for an increasingly dysfunctional Congress. Still, its failure could be a costly one for the American people.
It's hard to say exactly what will happen next, but none of the implications of this failure are good. Here are some of the possibilities:
- Slamming on the brakes. In the absence of a deficit reduction plan, the default position is for $1.2 trillion of automatic cuts to kick in beginning in 2013. This kind of abrupt, drastic cut in government spending would be like slamming the brakes on the economy. Already, the government sector has been steadily shedding jobs, and a sharp cut in spending would further add to the unemployment problem.
- Inflation. At some point, the global markets will tire of the fiscal irresponsibility of the American government. The U.S. dollar may be firmly entrenched as the world's reserve currency, but the government can only neglect its duties for so long before the country starts to lose credibility in the international financial community. If the value of the U.S. dollar suffers as a result, it could fuel inflation as import costs soar.
- Higher interest rates. Another way that a loss of credibility for the US could manifest itself is in higher interest rates, as global investors become more wary of U.S. bonds. This could start to counteract the Federal Reserve's effort to stimulate the economy through lower interest rates. The consequences of this might not be all bad, though. After all, current mortgage rates have gotten down to 4 percent without reviving the housing market, so the stimulus of low interest rates might not be missed all that much. Meanwhile, higher incomes on savings accounts, CDs, and money market accounts would be welcomed by bank depositors.
- A market debacle. Any bad news on the economic front could hit the stock market hard. This would drain more wealth from the economy, and provide yet another setback to people trying to build retirement savings.
- Wait 'til next year! The Republican strategy seems to be to resist doing anything until the 2012 presidential election, and both parties are guilty of putting politics ahead of progress by designing a plan whose consequences (the automatic budget cuts in 2013) wouldn't go into effect until after that election. The assumption seems to be that the outcome of that election will somehow allow the government to start functioning again, but is there any reason to believe that's true?
Given the political circumstances, perhaps the Super Committee was doomed to failure all along. But by going through the motions over the last couple of months, it did succeed in one thing--wasting time that the economy can ill afford.
December 2, 2011
A new study appears to show how woefully unprepared Americans are for retirement.
This survey released by Wells Fargo reveals that a quarter of us plan to work until the age of 80 because we haven't put enough in retirement savings accounts to quit work earlier.
The study surveyed 1,500 Americans ranging in age from 20 to more than 70 and earning between $25,000 a year and $99,000. Three-fourths of those people said they plan to work past normal retirement age.
In addition, about half said they would continue in their current jobs or a job with similar responsibilities. This fact raises questions about whether these workers can continue at the same level of work, and what it means to younger workers who typically move up the ranks and take over jobs when more experienced workers retire.
The survey also revealed:
- More than half said they need to significantly cut back on spending now and put more money into savings accounts for retirement.
- The average person has saved only 7 percent of what they had hoped to squirrel away in retirement savings accounts. In other words, if their goal had been to have $350,000, most Americans have actually only put $25,000 toward retirement.
Despite these sobering conclusions, the survey also showed that 75 percent of those with access to a 401(k) savings account are using it, with a median contribution of 6 percent. More than half would like to see their automatic contribution rate increased by 1 percent a year.
Luckily, there are steps you can take now to improve your retirement situation, such as cutting expenses, paying off debt and boosting your savings rate. While retirement may be a challenging prospect for many, careful planning is the first step toward a comfortable retirement.
December 1, 2011
Watching a couple of bankers duke it out wouldn't make anybody forget the Ali-Frazier fights, though it might draw some interest from the Occupy Wall Street crowd. Still, an escalating fight among banks for commercial loans might be worth the attention of anyone looking for positive signs about the economy.
American Banker reports that small banks are seeing more competition from big banks in their commercial lending markets. As a result, large banks are gaining market share in commercial loans at the expense of smaller banks. Here are four reasons this could be significant for the economy--for better or worse:
- Loan growth could spur economic growth. Even record low mortgage rates have done little to spur loan volume, in part because banks have been reluctant to lend. This new competition could signal that some banks are ready to switch from defense to offense.
- If lending becomes more profitable, rates on savings accounts could rise. A growing loan business makes banks value savings accounts and other deposits more, because they provide capital for further lending. Over time, this would encourage banks to offer higher interest rates to depositors.
- Fighting over a limited market has its risks. On the negative side, intense competition over a limited slice of the loan market could encourage undue risk-taking. Commercial and industrial lending, which is the focal point of this competition, represents only 20 percent of the U.S. loan market. Some bankers are concerned that if too many players try to crowd into this segment of the market, they won't adequately account for risk.
- Smaller banks could be caught in a squeeze. Small banks have been able to compete for deposits by offering higher interest rates, but that makes them less able to offer competitive loan rates.
If this new spirit of competitiveness among banks leads them to expand the loan market, it could stimulate the economy and eventually lead to higher interest rates on savings accounts, CDs, and money market accounts. On the other hand, if banks are simply fighting more intensely over a stagnant market, this competition could lead to more risk-taking without growth.