-- Posted Wednesday, 6 August 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Wednesday, August 6, 2008
“Phenomenally accurate forecasts”
If credit is so tight for commercial borrowers, why are so many households still deluged with mail from banks offering credit-card money at 3.99%? The answer came to light yesterday in news suggesting that the source of such loans is about to dry up. Banks have typically raised cash for revolving charge loans by issuing bonds that as recently as March topped $10 billion per month. The teaser rates to credit-car consumers varied from 0% to 8% and were usually good for six months. Bonds backed by credit-card payments have always been considered very secure, since default rates were low and payments predictable. However, both of these factors have taken a turn for the worse due to the deepening recession, causing the market for such bonds to wither. The result is that their issuance has been more than halved, to $5.26 billion in June, and then to $4.4 billion in July.
Teaser loans have made it quick, cheap and easy for households strapped for cash to cover their monthly bills, and the skillful juggler of such loans would have had little trouble since the early 1990s borrowing, more or less in perpetuity, tens of thousands of dollars at rates of 4% or less. Usually, there was a small up-front fee of 2% to 3% associated with the loan, but the fee was almost always capped at $50-$75. That meant a credit card customer with a $25,000 limit could have borrowed that sum for interest payments totaling less than $400 over the six-month life of the loan. The rate would typically skyrocket to 15% or more after the teaser period expired, but borrowers would have had little trouble rolling to a new teaser loan proffered by another bank.
Borrowers Trapped
More recently, however, the cap on the initial fee was lifted, so that instead of paying just $50 or $75 to get the loan, borrowers would have to cough up 3% of the total amount, or $750 on $25,000. Many loan-jugglers undoubtedly have been trapped into doing this, having amassed more debt than they can pay off. The up-front fee effectively raises the annualized cost of the loan to 6% plus interest paid over its life. The banks until recently were ready and eager to continue making such loans because of the high fees; and, to the extent most borrowers were able to keep current on payments, the risk to lenders was manageable.
Now, however, with defaults rising and many borrowers presumably at the threshold of delinquency, bond lenders have pulled back sharply. The day when borrowers find they can no longer roll their balances at teaser rates is coming, and with it a large wave of personal bankruptcies. The best hope for borrowers in over their heads is that the draconian bankruptcy laws hatched under Clinton and signed by Bush are revised or repealed. Congress, ever eager to be seen helping the little guy, is reportedly hard at work at this task, but clearly, time is running out.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 6 August 2008 | Digg This Article | Source: GoldSeek.com
