-- Posted Wednesday, 30 September 2009 | Digg This Article
| | Source: GoldSeek.com
Rick’s Picks
Wednesday, September 30, 2009
“Phenomenally accurate forecasts”
When B of A spokesman Lawrence DiRita turned up on the evening news not long ago to assure listeners that his employer was willing to work on a case-by-case basis with troubled customers, we decided to call his bluff. Would DiRita, formerly a high-ranking official in the Defense Department, go to bat for the borrower whose “teaser” loan from the bank was about to shoot up overnight from 0% to 12.24%? Everyone with a credit card has been offered such a loan at one time or another, and it was once possible to initiate one at rates varying from 0% to 4%, with no additional fee for the balance transfer. Not any longer, though. Anyone unfortunate enough to have gotten caught with a large balance when the music stopped is now paying rates of 10 percent or more to service it. And while there are still promotional rates available as low as 5.99%, a balance transfer fee of 3% to 4% effectively kicks that up above 10% annualized, since the loans are typically for 6-8 months.
If you’re in this situation and hoping the bank will work with you, don’t hold your breath. We were told that the lowest non-promotional rate available from B of A at the moment is 12.24%. The man we spoke with, who reports directly to B of A’s top brass, implied that only credit card customers with spotless records could borrow at that rate. We shudder to imagine the rate that would apply to those with spotty credit histories.
Funds Cost Nothing
Now, we don’t doubt B of A’s sincerity when they say that 12.24% is a pretty good rate for unsecured borrowing. The man we spoke with said that’s what the bank must charge in order to make a profit. We did point out to him that B of A and a few other biggies can borrow effectively limitless quantities of money from the federal government at rates approaching zero (a fact of which he seemed unaware). However, we had to concede that soaring default rates and delinquencies were probably behind the relentless rise in teaser rates. With so many borrowers skipping out on creditors, it’s possible banks really do have to charge at least 10%-15% on revolving-charge loans to break even.
But has anyone really thought this through? With the income and net worth of most Americans shrinking at the fastest pace since the 1930s, borrowing at nominal rates of 10%-15% equates to borrowing at real rates of 20% or more. This is more obvious in the mortgage world, where, we predicted here years ago, a 30-year fixed-rate loan would in deflationary times such as these become a crushing burden. Although a 5% mortgage is easy to pay off when one’s home is increasing in value every year, if the price of the home slips by, say, 3%, one’s real (i.e., adjusted for inflation) interest rate burden would shoot up to 8%. In fact, home prices in the U.S. have fallen by 30% on average, subjecting tens of millions of homeowners to effective real-rate burdens so high that, unless inflation returns to the real estate sector with a vengeance, the loans are destined to become virtually unpayable.
Best Game in Town
Meanwhile, banks continue to offer extortionate rates to credit card borrowers because, even with default rates so high, it is still the best game in town for lenders. However, we think they are seriously mistaken if they expect default rates to decline from this point forward. We see defaults at least quadrupling before deflation has run its course. At that rate, perhaps the banks should be charging 50% on unsecured loans?
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not b 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 © 2009, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 30 September 2009 | Digg This Article | Source: GoldSeek.com
