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Credit Card Charge-Offs – Moody’s Records a Spike

According to the Moody’s Investors Service, there is a spike in credit card charge-offs last August. The Moody’s Credit Card Index recorded a jump in charge-offs to 11.49 percent during that month from 10.52 percent in July. This is up by 6.8 percent from one year ago. Will Black, the senior vice president of the organization said that “August had traditionally begun a seasonal period when delinquency rates start to rise, and this August is no exception.”

The delinquency rate seen last August is a reversal of the earlier trend of declining charge-offs in the previous months. In addition, Moody said that the charge-off rate may not be at its peak yet; it projects that it will be at its highest next summer at 12 to 13 percent. This figure is influenced, to a large extent, by the increasing unemployment rate which at this point stands at 9.7 percent. A lot of Americans today are struggling to achieve debt relief. It is expected that unemployment will peak at around 10 to 10.5 percent in the middle part of 2010.

The rise of charge-offs for the month went with a rise in the delinquency rate of nearly 5.8 percent. It should be noted that the increase this August was influenced by the rise in overdue balances in the last 30 to 60 days. Black further stated that “More increases should continue as back-to-school and holiday expenditures compete with credit card payments.”

Charge-offs is the annualized percentage of the total outstanding credit card balances that have already been written off as uncollected. It provides banks, consumers, and the public a gauge of what to expect in the coming months. Moody’s Credit Card Index relies on credit card information from 300 individual credit card-backed securities which covers around $410 billion in credit card receivables.

Credit Card Reform – New Law Effective Tomorrow

It seems that Americans who worked hard to maintain good credit will be the first hit when the Credit Card Act of 2009 becomes effective tomorrow. Already, lenders are increasing interest rates across the board. The lowest available rate is now currently pegged at 11.25 percent which is significantly higher from 8.85 percent just this January. Meanwhile, customers with less-than-stellar rating have to pay 15.75 percent, up from 13.75 last January.

According to experts, banks are setting the rates this high so they can go down from there depending on market situations in the future. Fortunately, these rates increases would no longer come as a shock to consumers. Congress has given them a leeway of 45 days to reject rate increases. Americans have the choice of paying outstanding balances at current rates in a five-year timeframe. In addition, banks need to mail credit card bills 21 days before it is due.

Various parts of the credit card law are already implemented. For example, fourteen banks have dropped double-cycle billing, where finance charges are calculated on more than a single billing cycle. Meanwhile, eleven major banks have stopped the “universal default” practice wherein rates are rates because of missed payments even with another company.

What is the Catch?

The catch of the Credit Card Law is quite apparent: increased interest rates. Eleni Constantine, the director of Pew Charitable Trusts said that it has in fact increased by 20 percent from December. While increase might seem reasonable, the level at which it was increased certainly isn’t. The borrowing costs for banks are decreasing because of market condition. By raising the rates on consumers simultaneously, they are actually deriving more profits due to larger marginal lending rates.

Overall, the gains in the new Credit Card law are certainly welcome despite certain complications. However, it is important to keep in mind that it has been designed to help consumers with high balances. People with relatively good credit should be aware of these changes and decide whether they still want to use their credit cards or pay in cash instead.

Mortgage Rates Increase to 5.2 Percent

Despite the federal government’s best efforts to lower borrowing costs, the US mortgage rate rose to 5.2 percent, the first time in about a month. According to Freddie Mac, the average 30-year rate went up to 5.2 percent from 5.14 percent.

Mortgage rates are actually at its lowest point since May a week ago. It was lowered by the Federal Reserve’s $1.25 trillion package that was set aside for buying mortgage-backed securities. The low rates boosted purchase and refinancing applications from aspiring home owners. However, the record-low of 4.78 percent was actually in April, twice, because of the Central Bank’s announcement to boost spending on Treasuries and mortgage securities.

According to a senior economist from the Huntington National Bank, George Mokrzan, if the increase becomes too big, the recovery of the housing industry will be threatened. Delinquent mortgages were the prime culprit in the global financial crisis; it has cost firms around $1.5 trillion in asset writedowns and losses.

With the government’s push for recover, a lot of positive developments are being seen in the market. For the third consecutive month, the number of home resales increased last June because of lower borrowing cost, significant tax benefits, and even dramatic declines in home prices.

Increase in Home Purchases

The National Association of Realtors has many reasons to be happy these days. The number of home purchases increased to 3.6 percent (4.89 million) despite the still-gloomy economic condition. This is the highest level since October. However, median prices have fallen to 15 percent. Still, Mokrzan said that “overall, it’s positive”. The industry will bottom out this year and recovery will start.

Given all these developments, it is easy to pinpoint to source of the increase in mortgage rate. If borrowing costs were controlled because of government intervention, it seems that this is also becoming the reason why it’s not increasing. Investors are concerned that the high level of government debt will fuel inflation. It counters the sign that the housing market is stabilizing; and if it goes uncontrolled, it might become more damaging to the economy.

Bondholder’s $3 Billion Rescue Not Enough to Shield CIT

The $3 billion worth of CIT bondholder pledge might not be enough to avoid a CIT failure. According to Renee Dailey, CIT has “indicated they have significant upcoming maturities”. The commercial lender has around $10 billion of debt that’s maturing next year. It also has to deal with dwindling market share, mounting loan defaults, and other problems related to the economy.

CIT just announced its agreement bondholders; the rescue funding is designed to keep the 101-yr-old institution stable enough to avoid bankruptcy. The first $2 billion of the deal is immediately available while the rest will be received in the succeeding 10 days. While these efforts are certainly commendable, it is not nearly enough. Already, the company has said that this is just the first step. It is also asking debt holders to decrease their claims. In addition, there is a bigger restructuring plan on the drawing board.

What Brought CIT on the Brink of Collapse?

The first question in everyone’s mind is, was CIT as irresponsible as some of the country’s largest banks? It would seem that they were more of a victim of adverse economic conditions rather than a perpetrator of it. Over the last eight quarters, this century-old company has had to deal with $3 billion worth of losses from student loan, home mortgage, and commercial defaults.

However, unlike Citibank and company that were deemed “too big to fail”, it would seem that the government thought CIT shouldn’t get second cash infusion. It is fortunate that the group of bondholders stepped in after the government declined CIT their request. The loan extended to the company is said to be backed by a mix of corporate debt, medium-sized company loans, and even aircraft credits. To get this funding, CIT has pledged assets that have a face value of $30 billion.

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