There are loan sharks and then there are pay day loan stores. These are the stores that lend money on no credit and charge in 319% interest. If you can’t pay back the original pay day loan, then they renew and in many cases continue to loan money which ends up putting the customer in a trap that they will never escape.

Now, you can add banks to that pay day loan category. Banks such as Wells Fargo, Fifth Third Bancorp, and US Bancorp are already running a pay day loan program. Of course they certainly don’t call it that. Here is how it works – You can take out a short-term loan for 30 days. They charge $10 per $100 borrowed. That is the equivalent of 120% interest. The Wells Fargo spokeswoman says, “the advance is less expensive than a pay day loan.” So, in other words, it is OK to charge a fee that works out to around 120% in interest. The average pay day loan is $15 per $100. Wow! It looks like Wells Fargo is doing the customers a favor.

So, why are they going this route? Federal regulators finally cracked down on the abusive business of bank overdraft fees. This is the program where they give the customer the ability to continue use a debit card even though they are debiting more than is in the account. A bank customer could have nothing in his or her account, use the debit card 7 times in a day and have 100’s of dollars in fees because they didn’t know they were at a negative balance.

Now, federal regulators say that banks will have to give the customer the ability to opt into the program rather than just abusing them. This could be a loss of 15 to 20 billion dollars in revenue. Really? We should feel sorry for a banking industry that has used abusive means to make money. Just like the credit card industry, these banks will turn to different methods to abuse consumers. Now they are going to be pay day loan sharks. Sure 120% is lower than the 391% effective interest rate for pay day loans; however, it is still abusive. Banks are just going to provide another way for customers to get themselves into a problem.

Don’t worry – it will take regulators around 5 years or so until they deem this abusive then they will clamp down on the banking industry once again. It is amazing that the very people that are suppose to protect consumers from abusive consumer practices will allow these obvious abuses to be practiced for years before doing something about it. They allowed this practice of overdraft fees to go on for years.

Tags: Debt, Fees, interest rates, loan

This is the one of the bigger problems facing recovery right now.  In order to get recovery going, we need a healthy mortgage market as well a solution to the foreclosure crisis.  As this graph shows us, things are not looking real good for the mortgage markets.  The chart on the left shows how applications for refinancing have fallen off of a cliff because of the chart on the right.  The chart on the right shows how interest rates have climbed.  Just this last week the average 30 year rate jumped from 5% to 5.79%.  That is a large increase. 

In addition, this Wall Street Journal article talks about how the President’s plan, the Home Affordable Refinance Plan, is not working nearly as well as hoped.  It might be because so many people that need the help don’t qualify because they owe so much more than their home is worth. 

Consider this study: This report looks at how many mortgages are “under water” or are in trouble.  Typically, “under water” is a term referring to a mortgage where the mortgage exceeds the value of the home.  

Various Types of Mortgages – Percent “under water”

73% of Option Adjustable Rate Mortgages

50% of Sub-prime Mortgages

45% of Alt-A Mortgages

25% of Prime Mortgages

There are hundreds of billions of dollars of these mortgages that will be coming up on the period where the adjustable mortgage rate changes.  That means the interest rate and the payment goes up.  Because of the higher interest rates, lack of equity and poor credit, refinancing will not even be an option for many people. 

I don’t think we are out of the woods at all with this credit crisis.  When do you know it is over?  When the foreclosure problem starts to improve.

RealityTrac reported that foreclosures were up 18% this past May, which was the third straight month that we have exceeded 300,000 filings.  Those are horrible numbers.

Tags: Bob Brooks, Deceptive Money, equity, Foreclosure, Home Affordable Refinance Plan, interest rates, mortgage market, Mortgages, Prudent Money, refinanciang, Wall Street Journal

I get these at least every day. They actually provide some humor in the middle of the day. It is just amazing what a politician will say. Let’s take a look:

FROM THE PRESS RELEASE:

For a year now, I have been speaking out on the need to address our nation’s housing crisis. (What took you so long? This problem has been going on a lot longer. Oh and what were you doing to help prevent this problem in the first place?)

In March 2007, I first called for a “foreclosure timeout” that would bring together servicers, lenders and government actors to help keep families in their homes. In August 2007, I called for increased regulations to protect borrowers and rein in rampant mortgage industry abuses. (Nice thought – a little late. Americans needed protection from the mortgage industry about 6 years ago – I do hope that you and your colleagues enjoyed the nice artificial growth created by the real estate boom and easy credit.)

In December 2007, I proposed a framework to keep families in their homes with a moratorium on foreclosures for 90 days and a voluntary freeze of at least 5 years on adjustable rate subprime mortgage rates. (With all due respect Senator, it just doesn’t work like that. If it were that easy, President Bush would have done that a long time ago and we wouldn’t have that problem. Being an attorney, you should know the huge ramifications that would be had if interest rates were frozen for 5 years – I will give you Kudos for the great political sound bite.)

And in early January of this year, I called for $30 billion in immediate assistance to help states and cities mitigate the foreclosure crisis. (Senator Clinton, if you had $10,000 in debt, would a gift of $1 from the federal government really help? Although $30 billion is a big number, it wouldn’t put a dent in the problem.)

While I was heartened today to see the Administration acknowledge the need for greater federal oversight of the mortgage industry, this news comes seven months and 1.6 million foreclosure filings after I first called for similar steps. (see above comments – what took you so long?)

And while the Bush Administration has belatedly acknowledged that both a foreclosure moratorium and an extended rate freeze are important components of an eventual solution, their approach to-date has been far too narrow to address the scope of the crisis. (That is because President Bush has to play politics as well. He knows that it is important to say they are important components. He also knows that he can’t use them.)

That’s why today, in addition to my proposals for a voluntary moratorium and rate freeze, I am supporting a plan to help millions of families restructure their mortgages on affordable, sustainable terms. I am co-sponsoring legislation with Senator Dodd to expand the Federal Housing Administration’s (FHA) capacity to guarantee responsible, restructured mortgages. This legislation will give lenders new incentives to work with homeowners who have seen the value of their homes fall below the principal on their loans, and put them into more affordable, secure long-term mortgages.

This approach is not a bailout. (Of course not, nor is that program that freezes interest rates – did I just type that out loud?) It is a sensible way for all actors (hey another word for politicians) – lenders, investors, servicers and borrowers – to share responsibility, keep families in their homes and stabilize our communities and our economy.

I first championed FHA reform over a year ago, and offered legislation to help modernize the FHA infrastructure to make the investments in personnel and information technology to help meet market demand and offer safe and secure alternatives to subprime mortgages. (Alternatives to sub-prime mortgages? I wonder if she is referring to 30 year fixed rate loans?) Today, I am expanding that approach so that the FHA can help stabilize the current housing crisis. (I didn’t catch the solution. What can they do besides restructure loans to 30 year fixed loans where people still cannot make the payments?)

Finally, I am calling on Congress to immediately establish a $30 billion Emergency Housing Fund for states and localities struggling with mounting foreclosures. While the recently passed stimulus bill provides much-needed support for struggling workers and seniors (Yep, that $ 600 check is going to go a long way. Maybe a family of four can put enough gas in their car to take a trip and stay at a Motel 6.), it fails to address the housing crisis (You think?), which is at the heart of our economy’s problems. This Emergency Fund would give governors, mayors, and community organizations the resources they need to stem the downward economic spiral that accompanies concentrated foreclosures. (What a relief – I didn’t realize throwing 30 billion dollars is all that you needed to fix the problem.) These resources could be used to buy, rehabilitate and put foreclosed properties back into constructive use (Wow – too bad no one can afford to buy these refurbished homes due to lack of money and the inability to get credit), expand foreclosure prevention and counseling programs (Read: Consumer Credit Counseling-throwing consumers to the wolves), and support community-level efforts to combat blight.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tags: adjustable rate subprime mortgage rates, Bob Brooks, Congress, Federal Housing Administration, Foreclosure, Foreclosure Crisis, Hilary Clinton, Housing Crisis, interest rates, mortgage, President Bush, Prudent Money

Today the Federal Reserve Board met to determine the direction in interest rates. Due to all of the problems in the credit markets written about week after week on this web-site, the bulls were betting on the Federal Reserve Board bailing out the markets.

Although highly unlikely, they were hoping for an interest rate cut. If not, at least there was hope that the Federal Reserve Board to acknowledge that there is a problem and state that they are open to lowering interest rates.

Unfortunately for the bulls, none of that happened. In fact, the Federal Reserve Board is still aggressively fighting inflation.

Jim Cramer has been screaming every night on his stock show that the Federal Reserve Board should bail everyone out. He literally threw a 3 year old fit on television today following the fed announcement.

There is something that the bulls do not acknowledge in the desperate plea for someone to bail out these problems so the party can continue. The fed has every right to be concerned about inflation. However, it is not the type of inflation that they typically worry about during the meetings. They are worried about ASSET inflation getting out of control.

They cannot afford to lower interest rates here. If they do, the real estate markets will ignite again and a good possibility exists that all assets (Stocks, bonds, real estate, etc) would morph into an incredible out of control bubble environment. (See China) Remember bubbles don’t end very well. It would only be putting off the inevitable.

They cannot afford to ignite the speculative spirits of the markets. Thus they are forced to stay on the sidelines and do nothing.

Unfortunately, the economy is weakening and the real estate markets are making it tougher for the Federal Reserve Board to sit on the sidelines. They have to take the lesser of two evils. They are between the ultimate rock and a hard spot. So, they do nothing.

Only a very desperate situation will motivate the Fed to lower rates.

Tags: Bob Brooks, credit markets, Federal Reserve Board, inflation, interest rate cut, interest rates, Jim Cramer, Prudent Money, real estate markets