Our Changing Globe

Posts Tagged ‘banking system’

The Federal Reserve noted in a survey of loan officers that was released on Monday, May 6, that demand for prime mortgages rose in the first quarter for the first time since early 2007, and this was in spite of the fact that many banks tightened their requirements for home loans.

The increase in demand comes as 30-year mortgage rates fell to an average 4.78% last week.

Other details of the survey state that, about one half of U.S. banks tightened their lending standards on prime mortgages, which is up from about 45% from that given in a survey that was released in early February.

65% of banks reported having tightened their standards on non-traditional mortgages, such as adjustable-rate loans with multiple payment options, up from 50% in the last survey, and nearly 60% of banks said they tightened their requirement on credit card loans in the past three months.

The Fed’s survey was based on responses from fifty three domestic banks and twenty three foreign banks.

Additional good news was also reported by the National Association of Realtors which announced that its Pending Home Sales Index showed that pending sales of existing homes climbed upward in March, making two consecutive months of increases.

The NAR attributed a rise of 3.2% in signed contracts to “a flood of first-time home-buyers taking advantage of excellent mortgage interest rates”.

Put together, the seven biggest U.S. credit card issuers earned over $27 billion in operating profit in 2007.

Although banks can borrow at interest rates that are nearly as low as Treasury yields, they’ve been cutting credit lines and raising their fees, and the average annual percentage rate offered to new card customers in the U.S. is now 14.2 percent.

Just a few years ago, a booming economy kept loan losses in check and banks perfected marketing tricks and introduced the concept of teaser rates, and in just eight years Americans received around 44 billion pieces of mail jammed into their mail-boxes that promoted credit cards.

Now however, issuers are developing new models to calculate the fees and interest rates that they say are needed to cover the growing number of bad debts. New rules are being put into place too, and if somebody who’s had a card for a long period suddenly uses it at a grocery store for the first time, then it’s quite likely that he’ll be flagged as a potential credit risk and be added to a watch list.

It’s perhaps understandable that banks need healthy credit card earnings to ensure their survival because they can no longer rely on the securities markets that caused the economy to collapse, but it now appears likely that many of them will lose their long-term customers after the economy stabilizes.

Credit cards have become a mainstay of U.S. banking in recent years because the offer a steady income without the volatility that goes with trading and investment banking, but loans on credit cards are unsecured, and the industry absorbed about $55 billion in credit card defaults last year, which is up from $43 billion in 2007.

Fed rules, which will curb sudden changes in interest rates are set to go into effect on July 1, 2010 – but many Democrats in Congress are now pushing to have the legislation advanced, and they also want greater built-in consumer protection.

Read the rest of this entry »