Facing losses on bad loans, banks boost credit card rates

 I speak with some people on a daily basis who refuse to believe that the credit card companies have the ability to raise their rates whenever they want.  When you see articles like the one from USA Today I have posted below, it is really hard to deny.  Now, more than ever in the past, if you have credit cards you do not pay off in full every month, you need someone to help you melt down your debt and take control of your finances.  You can call my office today for a Free analysis at 1-888-456-5635

Your Friend,
Robert Weinberg 

By Kathy Chu, USA TODAY
Contributing: Christine Dugas and Venuri Siriwardane

To understand how the collapse of the nation’s real estate market is hitting borrowers of all kinds, consider Carson Moore.

Moore, of Elkton, Ky., says he always pays more than the minimum due on his credit cards, and does it on time, every time. But in January, Bank of America told him it was nearly tripling his interest rate, to 22%.

“I don’t know why they did it, but I’m not very happy about it,” says Moore, 60. “It’s not like I miss payments or anything.”

Bank of America (BAC) says it’s raising rates on some card accounts based on “periodic” reviews of consumers’ risk. The change, it says, isn’t directly linked to delinquencies on mortgages and other consumer loans. But as banks’ losses mount, they’re jacking up fees and rates and tightening rules on all sorts of consumer loans — from credit cards to auto loans — to cushion their losses, some analysts say.

“Banks will want to make up that income somewhere,” says William McCracken of Synergistics Research, a research firm. “They’re going to be much more aggressive. Everyone is going to see some (price) increase unless they have perfect credit.”

By raising rates and fees — but not boosting them so high that they push borrowers into default — lenders are seeking a “delicate financial balance,” says Robert Manning, a finance professor at Rochester Institute of Technology. “They can’t squeeze too hard that they’re going to kill their client. But they have to squeeze more revenue out of their current portfolios.”

Even as the Federal Reserve has aggressively slashed short-term interest rates, banks are raising rates on some credit cards. They’re also boosting late fees, lifting caps on balance-transfer fees and raising ATM fees for other banks’ customers.

Bank fees have been rising for years. But as their loan losses have surged, banks have become quicker to raise certain fees and rates, analysts say. Lenders collected a record $18.1 billion in penalty fees last year just on credit cards — up 69% from 2003 — from such customer missteps as paying late or exceeding a credit limit, according to R.K. Hammer, a consulting firm. The fees are likely to rise an additional 5.5% this year, Hammer says, because of late fees as people struggle to pay bills.

“I would expect banks to raise fees on a variety of services to offset some of the losses,” says Richard Bove, a financial services analyst at Punk Ziegel. “They’re going to start to nickel-and-dime you to build non-interest revenue.”

Escalating fees and rate increases come at a politically explosive time. Congress has held hearings on whether banks need tighter regulation given the increasingly broad range of credit-card fees and policies — such as deadlines in the middle of a day for receiving payments — that have tripped up consumers.

Ahead of those hearings, companies vowed to scale back some of their fees and punitive practices. Chase, for instance, announced then that it’d stop raising card rates on customers whose credit scores had dropped, and Citigroup said it would no longer raise rates if customers paid late to other creditors.

But Bill Hardekopf, CEO of LowCards.com, a card-comparison site, says he fears that “amid Congress’ preoccupation with fears about the economy, the ramp-up in fees and punishing practices by consumer lenders will go unchecked.”

Banks’ stepped-up reliance on fees in a sputtering economy makes it “abundantly clear that we do need new laws and rules to protect consumers, to protect the market,” says Rep. Carolyn Maloney, D-N.Y.

“Financial institutions have a right to make a profit, but they don’t have a right to make an extra profit because they messed up elsewhere,” says Maloney, who plans to introduce a bill to combat arbitrary interest rate increases and to ban issuers from applying such increases to existing debt. Sens. Hillary Rodham Clinton and Barack Obama have also made credit card reform an issue in their presidential campaigns.

Read the fine print on rates

Overall, falling interest rates are expected to reduce banks’ cost of capital. In theory, that should lead to lower loan rates for consumers. Many credit card rates are pegged to short-term rates that fall when the Fed cuts rates.

But that doesn’t stop issuers from changing an interest rate. Their contracts typically say they have the right to change a rate “at any time, for any reason.”

A Federal Reserve survey of senior loan officers last month found that 13 of the 53 banks surveyed have widened the spread — which could boost their profits — between what it costs them to borrow and what they charge on certain consumer loans. Four of 39 banks surveyed widened spreads on credit cards.

Loren Cooley, 39, of Toledo, Ohio, saw the rate on her Chase credit card nearly tripled late last year, to about 20%. Why? Her overall debt had swelled, and her credit score had dropped, mainly because of medical bills. Her issuer raised her rate, Cooley complains, even though she usually paid on time and hadn’t increased her debt on the card.

After USA TODAY contacted Chase, it offered to cut Cooley’s rate on her existing balance to 7.99%. Chase wouldn’t discuss the rate increase but says it’s working with the consumer to resolve the issue.

Chase has also raised the rate paid by new customers of its popular Chase Freedom card — even as the Fed has cut rates. The card’s rate soared as high as 17.2% in December, compared with 14.2% in September, before slipping back to 16% in January.

Card rates exceeding 30%?

Advocates say they fear that as employers shed jobs and housing values sink, more people will see their credit card rates raised to as much as 32%.Such penalty pricing can kick in if consumers pay late by just one minute or exceed their credit limit once.

Consumers can also be slapped with penalty rates if they pay late to some other creditor, because “a lot of issuers are still re-pricing accounts based on credit scores,” says Curtis Arnold of CardRatings.com.

The New York State Banking Department says it’s fielding more complaints about credit cards, many of them from people who feel their rates have been unfairly jacked up, says spokeswoman Jacqueline McCormack. The state agency refers such calls to federal regulators that oversee card companies, she says.

On a national level, data about card complaints are mixed. Complaints to the Federal Deposit Insurance Corp., which oversees state-chartered banks, rose 53% from 2006 to 2007. Janet Kincaid, head of the FDIC’s consumer-response center, says she expects complaints to rise further this year because of the soft economy. Meantime, the Office of the Comptroller of the Currency, which supervises national banks, says it hasn’t seen a noticeable rise in such complaints.

Though card defaults are still mild compared with historical levels, Fitch Ratings expects them to rise through 2008 because, “We’re not sure the Fed cuts will have an immediate effect” on consumers, says Christopher Wolfe, a managing director at Fitch. The firm expects credit card charge-offs to climb at least 35% and auto-loan losses at least 50% this year.

As defaults rise, auto lenders are becoming stricter about who qualifies for loans. GMAC Financial Services is making fewer loans to consumers with poor credit, says spokeswoman Gina Proia.

Still, those who qualify for auto loans are generally able to stretch their payments over a longer period — meaning lower monthly payments — as cars have become costlier, says John Bella, a managing director at Fitch. But Bella warns that banks could cut back on these longer-term auto loans if their losses on them escalate.

Some student-loan borrowers, meantime, can expect to pay more. Mark Kantrowitz of FinAid.org, a financial aid site, expects interest rates on private loans — which aren’t guaranteed by the government — to rise by between a quarter of a percentage point and 1½ points over the next few months.

As the economy weakens, consumers should look out for such changes in loan terms and rates — especially on credit cards. Banks generally must tell consumers in writing of “material” changes in terms.

Some of the stricter policies banks are imposing:

•In mid-April, Bank of America will start charging 3% for balances transferred to all its credit cards, rather than capping fees at $75 to $100 on some cards. Last year, it also raised, to $3, the fee it charges customers of other banks for withdrawing money from its ATMs.

•Chase has raised ATM fees charged to other banks’ customers for using most of its ATMs. Wachovia says it’s testing the higher fee for withdrawals by other banks’ customers at 4% of its 5,100 ATMs.

Chase spokesman Tom Kelly says it’s “appropriate” to charge other banks’ customers $3 to use Chase ATMs because “it’s continually more expensive to buy and service machines.”

•Citigroup (C) is weighing similar changes to its credit cards. Last month, after the bank announced a large write-down on bad mortgage loans, CFO Gary Crittenden replied to an analyst’s question about whether Citi would “pull back (on offering cards) or increase pricing or neither” by saying it was doing “all of the above.”

A majority of Citi’s recent card losses occurred in five states — California, Florida, Illinois, Arizona and Michigan — where a disproportionate number of customers are defaulting on mortgage bills, it says.

•Discover Financial (DFS) last year raised the top rate charged to risky new card customers and raised late fees for most of its customers. Spokeswoman Laura Gingiss says the company “assess(es) different risk factors on an ongoing basis,” which could result in changes such as higher APRs on credit cards.

•Capital One (COF) made a slew of changes to its credit cards last year. They include shortening the grace period — the time that customers have to pay their bills without incurring interest charges — to 25 days from 30 days and raising the cash-advance fee to 23% from 19%. In 2008, the issuer plans to “assess fewer fees on customers as they continue to adjust to (last year’s) new pricing,” CEO Richard Fairbank said last month.

Nelson Brentlinger of Pueblo West, Colo., says he recently borrowed $5,400 from his Capital One card to pay mortgage bills because he was told he’d pay no interest for 18 months. But when Brentlinger made new purchases on the card and tried to pay them off at the end of the month, the issuer applied his payment to his 0% balance and charged him 17.99% interest on his new purchases.

Brentlinger says he felt misled, because no one told him that payments would be applied to the lower-rate balance first. He complained to state regulators and to Capital One. Eventually, the bank forgave his interest charges. Capital One said it did so as a “goodwill gesture” because a representative might have given him wrong information.

Still, Brentlinger isn’t happy with the way he was treated. He suggests that if he, as someone who always pays on time, is being hit by unexpected new fees, other consumers will also be feeling the pain.

The experience “makes me feel very uncomfortable about credit card companies,” Brentlinger says.

Beware of Tax Scams

Along with the tax man come the inevitable new breed of scam artists. Be on guard – criminals who want your personal information use this hectic and confusing time of year to prey on unsuspecting individuals.

Watch out for unscrupulous scammers, who are sending emails that appear to be from the IRS. The content of the emails are often written to persuade you to link to a website that will allow you to update your data or receive important information. Remember, these phony emails are quite sophisticated, and the links send you to what usually appear to be legitimate IRS or government websites. In reality, they are not. These sites will prompt you to divulge private information under the guise of the IRS requiring it, to offer a larger refund, or sometimes, ironically, to protect you from identity theft or loss of privacy.

There are some simple steps you can take to avoid falling prey to one of these scams.

Always Be Suspicious of Emails. Remember, the IRS does NOT initiate communication with taxpayers through email, but rather through the regular mail. If you receive an email that says it’s from the IRS, you should immediately be suspicious and should forward it in its entirety to the IRS, so that they can take steps to shut down the fraudulent and bogus websites. The IRS requests that you forward all questionable emails to phishing@irs.gov.

Double Check the URL Address. Keep in mind that all IRS websites begin with the following web address: http://www.irs.gov/. So, if you ever click a link in an email or visit a website that you believe is related to the IRS, the first thing you should do is confirm the website begins with the correct URL address. Remember, sometimes it may “look” legitimate, but is actually an imposter site that is “phishing” for information. So always, always double check the actual URL address before you type any information in the site.

Exercise Extreme Caution with Attachments. When it comes to questionable emails, the best practice is to never open any attachments. That’s because attachments are an extremely common method that hackers use to infect your computer with programs that may harm your computer or steal your personal information–often without you even knowing!

In today’s technological environment, electronic communication offers us tremendous speed and convenience. But it can also be used for unethical purposes by scammers. Most organizations have worked very hard to put strict privacy policies in place. As a result, government agencies and financial institutions will rarely, if ever, ask you to divulge personal information via email.

If you receive any email asking for personal information of any kind, you should immediately be suspicious. When in doubt, call the customer service lines listed on your statements or documents and discuss the email that you received.

Delinquent Homeowners Get a New “Lifeline”

There is some more good news for homeowners who are delinquent on their mortgages: The program, dubbed “Lifelife” was announced yesterday and will delay foreclosure for tens of thousands, and give them the time they need to work out modifications with their lenders.  I included the details of the program in the article below.

 While this will help some, of course there are still so many who may face foreclosure on their homes.  It is imperative that if you or anyone you know is in this situation or may be in the near future, you call our office for a free mortgage review & analysis.  We can check to see if you are a candidate for this program as well as other possible solutions.  

Your Friend,
Robert Weinberg
Office 888-456-5635

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Six of the big mortgage companies involved the Hope NOW Alliance announced that the Alliance is expanding its efforts to help homeowners facing foreclosure.

The rate freeze program announced by President Bush in December applied only to borrowers who were facing resets on subprime adjustable rate mortgages but who were current, in fact had never been delinquent, on their mortgage payments.

The new program dubbed Project Lifeline extends earlier Hope NOW efforts to include those who are seriously delinquent whether their problems are with subprime, Alt A or prime loans and will even assist those in foreclosure with second mortgages or home equity lines.

The new program was announced in a press conference Tuesday morning at the Treasury Department. Treasury Secretary and Department of Housing and Urban Development Secretary Alphonse Jackson along with Bank of America representative Floyd Robinson and Home Now Alliance Executive Director Faith Schwartz presided.

Lifeline will be, at least at first, a joint effort by six of the largest mortgage servicers in the country; Bank of America, Wells Fargo, Citigroup, Washington Mutual, J.P. Morgan Chase, and Countrywide Mortgage. These six represent 50 percent of the U.S. mortgage market. There are another 19 services that are members of Hope NOW and Secretary Paulson expressed a strong desire to have them sign on to the new program.

Borrowers who appear to qualify for help will receive letters from their mortgage servicers notifying them of the program and their possible eligibility. These borrowers, who will be at least 90 days behind in payments, must contact the servicer within 10 days of receiving the letter and inform the servicers that they are interested in the program, that they are willing to participate in counseling if required, and they must provide financial information to the servicer. If the loan appears salvageable, the homeowner will be granted a 30 day “pause” in the foreclosure process to allow time for a loan modification or other resolution.

Bank of America’s Robinson said that the evaluation of a borrower’s situation will address the entire picture including credit card and other debt and will be transparent so the borrower knows exactly what is happening with the foreclosure and his loan.

Robinson and Schwartz recapped some of the activities of Hope NOW since it was set up to facilitate contact between troubled homeowners and those who might help them.

The hotline is now handling over 4,000 calls a day, up from 625 at its start, and there are 400 housing counselors working for Hope NOW. The organization has sent out 775,000 letters to borrowers in the last three months and has a 16 percent contact rate but hopes that this will improve as the program receives more publicity. An additional 200,000 letters are going out each month. 870,000 borrowers have been helped with their foreclosure situation and over one-half million of these have been subprime borrowers. Loan modifications doubled in the fourth quarter of 2007 over the third quarter.

One reporter asked how borrowers who are “upside down” in their loans would be treated. Would Bank of America for example, be open to writing down a loan to reflect the current market value of the home, thus forgiving that amount of debt? Robinson said he could not speak for the other servicers but that Bank of America would look at this kind of solution on a borrower-by-borrower basis.

Another reporter asked how many borrowers Project Lifeline was expected to help but Secretary Paulson refused to speculate saying that it would be up to the individual servicers to determine that number but that there would soon be a reporting system in place so that these kinds of questions can be answered.

Paulson stressed that not all borrowers can be helped by Project Lifeline or any other program. There will be some who simply refuse to make contact or who walk away from their homes and those whose financial situation makes it impossible to keep their homes “and we cannot help those who refuse to honor their obligations. But Project Lifeline has the potential to offer new solutions to responsible, able homeowners who want to keep their homes.”

Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates

by Barry Habib – Contributing Editor to CNBC.com 

The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates.  A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.

The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so.  Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.

Now let’s take a look at what happened with the Fed’s most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a “knee-jerk” reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. This past month, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp and mortgage bonds had little reaction – but, were unable to recover the enormous pricing loss seen back on Jan 23, the day after the surprise 75bp cut.

Better Know the Score!

It looks like lenders, landlords, insurance companies and employers aren’t the only ones interested in credit scores these days – now the health industry is getting in on the act.

Credit industry giant Fair Isaac is working with Healthcare Analytics and Tenet Healthcare to create a new “MedFICO” score. This new credit score is intended to judge a person’s likelihood of paying their medical bills and could debut as early as this summer. Understandably, the new score is already raising concerns from consumer advocacy groups that fear it will be checked before patients are treated. They are afraid that people with low medical credit scores could receive lower-quality care than those with a higher MedFICO.

According to Stephen Farber, chairman and chief executive of Healthcare Analytics, that will not happen. Hospitals will check the score, which will be based on the patient’s medical bill payment history, only after the patient is discharged.

And under the Fair Credit Reporting Act, hospitals and doctors may report health care debts to credit reporting agencies but cannot indicate what they were for. Hospitals generally do not report delinquent accounts, but they do turn them over to collection agencies. In such cases, only the medical provider’s name and the amount owed should be listed. And even then great care must be taken so as not to reveal the type of care given, as would be the case with the Betty Ford Clinic, which is widely known for treating drug and alcohol addiction.

But can they be trusted?

Given the problems with the credit system in general – such as identity theft and inaccurate scoring data – consumer advocates question whether or not this information should be used as the basis for a new medical version. In an analysis of more than 500,000 individuals’ credit scores, the Consumer Federation of America says 29 percent were 50 points lower than they should have been.

They ask, “What’s going to happen if there’s a mis-scoring due to clerical error or when there are two people with names like Bob Jones who have similar numbers?” Insurance companies are already using a person’s credit score to determine their premiums now. What’s going to stop health insurance providers from doing the same thing once the new MedFICO score is available?

If you ever doubted the importance or legitimacy of your credit score being as high as possible, this should be your wake up call!

Learn More About Credit Scoring and Credit Repair