US credit-card ABS takes hit as consumer stress grow

U.S. consumers, navigating a tighter credit environment as unemployment rises and recession looms, are finding themselves in a financial pinch that is adding pressure to credit card ABS.

After remaining largely immune from distress that leveled the key subprime mortgage asset-backed market, delinquencies and losses on credit card securities have shot past their historic norms. Payment rates have fallen as consumers struggle to keep up with their bills.

"The challenges of the wider economy, the growing unemployment and intensifying credit crunch, are on the verge of hitting consumer ABS in a big way," said Christopher Flanagan, analyst at JPMorgan Securities, in New York.

Credit card charge-offs, debt that is written off as uncollectable, increased by 40 basis points to 6.5 percent in August, 51 percent above the same period in 2007, according to Standard & Poor's.

Delinquencies are up 19 percent versus the year-ago period, S&P said.

Adding to the pressure was the drop in the monthly payment rate, which fell 60 basis points to 18.9 percent, as consumers grew more financially stressed, S&P said.

"The decline reflects the impact of a weaker economy and the lack of alternative funding sources that helped borrowers pay down credit card debt in past years," said Kelly Luo, a credit analyst at Standard & Poor's in New York.

"More and more, credit card users are having difficulty paying more than the minimum on their credit card balances," Luo said.

The rating agency expects losses to continue to increase, and peak at roughly 7.8 percent in the third quarter of 2009, assuming a 6.75 percent unemployment rate in a mild recession scenario.

In September, the U.S. unemployment rate was 6.1 percent.

Flanagan said the likelihood of the unemployment rate shooting pass 7 percent is now "probable" and could lead to deeper credit deterioration ahead for credit card ABS.

"The U.S. consumer is in jeopardy of sinking further, suggesting charge-offs could spike to threatening, if not all- out dangerous levels, ultimately testing ABS structures," the analyst said.

WIDENING SPREADS

Signs of stress continue to emerge in the ABS market, where over the last month or so, spreads on top-rated "AAA" credit card ABS have ballooned to record wides.

"Fundamentally, the U.S. consumer is weakening, especially compared to years past. That's weighing on performance and investor appetite for risks backed by the consumer," said Arvind Narayanan, assistant portfolio manager of structured products at GE Asset Management, in Stamford, Connecticut.

Since September, "AAA" credit card spreads have moved out by a sharp 225 basis points to a current spread of 325 basis points over swaps, a stark contrast from April's tighter 100- basis-points spread, analysts said.

"It's a tough enviornment from a liquidity standpoint. Across fixed income and even equities, things are a lot cheaper than they were in the spring," said GE Asset Management's Narayanan.

Since mid-September, the one-month London Interbank Offered Rate has spiked by 173 basis points to 4.22 percent, with major potential consequences for ABS structures, analysts warned. The majority of ABS bonds are floating-rate, so liability costs on most ABS will rise with LIBOR, they noted. Roughly, 80 percent of credit card ABS issuance isfloating-rate.

Flanagan said the risk of credit deterioration has now accelerated.

"Given the mounting threat on the real economy from the financial crisis, we believe the downside risks of sharp consumer credit deterioration has increased significantly," he said.

Despite the re-pricing already baked into the consumer ABS market, the analyst warned spreads may go even wider as credit deteriorates further and the credit crunch takes hold.

The growing uncertainty has caused sales of credit card ABS to decline by 20 percent to $57.2 billion in this year's third quarter, versus $70.9 billion in the same period a year ago.

While issuers have been able to sell credit card deals, investors are requiring extra yield for the risks of holding those securities.

"There's a general risk aversion in the marketplace," Narayanan said. "So to get investors comfortable with risks, you obviously have to offer investors a little bit more than you did earlier."

Credit crunch fallout raises mortgage rates

Canadians received more proof yesterday of the global credit crunch hitting home after this country's biggest banks began hiking their residential mortgage rates in an effort to recoup higher funding costs from their customers.

The interest rate increases follow days of forewarning by financial experts, who predicted Canadians would feel the pinch of the financial crisis through higher borrowing costs on consumer loans.

TD Canada Trust was the first of the big domestic lenders to increase mortgage rates, moving by 0.35 of a percentage point on fixed-rate loans with terms of three, four and five years.

Effective today, TD's posted rate on its benchmark five-year closed mortgage is 7.2 per cent, while a three-year closed term rises by the same amount to 7.05 per cent.

The bank, however, also has a "special offer" for a five-year fixed rate of 6.14 per cent.

Meanwhile, its "closed variable interest rate mortgage" also increased by more than a third of a point, to 4.75 per cent.

"The reason it has gone up is because we've been holding on – all of the industry has been holding on – trying to not pass the cost to the customer, but we can't do it any more," said Joan Dal Bianco, vice-president of real estate secured lending for TD Canada Trust.

Dal Bianco said all mortgages – but variable rate loans in particular – have become money losers "because of the cost of funds due to all the challenges that are going on in the world right now."

Banks are grappling with higher funding costs in the wake of last year's subprime mortgage market meltdown in the United States. With the ensuing global credit crunch now in its second year, banks remain wary of lending to each other.

The bond market has also been in flux ever since the United States announced a $700 billion (U.S.) bailout plan for American banks. Experts say the plan, while necessary, would likely stoke inflation. That, in turn, has made it more expensive for banks to finance residential mortgages.

The interest rates on mortgages and other short-term borrowing are set based on the price of bonds. With lower demand for bonds and fears of inflation, rates have to rise to lure investors.

Later in the day, Bank of Montreal and Laurentian Bank raised their own five-year, fixed rate mortgages by 0.35 of a point to 7.2 per cent. Those five-year terms are traditionally the most popular mortgage choice amongst Canadians.

Also yesterday, Royal Bank of Canada set aside $35 million (Canadian) to protect clients who invested in a frozen U.S. money-market mutual fund. RBC's U.S. wealth-management unit last week began requesting redemptions for clients of its Ferris, Baker Watts Inc. unit who invested in the Reserve Primary Fund.

Reserve Primary on Sept. 16 became the first money-market mutual fund in 14 years to fall below $1 (U.S.) a share, an event known as "breaking the buck," because of losses on debt issued by bankrupt Lehman Brothers Holdings Inc.

RBC will cover losses of as much as three cents a share if clients receive less than $1 a share when the fund is liquidated, the bank said in a statement.

How to secure low rate personal loan

Choosing the right collateral to secure your low rate personal loan isn't always easy... depending upon the value and how easy it is to use each potential collateral item, you may end up paying more in interest with certain types of collateral than you would with others.

In order to get the best deal, you need to make sure that you use the right collateral as security and find the right lender to offer you the loan. To assist you with this, you'll find helpful suggestions below on how to make your collateral choices as well as tips on shopping around for a lender. Hopefully, this will help you to save money on your loan while still getting the money that you need when you need it.

How Collateral Works

Before getting into the subject of choosing the right collateral to secure your loan, it's important that you understand exactly how collateral works to guarantee a low rate personal loan. The reason that collateral is used to secure a loan against default is that the value of the item being used to guarantee the loan repayment is in most cases higher than the amount of money that's being borrowed... meaning that if you fail to repay the loan, the lender can take possession of the collateral item and place it up for sale so as to get their money back. This is done as a last resort, of course; it takes both time and money to take possession of collateral, and then more time and more money to find a buyer for it. This means that the lender will have to recover not only the amount that you borrowed, but also the amount that has been spent on repossession and selling. If after repeated attempts at collection you still haven't worked out other alternatives with the lender, however, then they will do what is necessary.

Choosing Your Collateral

When choosing the collateral for your low rate personal loan, it's important that you keep in mind that the value of whatever you use as collateral should be higher than the amount that you're planning to borrow. This shows potential lenders that they'll be able to get their money back no matter what, and can help you to get a lower interest rate than you might otherwise. Using a collateral item with an easily-accessible market such as an automobile or precious metals or one that is easy for a lender to work with like home equity can also secure your loan while bringing interest rates down.

Finding Your Loan

Once you've decided what form of collateral you're going to use as security for your low rate loan, you need to begin your search for a lender to actually offer you the loan. Take the time to research the different types of lenders that are available in your area, and then begin requesting quotes from each so that you'll be able to compare the loans that each lender is offering.

You should also visit several online lenders, contacting them and inquiring about their loan rates for the amount you want to borrow. Compare the various quotes that you've received so as to find the one that has the lowest interest rate and the most flexible loan terms. This way you'll be able to repay the loan quicker, and save money while doing so.

Zero Interest Credit Card Balance Transfer Tips

The $200 purchase would soon turn out to be a $400 one with addition of late payment charges as well high interest rate charges on the principal amount. Thus, if you decide to get rid of the credit card debt, go ahead with credit card balance transfer and the best option to exercise is the zero interest credit card balance transfer.

Credit card balance transfer helps to consolidate your credit card debt and saves you some money as well helps you get rid of the several credit cards once and for all. More importantly the zero interest credit card balance transfer is again the best option to help you stop shuffling between credit cards bills and you get only one bill to pay off your amount.

Actually, one can save a lot of money with the balance transfer on credit card facility as the amount that you would be paying as equated monthly installment would actually go towards paying your principal amount rather than only the interest charges. Thus, if you were in possession of too many cards, the best option would be to transfer the high interest credit cards to the low interest one.

However, it is the best option, but one might also be cautious to avoid any future pitfalls. There are certain key queries that if resolved will help more in understanding the added benefits of a zero percent credit card balance transfer.

It is important to get clear as to if there exist any minimum amount for balance transfer, if so, then get to know on the interest rate that would be charged after the introductory period. If you don't pay off the balance in time, then the credit card company can charge higher interest on the remaining balance. So, it is important to get clear on this issue before one embarks on credit card debt consolidation by balance transfer mechanism.

Again, if there is no minimum amount concept then find out if they would charge higher interest on the new purchases. If so, then it would be prudent not to charge anything on this card and use it only to pay off your balance transfer amount otherwise the charges on purchases will go on increasing.

So, pay off in time and enjoy the host of benefits that come from the zero interest credit card balance transfer. It also helps in improving your credit score in the long run as you continue paying your monthly installment well in time to get rid of the credit card debt.

But, be very cautious and read between lines as well as the fine prints before you sign on the dotted lines as zero interest credit card balance transfer offer actually ends up in less than twelve months.

Bad credit loan option available now!

Due to natural changes in the UK credit market, borrowers that have adverse credit history and rating have much greater access to reasonable loan rates than ever before. Statistics show that about one fourth of all UK borrowers have experienced some type of adverse credit. This is a fairly substantial amount of people. While it is somewhat alarming to hear that so many people are having struggles with debt, it is not surprising in today's credit-driven economy.

Credit card balances and revolving debt amounts continue to increase in the UK, which naturally leads to more people struggling to manage their personal debt situations. The good news for the growing group of people that have adverse credit is that now more than ever, they have options to obtain financing. This increase in the amount of bad credit loan opportunities can actually be partly attributed to a growing population of consumers who fit the profile of this target audience.

As more consumers face bad credit, and as the credit market has become flooded with lenders and card companies, competition has forced banks and lenders to be competitive with loan products. This has caused some lenders to aggressively pursue the bad credit market with targeted loan products. While it cannot be said that having bad credit is advantageous, it can be said that it is not as hopeless as it once was for those that have been irresponsible with debt. There are more second chances for borrowers.

Certainly there is more risk to lenders when making loans to consumers that have already demonstrated poor performance with debt. However, some lenders market themselves as being sympathetic to the needs of bad credit borrowers. Lenders attempt to go after borrowers with either low hassle application processes, more reasonable rates or terms on loans, or loans of lower amounts that help the borrower rebuild their credit.

Another change that has benefited bad credit borrowers has been the growth in the internet with regards to lending. Independent brokers have forced more rate competition among loan carriers, and more lenders are offering products online. This has created a more efficient market for lenders and allowed for quicker loan processes for consumers. Borrowers due need to be cautious when searching for loans with bad credit. While many reputable lenders are available, some unscrupulous lenders look to take advantage of desperate borrowers with high rates and up front loan fees. Some hide these fees in fine print of disclosures to avoid communicating them directly to consumers.

RBA rate cuts may fail to ease mortgage pain

Six and a half years later, official and unofficial rates are no longer moving in lockstep, raising the unpleasant prospect of delayed mortgage relief even if the Reserve Bank starts to reverse the cycle of 12 consecutive rate increases.

National Australia Bank chief economist Alan Oster, just back from a month in Europe, said a reprise of the British experience, where banks failed to ease the burden on borrowers despite official rates falling 75 basis points over six months, was not out of the question.

"The reason it occurred in the UK was the offset due to higher credit costs, and it could happen here if the market continues to deteriorate," Mr Oster said.

In Australia, though, the starting point was different, with banks broadly pricing loans to reflect their higher cost of funds after unilaterally hiking variable rates by 50 basis points since the beginning of the year.

NAB, moreover, is forecasting an abrupt end to a six-year cycle of official rate increases in the first quarter of next year, when, it says, a slowing global economy will put a brake on inflation and usher in a 12-month period of cash rate reductions from 7.25 per cent to 6 per cent.

"(Unlike the UK experience), I am assuming that the cuts will be large enough to get something going here in terms of mortgage relief," Mr Oster said.

The new dynamic affecting household budgets is the spiralling cost of wholesale bank funding, where pressures are intensifying after the failure of the US lender IndyMac and the Bush administration's rescue of mortgage funders Fannie Mae and Freddie Mac.

One indicator of those pressures -- the margin of the 90-day bank bill rate over the cash rate -- has been relatively stable since March and now stands at around 50 basis points.

But if the margin were to again blow out, as it did in March to 100 basis points, then all bets would be off for a decline in mortgage rates to accompany any easing in monetary policy.

Commonwealth Bank chief executive Ralph Norris also refused to rule out more rate hikes, independently of any Reserve Bank action.

"Well, it is hard to speculate on that," Mr Norris told a business lunch in Adelaide yesterday. "Basically it depends on where pricing goes internationally, so if rates continue to remain high, or increase, there is always a risk there will be further out-of-sequence increases, but certainly that is not something we do lightly."

Although NAB yesterday said that it was holding up to $580 million in bonds issued by Fannie Mae and Freddie Mac, the Australian banking system's direct exposure is insignificant.

But there are large-scale ripple effects from the sub-prime crisis to worry about.

More failures in the shaky US banking system, for example, could force a stalled economy into serious recession, dragging China down with it.

Goldman Sachs JB Were said in a report yesterday that any large collapses in US regional banks would also constrain the availability of bank funding and force funding costs higher.

ANZ deputy chief executive Bob Edgar said that the bank's relatively pessimistic initial view was that it would take at least until the middle of next year for the impact of the sub-prime debacle to wash through the global financial system. "But I would say we have gone out another 12 months now and we will be fortunate to see the end of it by mid-2010," he said.

Asked to compare the scale of the current crisis to the savings and loans fiasco of the late 1980s and early 90s, Mr Edgar said sub-prime was bigger.

"This has all the hallmarks of being quite serious, because it is affecting a deeper range of more important institutions and it has got quite a bit longer to go," he said.

"Confidence levels in the US have been punctured and the country seems to be talking itself into a recession."

Mr Edgar likened the situation to the deep economic malaise in Victoria in the early 1990s, when the state was almost regarded with pity by the rest of the nation.

It took years, he said, before the state could mount a serious revival. Australia would not escape the impact of a US recession, he said. "It will affect us in a way that we are reluctant to come to grips with after so many years of uninterrupted growth."

Fed toughens mortgage rules

Underscoring the depth and breadth of the housing crisis and the risk it poses to financial markets and the economy, government officials worked furiously Monday on a dual track to stabilize the home-lending system.

The Federal Reserve approved sweeping consumer protections, requiring all mortgage lenders to ensure that borrowers can verify income to qualify for loans and limit early repayment penalties. The rules, which apply to banks and non-banks, are tougher than an earlier package considered by the Fed.

Meanwhile, Congress is trying to expedite legislation that would create a new regulator and expanded financing for mortgage giants Fannie Mae and Freddie Mac.

The quicker Congress acts, the sooner 400,000 strapped homeowners could get new, cheaper loans instead of losing their homes.

Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, said the House would act by Friday to resolve lingering differences in the mortgage legislation in hopes that the Senate would agree and clear the measure for President Bush next week.