Citi Reviewing Foreclosure Cases

After the scandals regarding wrongdoings in the oversight of many foreclosures, Citigroup is the first bank in attempting to come clean by reviewing about 14,000 foreclosure cases for potential errors. Harold Lewis, a managing director of the bank's CitiMortgage unit is expected to say that Citi is “reviewing about 10,000 foreclosure documents to ensure they are correct. Another 4,000 are being reviewed because they may not have been signed with a notary public present, as required by state law” (WSJ).

However, Citigroup continues to argue that it has a good foreclosures documentation process. It explains that the error in the foreclosures were due to the fact that “the affidavits now reviewed were done before the bank took steps to strengthen procedures and added staff to ensure foreclosures were being processed correctly” (WSJ). Citigoup assures its investors that this mistakes made were an exception to the rule and that its foreclosure documentation process is sound and there aren’t systemic issues.

Citigroup is just the first one in a long list of bank which will try to regain their credibility. “Several major lenders, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc.'s GMAC Mortgage and J.P. Morgan Chase & Co., have been reviewing thousands of foreclosure cases amid revelations they filed large numbers of foreclosure documents without properly reviewing their contents” (WSJ).
If the banks succeed in regaining the public confidence and trust it would be reasonable to expect a faster recovery on the consumer banking industry and vise versa.


sources:http://online.wsj.com/article/SB10001424052748703688704575621120748504644.html?mod=WSJ_Banking_leftHeadlines

Where to Find Free Checking Now

Free checking is when you as the consumer pay a small fee and in return the bank gives you certain ways to save. These savings include no low balance fees, no charge for ACH and Direct Deposit transactions, unlimited check writing, and free ATM/or Debit cards. Looking back now, people are realizing that the fees for free checking outweighed the actual savings. If people had invested in a savings account as opposed to a free checking account they would have yielded much more interest/ savings. So if by chance people are still looking to open free checking accounts, this article says that the best place to invest would be in your credit union. The article says that banks are only in the business to make a profit for their owners/ shareholders. Credit unions on the other hand have the main priority of returning low interest loans and high interest deposit accounts.

Could these credit unions be a threat to commercial banks? Credit unions are much smaller then big banks so they offer a more personal banking experience. At the same time however because of their size you are much less likely to find an ATM which could lead to additional costs for having to use other banks ATM. Banks must recognize that they might not be a dominant force in the consumer banking industry anymore. They must adapt to the methods that credit unions are using to gain business and incorporate them.


http://www.bargaineering.com/articles/find-free-checking.html

Fed Looks to Issue Another Round of Stress Tests

The Federal Reserve announced that it plans to once again analyze the top nineteen U.S. banks in attempts to gauge the healthiness and capacity of the banking system. The banks will be required to "submit capital plans by early next year showing their ability to withstand losses under a set of conditions, including 'adverse' economic conditions and continuing realestate-related woes." The banks were evaluated under a similar stress test in 2009 during the peak of the financial crisis.

The Fed's efforts are part of a greater initiative to enhance government oversight within the industry. The Fed will not only be checking up on the the bank's capacity to handle a crisis but more importantly ensuring that banks have tightened their lending standards on commercial and consumer loans. If banks are up to par, the Fed has set up requirements that will allow banks to raise dividends or buy back stock. But banks will only be given the go ahead if they "have the capital cushions in place to withstand losses over the next two years and demonstrate an ability to satisfy new, tougher, global capital requirements."

Hopefully, additional government oversight within the industry will provide more of a safety net for banks and their consumers. As banks become more stable, hopefully consumer confidence with in the industry will grow. Interestingly enough, the article points out that while "J.P Morgan, Wells Fargo, PNC Financial Services, and U.S. Bancorp are expected to be amount the first to be allowed to raise dividends," Bank of America and Citigroup apparently have "more hurdles" ahead. This further warrants our Wells Fargo investment recommendation. However, I have to wonder why the Fed believes BofA and Citi will not be up to par.

Source: http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_Banking_leftHeadlines

Signs of Recovery for Credit Card Issuers in the Consumer Banking Industry

A report released on November 15th stated that most U.S. credit issuers saw a decline in delinquency rates between September and October (see article).  Capital One Financial Corp. experienced the largest drop in delinquency rates out of the major U.S. credit issuers with a decline of 1.12% between September and October (see article).  This news comes on the heels of a report issued by the Federal Reserve which stated that credit lines decreased by over $8 billion (see article).  While the delinquency rates did not shrink for all banks, this report is still positive news for credit card issuers in the consumer banking industry.

This report is a sign that the credit card issuers could see an increase in revenue as the economy turns around.  When the economy crashed, many cardholders were unable to pay off their balances which led to an increase in delinquencies, or late payments.  Late payments are problematic for credit issuers because they are forced to cover the accounts with capital (see article).  Falling delinquency rates mean that consumers are paying off their overdue balances, so credit card issuers don't have to worry as much about covering potential losses with capital.  Now that the economy is recovering, cardholders are able to pay off their balances and spend more.  An increase in spending on credit cards boosts the revenue of credit card issuers (see article).  If this proves to be a long-term trend, credit card issuers could be on track for future profits in the long-run.

As for the consumer banking industry as a whole, this report indicates that the consumer banking industry appears to be recovering from the financial crisis.  If the recovery continues, banks will begin to see long-term, stable growth which will propel the industry back to its former prominence.

-Justin Schaffer
http://online.wsj.com/article/SB10001424052748703670004575616751808746156.html

Credit card interest rates hit another record high

The national average interest rate on new credit cards reached 14.78 percent. This record level interest rate is coincided by the national average credit card APR being at peak levels. The APR is comprised of about 100 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers. But these high APRs are not a new phenomenon for consumers. In fact, in the third quarter a survey shows that more executives actually increase their APRs then decrease them. However, Chase defied these increasing APRs by lowering the bottom end of the APR range on its Freedom card to 11.99%. Chase is not the only sign of there being hope for credit card consumers though. The Federal Reserve recently multiple senior loan officers for major banks. They found that more than 12 percent of lenders reported easing their credit card approval standards in the third quarter of 2010. This is a sign of what is to come for the credit card industry.

Even though credit rates are at record highs, borrowers will soon have an easier time getting a new credit card. But until these interest rates decrease they will continue to have a real impact on cardholder’s economic situations. Consumers can have as many credit cards as they want but with the interest rate increasing it will take them even longer to pay off the debt which will leave them in debt for years to come.

Source:

http://www.creditcards.com/credit-card-news/interest-rate-report-101110-1276.php

The Consumer Protection Act

As a response to the 2008 – 2009 recession the Federal Government enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act gives unprecedented power of the economy to the federal government. Milton Friedman must have been turning in his grave right about the time these passed thru congress. “The worst element of this system is that the extraordinary power given to regulators--and particularly the Federal Reserve--is likely to change the nature of the U.S. financial system” reads the Wall Street Journal. This will probably destroy the free market as we know it by creating a situation where banks must collude with the government to operate. The Journal continues “Where financial firms once focused on beating their competitors, they will now focus on currying favor with their regulator, which will have the power to control their every move. What may ultimately emerge is a partnership between the largest financial firms and the Federal Reserve”.

Key points in this Outlook:
•The Dodd-Frank Act gives the Federal Reserve, under light supervision by a council of regulators, unprecedented control over the largest firms in the U.S. financial system.
•The result may be a public-private partnership, in which the Fed protects the largest firms from excessive competition and failure and they in turn follow the government's directions.
•In the interest of protecting consumers, the act sacrifices the basic protections built into the U.S. Constitution, creating an agency--the Consumer Financial Protection Bureau--that is answerable to no one.
•Ultimately, the act's effort to suppress risk taking will result in a decline in U.S. competitiveness, innovation, and economic growth.

This means more oversight over the economy and less risky investments for the banks. Loans, credit and mortgages will be less accessible as a result and this will lower the revenue that companies collect. In the short run this policy seems bad for business. It remains to be seen if it prevents future recessions.

Regulations on College Campus Credit-Card Recruitment Leave Banks With Few, Profitable Options

Under new credit regulations, banks are no longer allowed to issue credit cards to anyone under the age of twenty-one unless the applicant has a co-signer or proof that they can independently afford the card. This specifically undermines strategies that consumer banks long capitalized on on college campuses. Before such regulations, college campuses signed contracts with banks, allowing banks to market their credit cards to students on campus. Students were offered pizza, t-shirts, etc. in hopes that they would fill out a card application. Credit-cards were often given to students without checking income sources. Estimates suggest that in 2008, eighty-four percent of undergraduates had at least one credit card with averaging balances toping $3,100. 

The article outlines that such regulations will pose a giant, strategical problem for banks across the board (especially Bank of America). Bank of America had contracts with over 906 college institutions and paid them over $62 million dollars for access to their student market. The bank opened more than 38,000 accounts per year, amounting to "roughly $1,600 paid for each new student account." JP Morgan Chase will also be widely affected. The bank paid over $13.9 million in contracts with college institutions to open 529 accounts, translating into $26,000 per student !!!! 

These statistics and regulations indicate a couple things. First, college student credit card accounts represented a huge, profitable market for banks. Second, banks are willing to invest a ton in undergraduate students, knowing that they could be potential, long-term clients. And third, these regulations will severely hinder credit card interest profits that banks were making off of these students. But then again, there's always debit. 

http://www.americanbankingnews.com/2010/10/28/new-credit-card-strategy-needed-for-bank-of-america-nyse-bac-jpmorgan-chase-nyse-jpm-and-others/