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
Thursday, November 18, 2010
Wednesday, November 17, 2010
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
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
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
Monday, November 15, 2010
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
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
Wednesday, November 10, 2010
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
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.
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/
Sunday, November 7, 2010
Foreclosures Continue to Drain the Consumer Banking Industry
Poor mortgage oversight continues to haunt the consumer banking industry. A recent article from The Wall Street Journal highlighted the consumer banking industry's struggles in trying to sort out the massive amount of home foreclosures. The high volume of foreclosures has caused members of the consumer banking industry to shift much of their focus to their home mortgage branches. The home mortgage branch represents one of the most profitable services provided by consumer banks. The focus on mortgages may allow banks to keep up with the high volume of foreclosures, but it is also drawing attention away from the other services provided by banks (Reilly, 2010). This is making the business of home mortgages less efficient and less profitable (Reilly, 2010).
As far as trends in the industry go, the future does not look any brighter for the consumer banking industry. All home mortgage providers in the United States were given a negative future outlook by one rating association (Reilly, 2010). This is clearly an indicator that the consumer banking industry still has a large task on its hands as it tries to sort through all of the issues surrounding foreclosures. This is bad news for the industry as it tries to recover from the financial crisis. In order to become more profitable, banks are going to have to sort out the problems with foreclosures and make this a profitable service once again.
This article mirrors what I found out during my informational interview. I interviewed a man from Wells Fargo's Home Mortgage Branch. He told me that he has noticed that his local branch at Wells Fargo has had to shift much of its focus to the Home Mortgage Branch of the business. This just serves as further proof that the effect of the foreclosures is being felt even at some of the most basic levels of the consumer banking industry.
-Justin Schaffer
http://online.wsj.com/article/SB10001424052748704405704575596531820563978.html
As far as trends in the industry go, the future does not look any brighter for the consumer banking industry. All home mortgage providers in the United States were given a negative future outlook by one rating association (Reilly, 2010). This is clearly an indicator that the consumer banking industry still has a large task on its hands as it tries to sort through all of the issues surrounding foreclosures. This is bad news for the industry as it tries to recover from the financial crisis. In order to become more profitable, banks are going to have to sort out the problems with foreclosures and make this a profitable service once again.
This article mirrors what I found out during my informational interview. I interviewed a man from Wells Fargo's Home Mortgage Branch. He told me that he has noticed that his local branch at Wells Fargo has had to shift much of its focus to the Home Mortgage Branch of the business. This just serves as further proof that the effect of the foreclosures is being felt even at some of the most basic levels of the consumer banking industry.
-Justin Schaffer
http://online.wsj.com/article/SB10001424052748704405704575596531820563978.html
Wednesday, November 3, 2010
Bank of America’s Not-So-Monumental, New Consumer Banking Strategy
Mounting government regulations and expected revenue loss has lead Bank of America to announce its launch of a new consumer banking strategy. The strategy is geared at bringing consumers “a better banking experience” through “focusing on a on a relationship enhancement strategy designed to incent customers to bring more business” and making “pricing more upfront and transparent.”
The strategy outlines vague innovations and measures that the banks intends to capitalize on over the next few months. eBanking in particular seems to be the first of many innovations we can expect as Bank of America begins to implement its new strategy. Bank of America hopes that the rewards and better pricing it offers through eBanking will attract more business. The bank also writes that intends on offering customers more choices on how to pay for banking services and “reward them for using certain products or bringing more balances.” The bank concludes its statement, writing that it will also look into developing new products that will target the needs of specific consumer groups.
Though the statement represents an effort to prioritize the consumer banking industry, it is clear that Bank of America really doesn’t have any monumental change or innovation in mind for how will proceed with its consumer banking operations. The statement is vague and indicative of two major problems facing the industry: innovation and differentiation. It seems as though the banks are fresh out of ideas now that lucrative late fee and interest rate policies have been ousted. Bank of America in particular certainly seems to be lacking when in comes to bringing new ideas to the table.
http://bucks.blogs.nytimes.com/2010/10/21/what-will-bank-of-america-do-to-its-checking-accounts/?scp=4&sq=%22Bank%20of%20America&st=cse
Citigroup posts gains for the past three quarters?
Ever since the beginning of the recession in 2008, Citigroup stood as a symbol of all that was wrong in the financial system. However this past quarter Citigroup posted a $2.2 billion quarterly gain, which marks the third consecutive quarter where Citigroup has had a gain. Citigroup has been taking technical steps that have allowed it to start its reemergence from its previous state of dismay.
Recently Citigroup as well as its rivals (Bank of America, GMAC, etc.) have been plagued by a problem called Robo-Signing. Robo-Signing is when there is a flood of paperwork from foreclosures which is caused when representatives sign off on foreclosures without verifying the information in the documents. Citigroup though is hoping to have avoided this documentation problem. According to Citigroup executives, the banks consumer banking division anticipated these mounting foreclosures close to 18 months ago. By anticipating these foreclosures Citigroup was able to its loan-servicing practices by bolstering employee training and tightening documentation practices. By doing this Citigroup has sidestepped an unnecessary setback which gives them a competitive advantage over other consumer banks. The bank has decided it does not need to set aside cash to cover Robo-Signing problems though. It has however raised its reserves to handle other potential mortgage problems that might force it to repurchase some loans. Citigroup’s mortgage servicing portfolio is a $500 billion, and over the past 3 quarters it has added about $322 million to cover the potential costs of faulty mortgages it will repurchase from Fannie Mae, Freddie Mac and other private insurers. The bank still has the problem though of finding a buyer for CitiFinancial, its large consumer lending franchise that serves lower-income customers, as well as a big portfolio of subprime credit card loans.
Citigroup is now on the path of emerging as one of the top consumer banks in America. By taking the steps it has taken, they are now in a place where they can compete with other banks. But Citigroup isn’t the only bank that is on an upswing. JPMorgan Chase, whose mortgage servicing portfolio is nearly twice Citi’s size, set aside about $1 billion last week, bringing its total to about $3 billion. This is a sign that consumer banking industry is finally starting to stabilize after several years of decline.
-http://www.nytimes.com/2010/10/19/business/19citi.html?scp=7&sq=consumer%20banking&st=cse
Recently Citigroup as well as its rivals (Bank of America, GMAC, etc.) have been plagued by a problem called Robo-Signing. Robo-Signing is when there is a flood of paperwork from foreclosures which is caused when representatives sign off on foreclosures without verifying the information in the documents. Citigroup though is hoping to have avoided this documentation problem. According to Citigroup executives, the banks consumer banking division anticipated these mounting foreclosures close to 18 months ago. By anticipating these foreclosures Citigroup was able to its loan-servicing practices by bolstering employee training and tightening documentation practices. By doing this Citigroup has sidestepped an unnecessary setback which gives them a competitive advantage over other consumer banks. The bank has decided it does not need to set aside cash to cover Robo-Signing problems though. It has however raised its reserves to handle other potential mortgage problems that might force it to repurchase some loans. Citigroup’s mortgage servicing portfolio is a $500 billion, and over the past 3 quarters it has added about $322 million to cover the potential costs of faulty mortgages it will repurchase from Fannie Mae, Freddie Mac and other private insurers. The bank still has the problem though of finding a buyer for CitiFinancial, its large consumer lending franchise that serves lower-income customers, as well as a big portfolio of subprime credit card loans.
Citigroup is now on the path of emerging as one of the top consumer banks in America. By taking the steps it has taken, they are now in a place where they can compete with other banks. But Citigroup isn’t the only bank that is on an upswing. JPMorgan Chase, whose mortgage servicing portfolio is nearly twice Citi’s size, set aside about $1 billion last week, bringing its total to about $3 billion. This is a sign that consumer banking industry is finally starting to stabilize after several years of decline.
-http://www.nytimes.com/2010/10/19/business/19citi.html?scp=7&sq=consumer%20banking&st=cse
Tuesday, November 2, 2010
A Merger Deal Gone Bad
As Bank of America continues to struggle with the high number of foreclosures, there is talk that the bank could push Countrywide into bankruptcy. Amidst the height of the financial crisis in 2008, Countrywide, a company that specialized in home mortgages, was going under because of the high amount of foreclosures. Bank of America merged with the company to try and relieve some of the problems the company had to deal with. Since the merger two years ago, the Countrywide unit has caused nothing but trouble for Bank of America. One analyst says that Countrywide units account for 86% of Bank of America's overdue mortgage loans (see article). There are rumors that Bank of America is considering dropping Countrywide and pushing it into bankruptcy rather than resolve its issues.
If Bank of America does push Countrywide into bankruptcy, this event could have enormous repercussions in the consumer banking industry. Bank of America has come under fire in the media recently because of its struggle to sort out its home mortgage issues. Since Countrywide accounts for most of Bank of America's foreclosures, dropping the company would alleviate a great deal of Bank of America's worries. This could end up making the company stronger in the end. On the other hand, pushing Countrywide to bankruptcy could have negative repercussions in the rest of the system. This news is clearly an example of some of the negative effects of a merger. While some companies merge to make a single stronger firm, Countrywide's weakness clearly has poisoned Bank of America.
Regarding an investment recommendation, this news serves as further evidence of why the investment recommendation should not support Bank of America. The bank has already come under fire for other issues, and these rumors add to the growing list of reasons why investing in this bank would not be a good idea.
-Justin Schaffer
Subscribe to:
Posts (Atom)