November 21, 2024

Will Silver Stocks Outperform Bullion At $130 Per Ounce?

February 18, 2011 by Leave a Comment

As silver moves to new highs, silver stocks have underperformed the metal.  Is there any  fundamental significance to this disparity for an investor, or have silver stocks routinely lagged  price increases in silver bullion?

Theoretically, silver producers should experience a significant degree of earnings leverage as the price of silver appreciates and the stocks would be expected to outperform the metal.  A look at the long term picture, however, shows that this is not the case.

While silver has increased approximately 50% from the $20 per ounce range in early 2008, the stocks of many major silver producers are below prices reached in 2008.  For example, since early 2008 the price of Hecla Mining (HL) has decline 14% from $12 to $10.27, the price of Pan American Silver (PASS) has decline 12% from $40 to $35.40 and the price of Silver Standard Resources (SSRI) has declined a massive 36% from $40 to $25.55.  An exception to this trend was Silver Wheaton Corp (SLW) which increased by 83% from $20 to $36.77.

If one was lucky enough to pick SLW,  the stock outperformed the metal.  A basket of the four stocks cited would have yielded a loss of 3.6% since early 2008.  So much for the theory of earnings leverage with silver stocks.

Using the iShare Silver Trust (SLV) as a proxy for the metal also depicts the under performance of silver stocks compared to the bullion.

The risk of equity ownership compared to holding silver bullion is also greatly magnified when the price of silver declines.  During the financial crisis of 2008, as silver declined from $20 to $10, silver stocks were utterly crushed. The price of Hecla Mining, Silver Wheaton and Silver Standard Resources dropped approximately 85% and the price of Pan American Silver Corp dropped 75%.  Leveraged worked as expected on the downside but failed to produce superior returns when silver prices increased.

From a very long term perspective, silver stocks yielded a slightly greater return over the metal if the right stocks were chosen at the right time.  Investing in the silver stocks cited above at the exact lows during 2000-2001 produced marginally higher returns over the bullion but with greater risk during periods when silver prices dropped.

As a long time holder of silver bullion and coins, I would expect a continued explosive move upward over time in the price of silver.  The historical high of $48.70 reached in January 1980 should be easily exceeded.  A price greater than the inflation adjusted historical high of $130 per ounce would not be surprising.  The open question is, when silver soars, will stocks or the bullion outperform?

For those who find the process of physically holding silver cumbersome, ownership in the iShares Silver Trust (SLV) is an excellent proxy.

Disclosures: Long silver bullion, SLV and SLW

Filed Under: Silver Tagged With: , , , , ,

FHA Zero Down Payment Financing Returns

September 14, 2010 by 8 Comments

Home buyers can once again purchase a home using FHA financing with a zero down payment.

Previous zero down payment FHA loan programs were funded by seller contributions funneled through a nonprofit group which then donated the down payment to the purchaser.  These seller financed down payment programs were terminated in 2008 after the FHA experienced default rates three times higher than when buyers made a cash down payment.

The innovative zero down payment FHA home purchase program was recently introduced by The Lending Company of  Phoenix, Arizona.  In order to meet the FHA required 3.5% down payment the borrower receives a 2.5% gift from a non-profit organization and the remaining 1% can be gifted from a family member. 

The Lending Company notes that the program is not a seller-paid down-payment assistance program.  To further reduce the amount of cash required by the purchaser, the seller is encouraged to provide seller concessions to cover closing costs.  A borrower receiving both gift funds and seller concessions can potentially purchase a home without putting any cash into the transaction.

The Lending Company – The One Percent Down Solution Gift Program is designed to provide eligible homebuyers a gift of up to 2.5% of the sales price to be applied towards the FHA down payment and/or allowable closing costs for the purchase of a home.

Targeted towards quality affordable housing, approved homebuyers can purchase a home for as little as 1% down payment. The program also allows for the remaining 1% down payment to be gifted from any FHA allowable source.

Program Benefits:

  • The program provides up to a 2.5% gift to FHA qualified home buyers (subject to market conditions, greater gift amounts up to 5.5% may be allowed)
  • Seller can and is encouraged to contribute towards the closing costs to further assist the homebuyer
  • Minimum credit score of 620
  • Successful credit restoration allowed

It will be interesting to see how future default rates on this zero down payment program compare to earlier “seller funded” down payment assistance programs (DAP).  The Federal Housing Finance Agency is well aware that zero down payment mortgages default at a much higher rate, as detailed in a 2007 study by the Office of Federal Housing Enterprise Oversight.

This paper extends the analysis of mortgage default to include mortgages that require no down payment from the purchaser. The results indicate that borrowers who provide down payments from their own resources have significantly lower default propensities than do borrowers whose down payments come from relatives, government agencies, or non-profits. Borrowers with down payments from seller-funded non-profits, who make no down payment at all, have the highest default rates.

Source of down payment has not previously been considered in default modeling, but the relationship between default and the source of the borrower’s down payment may be related to trigger events. Borrowers who are capable of increasing their saving, or increasing their labor earnings, in response to unforeseen events may be less susceptible to trigger events. The need to save for a down payment may serve to separate those who can more readily increase saving and earnings from those who find it more difficult.

Loans with involvement from Down payment Assistance Program’s (DAPs), which effectively had no down payment, consistently showed the highest delinquency and claim percentages. Loans with a down payment from a source other than the borrower, such as a relative or government program, had lower claim and delinquency propensities, while loans with down payments from the borrower’s resources consistently showed the lowest rates of claim and delinquency.

This paper examines the case of literally “no money from the buyer” mortgages, and finds delinquencies and claim rates much higher than those for comparable loans with cash from the borrower.

fha-format

In January of this year, a bill was introduced in Congress that would have reinstated seller funded FHA down payments to purchasers through non profit groups.   The bill was never approved but  FHA Commissioner David Stevens stated his opposition, as reported by Bloomberg:

“We’ll always listen to proposals, but Secretary Donovan has been absolutely crystal clear that he’s against the idea, as am I,” said David Stevens, commissioner of the FHA, which is under the purview of Housing and Urban Development Secretary Shaun Donovan.

Stevens said that homeowners are more willing to default if they haven’t put any cash into their purchases.

“If a buyer puts down even a few thousand dollars, it’s a lot of money for them,” he said. “There’s a financial and an emotional commitment to the home that you don’t have otherwise.”

About 13 percent of down-payment-assisted mortgages originated in 2004 have defaulted compared with about 4 percent of other FHA mortgages, according to agency data.

None of the lenders, including San Francisco-based Wells Fargo & Co. and Countrywide Bank, acquired by Bank of America Corp. in Charlotte, North Carolina, incurred any losses, since mortgages they issued were insured by the FHA, the agency said.

Programs that provide down payments to purchasers may help home sales, but past experience suggests higher default rates and increased losses for the FHA.

Filed Under: FHA, FHA Defaults, Housing, Mortgage Defaults Tagged With:

Latest Government Scheme For Growth – The Invisible Tax Cut

September 8, 2010 by Leave a Comment

Pulling forward future demand to stimulate economic growth didn’t work with the cash for clunkers program or housing tax credits.   Car and home sales collapsed after consumers who were going to buy cars or houses anyways bought today instead of tomorrow.  Past stimulus programs have increased government deficits without improving long term economic fundamentals.

Undeterred by previous failures the government is again attempting to pull forward demand, this time with accelerated write offs for new plant and equipment spending.

The new Obama tax break proposals are likely to be even more ineffective than previous stimulus attempts.  To “offset” the revenue loss of accelerated deductions, other taxes would be raised, effectively muting the net stimulus that the plan attempts to provide. 

NYT –  In a speech in Cleveland on Wednesday, Mr. Obama will also make a case for the package of roughly $180 billion in expanded business tax cuts and infrastructure spending disclosed by the White House in bits and pieces over the past few days. He would offset the cost by closing other tax breaks for multinational corporations, oil and gas companies and others.

The “tax cuts” for increased business investment merely accelerate the existing tax write off for business investments that are presently written off over a period of years.  If other taxes are raised to “offset” the accelerated tax deductions, the net effect of the plan would be to effectively increase taxes on businesses.

The lure of accelerated tax cuts (which increase cash flow) is not likely to affect decisions on investment spending since corporate America is already sitting on a record amount of cash.  Accelerating depreciation deductions will merely pull demand forward from companies that had already planned spending increases for plant and equipment. 

Rational consumers and businessmen do not base long term spending decisions on tax deductions.  Increased spending by businesses is based on an increase in forecast demand.   Consumer spending is ultimately based on confidence in the prospect for increases in future incomes.  

For good reasons, neither businesses nor individuals are confident about the future and there is deep skepticism that additional stimulus programs will do little more than increase the government deficit.  The latest stimulus plan is conceptually vacuous and likely to decrease public confidence in the government’s ability to formulate a plan for long term economic recovery.

Filed Under: Confidence, Economy, Government Deficits, Government spending, Stimulus Plan Tagged With:

Borrowers Chose Strategic Default On Reverse Mortgages

September 7, 2010 by Leave a Comment

When reverse mortgages were last reviewed, it was predicted that many unqualified borrowers would wind up defaulting, despite the fact that a reverse mortgage has no payment due. 

As originally conceived, reverse mortgages were designed to fulfill a legitimate borrowing need.  Reverse mortgages were developed for elderly Americans who had a mortgage free home with substantial equity and wanted to cash out their home equity to supplement their retirement income without having to sell the house or face large mortgage payments.

In theory, the HECM made sense by allowing homeowners to remain in their homes and monetize their equity.  The lifetime HECM payment, along with other retirement income and savings would allow for a more comfortable lifestyle.  The only theoretical loser on the HECM program would be the FHA if property values dropped.

The HECM is available to all those 62 or older who have sufficient equity in their homes.  HECM program lends without regard to credit or income and is strictly  asset based lending.  Do these lending criteria remind anyone of  past  disastrous mortgage programs, such as  sub prime, ALT A or Pay Option ARMs??

A HECM does not require that the homeowner escrow for taxes  or homeowners insurance.  A known risk factor for default is a non escrowed loan.  The homeowner can face foreclosure  for not properly maintaining the property or for non payment of taxes or insurance.

Many homeowners taking out reverse mortgages were taking the maximum loan allowed upfront (instead of taking a monthly draw) and using the proceeds to payoff existing debt.  This choice left the elderly homeowner with little equity and no monthly cash payment to supplement retirement, a recipe for financial disaster.

The reason why borrowers are taking most of their available cash out upfront is because they are using the proceeds to pay off mortgages, consumer debt, medical bills, credit cards, etc.   Borrowers run up large amounts of debt when spending exceeds income, a situation likely to continue  after the borrower taps the last dime of equity from his home.  Since the HECM was the last option available, what happens in a couple of years when the borrower is again overwhelmed by debt?

Based on the credit profile and debt levels incurred prior to his approval of a HECM, what are the odds that the borrower’s finances turn around after his refinance?  My guess is that within a few short years, the borrower is in heavy debt again, unable to pay the property taxes or maintenance on the property and thus facing a potential foreclosure.  Since HUD will not be throwing senior citizens out of their homes, expect a mortgage modification program for reverse mortgages and further losses to the taxpayer on another mortgage program gone bad.

It now appears that, as predicted, many elderly reverse mortgage borrowers cannot afford to pay the property taxes due on their homes or are strategically chosing default since the decline in property values wiped out whatever equity they had left.  The end result is the predicted and ridiculous situation of borrowers defaulting on mortgages that do not have payments. 

This situation was confirmed in an audit report by the Office of the Inspector General.

HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With Maximum Claim Amounts of Potentially More Than $2.5 Billion

We performed an internal audit of the U. S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) program because we found that an increasing number of borrowers had not paid taxes or homeowners insurance premiums as required, thus placing the loan in default. Also, we noted that HUD had granted foreclosure deferrals routinely on defaulted loans, but it had no formal procedures.

We found that HUD’s informal foreclosure deferral policy and its reversal had a negative effect on the universe of HECM loans and loan servicers (servicers).  As a result, four servicers contacted were holding almost 13,000 defaulted loans with a maximum claim amount of more than $2.5 billion, and two of the four servicers said they were awaiting HUD guidance on how to handle them. Further, the servicers had paid taxes and insurance premiums totaling more than $35 million for these 12,958 borrowers…

Since unreported defaulted loans were only obtained from 4 of a total of 16 HECM servicers nationwide, more defaulted loans may exist. Further, as HUD could not track these loans, it did not know the potential claim amount. In the event of foreclosure of the 7,673 loans for which HUD was aware and 12,958 loans of which it was not aware, HUD could lose an estimated $1.4 billion upon sale of the properties.

Filed Under: FHA Defaults, Housing, loan modification, Mortgage Defaults, Reverse Mortgages, Strategic Defaults Tagged With: ,

FHA Introduces New Minimum 580 Credit Score Requirement

September 6, 2010 by 54 Comments

The FHA is introducing new guidelines on loan to value ratios and the minimum credit score required for FHA borrowers.  As detailed in a Mortgagee Letter from the Department of Housing and Urban Development (HUD), the following credit requirements will apply for FHA borrowers, effective October 4, 2010.

  • To be eligible for maximum financing, borrowers will need a minimum credit score of 580 or higher.
  • Borrowers with a credit score between 500 and 579 will be limited to a loan to value of 90%.  A sub 580 FICO credit score borrower will henceforth need to make a 10% minimum down payment on a purchase transaction.
  • All  borrowers with a credit score below 500 will not be eligible for FHA-insured mortgage financing.

HUD’s newly introduced minimum credit score and loan to value requirements will apply  to all single family loan programs, except for Reverse Mortgages (Home Equity Conversion Mortgages) and Hope for Homeowners.

The new credit requirements are not expected to dramatically change the number of FHA mortgage approvals.  Most  lenders had already imposed a minimum credit score requirement of 640 or higher for FHA borrowers.  In limited cases, borrowers with scores between 620 and 639 could still obtain mortgage approval.

Many potential FHA borrowers with scores below 640 who cannot obtain mortgage approval may be left wondering why this is the case if the FHA has established a minimum score of only 580.  The explanation for this is that the FHA does not make mortgage loans but rather insures FHA loans made by lenders.  Despite the FHA insurance, banks do not have an iron clad protection from loss.

To protect themselves from loss exposure, FHA lenders impose various requirements that may include establishing higher minimum credit scores.   Some of the factors that influence banks in their assessment of risk on FHA loans are discussed below.

More and more banks are increasing the minimum credit score on FHA loans to attract a better overall execution (sales price) on their securities which improves profitability.  Nonetheless, the increase in the minimum credit score isn’t always about protecting the bank on a potential future loss.  In a lot of cases a bank feels more comfortable with a profit model that positions itself as a mortgage seller with a higher weighted average credit score on their pool for many other factors.

A credit score is an 18 month predictive measure of future performance but is not as reliable when a state or region is hit by some unpredictable negative economic factor.  An increase in the minimum credit score can be used as an override to protect against losses resulting from a sudden downturn in the economy.

Each bank executes a contract of sale with defined representations and warranties on their future liability.  The penalty (or loan buyback provision) is legally defined in the contract between seller and buyer of the loan.  However, not all contracts are the same with regard to liability issues.  When a loan default occurs, a post closing quality control review takes place.  If the loan originator was negligent with respect to due diligence, the bank is subject to full recourse provisions and required to repurchase  the loan which usually results in large losses to the bank.  An example of this occurred recently when Bank of America announced that Fannie Fae and Freddie Mac were demanding $10 billion of loan repurchases.

Given the complexities and potential losses to banks on the origination and sale of FHA loans, it is unlikely that banks will be decreasing their minimum credit score requirements any time soon.

More On This Topic

Sub 620 FICO Score FHA Lenders

What Are My Odds Of FHA Loan Approval With A FICO Score Below 620?

Basic Requirements To Be Eligible For FHA Financing

Filed Under: Banking Industry, FHA, FHA Minimum Credit Score, Mortgages, Sub 620 FHA borrowers Tagged With: , , , ,

Local Governments Join The Strategic Default Movement

August 17, 2010 by 2 Comments

As if creditors didn’t have enough worries with nonperforming consumer debt and defaulting  real estate mortgages, it now appears that another wave of debt defaults has started – this time by municipal borrowers.

Consider the City of Buena Vista, Virginia, that recently defaulted on a bond payment due July 15th:

WSJ– Buena Vista, Va., borrowed $9.2 million through a bond offering in 2005 to refinance a municipal golf course. It pledged as collateral, of all things, its City Hall and police station.

Now, amid financial difficulties, the city says it can’t pay its debt, triggering a showdown over these public buildings.

On the other side of the battle is a big New York insurance company, ACA Financial Guaranty Corp., which is obligated to pay bondholders if the city defaults.

Municipalities across the U.S. are struggling with huge debts and shrinking revenue, making them vulnerable to similar situations. Harrisburg, the capital of Pennsylvania, is publicly flirting with bankruptcy. And when Central Falls, R.I., couldn’t pay its debt recently, it handed its finances to a receiver.

ACA Financial  insured the $9.2 million “moral obligation” bond offering, under which Buena Vista promised to pay the debt if revenues from the golf course were inadequate.  The golf course turned out to be a bust, and the City has been losing money every year just to keep it open. 

In 2005, at the peak of the lending/real estate bubble, ACA Financial did not foresee a problem with insuring a loan not backed by the full faith and credit of the issuing municipality.  This overly optimistic underwriting decision is likely to result in a 90% loss for ACA since the collateral backing the $9.2 million loan is only worth about $1.1 million and the borrower is under no legal obligation to pay (only a “moral obligation”).

The insurer has much to lose. The collateral is worth just a fraction of the debt. The bonds are secured by the golf course itself, but it is valued at just about $950,000, Mr. Kearney says.

The City Hall, part of the collateral, is a small two-story building constructed in the 1960s. Like the newer police station, it is worth just a few hundred thousand dollars, Mr. Kearney guesses, though nobody has bothered to appraise it.

Defaulting on debt has become a rational choice for many debtors.  Many defaults are forced due to unemployment, income loss or depleted savings.  More challenging for lenders are “strategic defaults” by borrowers who have ability to pay but chose not to, due to loss of collateral value backing the loan. 

In the case of Buena Vista, the mayor stated that “No one has been able to give us any solution short of a dramatic tax increase”.  Exactly how “dramatic” a tax increase would be required was unmentioned but here are some numbers to consider:

-Under the circumstances, Buena Vista could probably negotiate a reduction in the interest rate to 3% from the current 7.2% and extend the term to 25 years

-Buena Vista has approximately 2,300 families (total population 6,222) and the median household income is $41,900

-The monthly payment on a $9.2 million loan over 25 years at 3% is $43,627

-The payment due from each household to pay off the bond issue would be $18.96 per month, equivalent to foregoing around 3 cups of coffee per month at Starbucks

Is default Buena Vista’s only viable option or have they joined the Strategic Default Club?

Filed Under: Debt Repudiation, Government spending, Risky lending, Strategic Defaults Tagged With:

Newmont Mining – Getting Ready For A Price Explosion

July 14, 2010 by Leave a Comment

Newmont Mining (NEM) has been a frustrating stock for many investors over the past 14 years.

As the price of gold moved from the $390 range in May 1996 to $1200 today, Newmont’s stock price is only $3 above the all time high of $59 reached in May 1996.  Long term Newmont shareholders are certainly justified in wondering when the price explosion in gold will be reflected in Newmont’s stock price.

Based on recent relative price performance and fundamentals, Newmont shareholders should finally be looking forward to an explosive move upward in the price of the shares.

During the recent price correction in gold, Newmont’s shares have shown a strong relative price performance compared to other large major gold producers.  Short term price pullbacks in Newmont were quickly recovered, indicating eager buyers at lower prices.

NEWMONT GOLD OUTPERFORMS

NEWMONT GOLD OUTPERFORMS -COURTESY YAHOO.COM FINANCE

The fundamentals on Newmont are exceptional and do not seem to be fully factored into the stock price.  Newmont sells at a forward price earnings ratio of only 15 times earnings, has had quarterly revenue growth of 46%, enjoys a 17% return on equity, has had quarterly earnings growth of 188%,  is sitting on $3.4 billion in cash ($7 per share) and the stock price has recently hit an all time high.

newmont-ready-to-fly

Based on the trend in fundamentals and strong relative price performance, look for a blowout earnings announcement by Newmont on July 28th.

Disclosures: Long NEM

Filed Under: GLD, Gold Tagged With: ,

Strategic Defaults – The Difference Between The Rich And “Other People”

July 13, 2010 by 1 Comment

Million Dollar Home Owners Falling Off The Cliff

“I think you’ll find the only difference between the rich and other people is that the rich have more money” – Mary Colum

If the difference between the rich and “other people” is money, why are the rich walking away from their mortgages just as fast as anyone else?   This question is examined in a recent New York Times article which cites a serious delinquency rate of 1 in 7 for homeowners with a mortgage over $1 million compared to a delinquency rate of 1 in 12 for smaller mortgages.  The Times’ conclusion is that the biggest defaulters on mortgages are ruthless rich folks with no scruples.

Without citing specific statistical analysis, the Times article seems to draw the conclusion that anyone with a million dollar mortgage would have substantial financial resources that could be tapped to keep the mortgage current.   This may well be the case for some, but drawing from my own experience in the mortgage industry, many homeowners with the million dollar mortgages are financially thin and over leveraged.   For a variety of reasons ranging from ego, poor financial planing or irrational exuberance, many purchasers walk into million dollar homes with empty pockets.

Many of the million dollar homes now in default were purchased when eager buyers believed that home values could only go up and that buying as much home as possible simply meant larger profits down the road.  A ten percent gain on a million dollar home results in a handsome $100,000 gain – ten times the profit from purchasing a $100,000 home.

A few short years ago, at the height of the housing bubble, income was deemed irrelevant when banks granted mortgage approvals.   The proverbial strawberry picker or fast food cashier with average credit could use exotic mortgage programs to buy at any price level chosen, without the bother of a down payment or income verification.    Ever increasing home values then allowed cash extraction from a refinance or second mortgage, once again without the hassles of verifying income.  It should come as no surprise that wannabe millionaires taking the biggest risks now have the highest default rates.

According to the Federal Reserve, “half of the defaults are driven purely by negative equity” when the mortgage debt exceeds 150% of a property’s value.  Since high priced homes have seen large declines in value, it should come as no surprise that many strategic defaults will occur at the high end of the market by homeowners with million dollar mortgages.  The open question is – does having a million dollar mortgage imply a wealthy homeowner?

If a statistical study was done on the net worth of defaulting homeowners who have million dollar mortgages, it would probably reveal that many of these alleged “rich” homeowners have an embarrassingly low or negative net worth.  Consider the findings from one of the most influential studies on the mind set and lifestyles of the wealthy from The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas J. Stanley and William D. Danko.

Characteristics of the millionaire next door:

  • Avoids buying status objects or leading a status lifestyle
  • 97% are homeowners with an average home value of $320,000, occupying the same home for over 20 years
  • The average millionaire lives well below his means and spends below his income level

The rich did not get rich by being poor stewards of capital or chasing housing bubbles.  The bulk of those defaulting on million dollar mortgages (strategically or otherwise) are simply poor people, living in big houses they could never afford in the first place.

Living Large

Living Large

Filed Under: Debt Repudiation, Deleveraging, Housing, Mortgage Defaults, Saving Money, Strategic Defaults Tagged With: ,

Will Governor Schwarzenegger Trigger 55,000 California Foreclosures?

July 7, 2010 by 3 Comments

California’s long running budget crisis has now degraded to the point where Governor Arnold Schwarzenegger has ordered a pay reduction to the minimum wage rate of $7.25 an hour for 200,000 state employees.

The California banking industry, perhaps sensing an opportunity to rebuild their poor public image, has jumped into the budget mess with a plan to rescue beleaguered state employees.   Spearheaded by $7.6 billion asset Golden 1 Credit Union, banks are tripping over themselves to offer “Budget Impasse Loans”, an easy way for over leveraged State workers to tide themselves over until the budget crisis passes.

Bloomberg: The Golden 1 Credit Union, a lender that caters to state workers, will offer zero-interest loans to customers whose pay falls because of the stalled spending plan, according to a July 2 statement.

Golden 1 said as many as 55,000 of its customers may participate this year, if state-employee pay is cut to the federal minimum wage, currently $7.25 an hour. Flyers that tout the program are being distributed in its 84 offices, carrying a message that says “balancing the state’s budget doesn’t have to affect your own.”

“We could survive off our savings for a little while, but it would be a real burden on us,” said Chava Yniquez, a 49- year-old technician in the Senate printing office who has used Golden 1 budget-impasse loans in the past. “It’s a lifeline.”

The California budget crisis and bankers pushing loans are not the issues to ponder here.  Golden 1 Credit Union’s estimate that 55,000 employees will need a loan after seeing their first pay check reduced indicates the very fragile financial condition of 25% of the State’s workforce.  How many more will need a “Budget Impasse Loan” after two weeks, or a month?  Will the first week of the Governor’s budget balancing plan wind up pushing 55,000 home owners onto the path of foreclosure?  Terminator indeed!

The very banks offering “Budget Impasse Loans” may shortly find themselves offering “Loan Modification Plans” if the California budget crisis eventually requires permanent pay concessions from State employees.

Golden 1 Credit Union, which lost $22.6 million in 2008 and $23.1 million in 2009 may be offering a valuable service to strapped State employees, but is a customer one paycheck away from default a solid credit risk?  Golden 1’s website notes that budget impasse loans will be offered with “rates as low as 0% APR”, implying that some borrowers will be paying a “risk adjusted” rate of interest.  Since Golden 1 is offering depositors a whopping .25% on regular savings accounts, even a “low rate” of, say 4%, would still leave them with a very nice spread.

At a time when the universal “solution” for every financial problem is to borrow more money, perhaps the banks should develop a unique “new program” involving financial responsibility, saving and wealth accumulation.

Finally, in the “too ironic not to mention” department, the Press Release issued by Golden 1 immediately prior to the Budget Impasse Press Release reads as follows:

SACRAMENTO, Calif., June 30, 2010—Employees and business partners of The Golden 1 Credit Union participated in the second annual United Way Toilet Paper Drive on June 18 contributing 15,989 rolls of toilet paper to benefit local nonprofits.

Golden 1’s contributions represented 33.5% of the total rolls of toilet paper collected by United Way in this drive. Of these, 10,205 came from the credit union’s employees and 5,784 came from its supportive business partners.

Perhaps soon, California State employees can contribute to this worthy effort by sending Golden 1 their state paychecks.

Filed Under: Banking Industry, Budget Impasse Loan, California, Deleveraging Tagged With: , , ,