June 12, 2024

Time Shares – Another Shattered Dream

Vacation Turns Into Financial Nightmare

Anyone who has vacationed to a tropical resort cannot be blamed for thinking how great it would be to own a piece of paradise.  Those who succumbed to the charms of the omnipresent time share salesmen may now be having deep second thoughts.  Consider the plight of the time share industry:

Major time-share developers, led by Wyndham Worldwide Inc., Marriott International Inc., Starwood Hotels & Resorts Inc. and others, are scaling back their time-share business as investors in time-share loans demand higher interest rates, buyers become more scarce and resales of time shares put downward pressure on prices and demand for new units.

The pullback will reshape some large time-share players. Wyndham, which owns 150 resorts globally and counts 830,000 time-share owners, intends to whittle its time-share business by 40% this year to an annual sales rate of $1.2 billion. That is a big reduction for Wyndham as a whole; its time-share division provided 53% of Wyndham’s revenue last year and 42% of earnings before interest, taxes, depreciation and amortization.

Meanwhile, sales of new time shares have been depressed by a rise in the pool of time shares listed for resale as the foundering economy forces some owners to try to unload their time-share debts and maintenance fees. Carrie Stinchcomb, a sales associate at A Time-share Broker in Orlando, said her office’s listings have increased 30% from last year. However, sales have fallen roughly by half because there are fewer buyers, she said.

Delinquencies on securities backed by time-share loans topped 5% in the first quarter, up from 3% a year earlier, according to Fitch. Starwood, which operates 26 time-share resorts, reported an estimated average default rate of 7.9% at the end of last year on time-share loans it originated.

The hurt that time share developers are feeling may be nothing compared to the plight of those who actually “invested” in time shares.   As an “investment class”, the only apparent rationale for purchasing a time share seemed to be easy financing and the belief that resale prices would increase relentlessly.   Now that values are plunging investors are reflecting on the negative side of time share ownership –  huge upfront sales commissions,  increased yearly maintenance fees, cost of traveling to the timeshare and the cost and complexity of unloading a timeshare in the secondary market.

The default rates on time shares may rise much higher as owners come to grips with the massive price declines that have occurred in time share values.   Many owners may not yet realize the extent to which the value of their investment has declined.  Time shares can often be found on EBay for literally a couple of dollars – eager sellers simply want to dump a unit that carries high yearly maintenance fees.

Here’s a Maui bargain at the Westin in Kaanapali:

STAROPTIONS Westin Kaanapali MAUI Hawaii TIME…

Current Bid: US $17,097.00
Units similar to the one above were being marketed in the 2005 era for $50,000.   Annual maintenance fees are $2,000.

If  you prefer Mexico, here’s another bargain at 92% off the original price.

Playa Del Sol, Los Cabos, Mexico – Buy It Now Price $997, Yearly Maintenance $424
Here is your chance to own a Membership Property (Does Not Expire) at a fraction of the developer price! Studio, One Bathroom (sleeps two),complimentary week! Maintenance fees are billed on odd years only. This club membership allows you to travel to any one of Playa Del Sol’s Resorts. Purchase this exact ownership NOW at a fraction of the original price ($13,500)!! This item is a NO Reserve auction and will be sold to the highest bidder!!

Buying At The Bottom?

Any one trying to sell their time share today is looking at big losses. Those who believe that the Federal Reserve can re-inflate the burst real estate bubble should be buying with both hands.
Disclosures: No positions

Feds To CIT – “Your Loan Application Has Been Denied”

CIT Solution Is Bankruptcy – Not Bailout

A CIT spokesman said late today that “There is no appreciable likelihood of additional government support being provided over the near term”.   Taxpayers had previously supplied a massive $2.3 billion dollars in loans under the TARP program late last year.  The large TARP infusion did little to turn around CIT which has reported losses for the past two years of over $3.4 billion.

CIT has $60 billion in finance loans and leases outstanding, an amount that is a mere rounding error in a $14 trillion US economy.  CIT does not represent a systemic risk to the US financial system.  The large amount of losses reported by CIT over the past two years suggest that loan approvals were given to risky enterprises.  CIT would not be losing money and on the verge of bankruptcy if their lending policies had properly accounted for risk.

The weak economy certainly contributed to CIT’s losses, but they could have been mitigated by better risk management.   As a private lender, CIT has the right to lend based on whatever standards they chose.  As a private lender, they also bear the responsibility of loss.

The American taxpayer should not be stuck with the cost of bailing out every failed business enterprise.  There already is a solution for poorly run companies – the solution is known as bankruptcy.  The US Treasury can join other creditors in bankruptcy court – cutting your losses is often the best option.

CIT aggressively expanded its loan portfolio over the past fives years by almost 100% to $60 billion.   CIT attempted to rein in its lending as the recession deepened, but the losses continued.  Increased losses resulted in a dramatic reduction of new lending activity over the past year.  CIT has effectively shut down new lending to small businesses for over a year now.  Customers that qualify for financing have gone elsewhere.

CIT -courtesy WSJ

CIT -courtesy WSJ

For small businesses, CIT is already failing.

“In order to service its debt and meet obligations, [CIT] has been cutting back on new originations,” explains David Chiaverini, research analyst at BMO Capital Markets.

CIT CEO Jeffrey Peek said in November that his company was “the bridge between Wall Street and Main Street,” and “one of the few significant sources of liquidity for small and mid-sized businesses who are struggling to survive.” But by then, CIT was already burning down its bridge, turning away many of the small businesses that had come to rely on the company.

BMO Capital Markets’ Chiaverini sees bankruptcy as CIT’s most likely next step.

“The best case for CIT is to get its liquidity issues resolved — bankruptcy could actually get things back to normal on the lending front,” he says. “If it does go into bankruptcy, I think what will happen is unsecured debt holders will convert their debt into equity and it will emerge stronger without the overhang of debt coming due. Then, it can start lending again.”

CIT’s role in small business financing will be hard to fill, but for many companies, the damage is already happening. Saving CIT would only help Main Street businesses if the company became healthy enough to resume making loans.

FDIC Rejects CIT Loan Guarantee Request

Sheila Bair, FDIC Chairman, had previously expressed deep reservations about allowing CIT to access the Temporary Loan Guarantee Program (TLGP) due to CIT’s weak financial condition.   Due to the financial crisis, the FDIC was called upon to provide guarantees to bank issued debt under the TLGP.  This type of massive “mission creep” imperils the primary purpose of the FDIC which is to protect depositor funds.  The FDIC Deposit Insurance Fund (DIF) is nearly depleted.  Sheila Bair made the right call and so did the Federal Government.  Let the owners and creditors of CIT assume the risk of loss – not the US taxpayer.

“Cutting Your Losses”


Disclosures: No positions

More on this topic: Treasury Bets U.S. Financial System Can Weather CIT Collapse

The Contradiction Of Empty Homes And Rising Apartment Vacancies

A Housing Surplus

Huge increases in foreclosures have resulted in millions of homes sitting vacant as bank REO managers struggle to sell the empty homes.  Theoretically, people who have been evicted or lost their homes to foreclosures would be new renters.  Consider, however, the increase in apartment vacancies to a 22 year high:

U.S. apartment vacancies rose to their highest in 22 years in the second quarter as job losses cut tenant demand and more units came to market. Vacancies climbed to 7.5 percent from 6.1 percent a year earlier, New York-based real estate research firm Reis Inc. said today. The last time landlords had so much empty space was in 1987,

“Vacancies continued to rise despite what has traditionally been a strong leasing period for apartment properties,” said Victor Calanog, director of research at Reis.

Job losses and falling wages are shrinking the pool of potential renters, defying forecasts that prospective homebuyers would rent rather that purchase as house prices decline. The U.S. unemployment rate rose to a 26-year high in June and U.S. payrolls dropped more than forecast in June, the government said last week.

Rents paid by tenants, also known as effective rents, fell 0.9 percent from the previous quarter to $975, said Reis. Effective rents were 1.9 percent lower than a year earlier.

“New buildings coming online over 2009 and 2010 will face higher initial vacancy levels, and will work to increase the pressure on leasing managers,” Calanog said.

The brutal economic fact is that those losing their homes cannot afford to rent.  In many cases dispossessed adults are now sharing homes with children, friends or relatives.  In addition, USA Today reports  children are moving back into their parents’ homes:

Matthew Costigan is young, single and a recent college graduate.

So what does he do? He gives up his nice pad in the trendy Shadyside neighborhood of Pittsburgh and moves in with mom and dad. To his boyhood home. In the suburbs.

Costigan and many others in the most educated generation of young adults are seeking refuge under their parents’ roofs from skyrocketing housing prices, mounting college debts and a tight job market.

A survey of 2004 college graduates shows that 57% planned to move back in with their parents. MonsterTRAK, an online job site for college students and young alumni that conducted the survey, found that 50% of 2003 graduates are still living at home and 35% are still looking for work.

The Families and Work Institute for the first time asked 3,504 employed adults whether they have grown children living at home. The findings were surprising, says Ellen Galinsky, president of the New York research group. “Fully 25% of employed parents have children from 18 through 29 years of age living at home at least half of the time,” she says.

Forced by economic hardship, children are moving back in with parents and parents are moving in with their children.   Meanwhile, apartments and homes sit vacant, causing bank losses on homes and commercial loans.

Foreclosed empty homes and increasing rental vacancies are just one more sign of an over leveraged, cash poor consumer.  Forecasts predicting an economic recovery based on increased consumer spending are certain to be wrong.  Major job losses and wealth destruction of the past two years are forcing consumer to do what they must to survive.  With job losses increasing and unemployment reaching depression levels, an economic recovery remains a fantasy at this point.

The Futility Of Lower Interest Rates, Obama Motors, “Atlas Shrugged” Sales Surge & Confidence Mounts

As stock markets surge, GM’s future is suddenly bright and consumer confidence soars, here are some recent blog posts worth the read with some alternative insights.

Why lower interest rates are not effective monetary policy

If too much debt caused the financial crisis, why are governments world wide trying to force more debt on an over leveraged world?  Japan’s policy of rock bottom low interest rates did not prevent Japan’s “lost decade” of economic growth and results for the  rest of the world will be no different now.  Why low interest rates do not improve the economy.

We are all now GM shareholders but don’t spend the profits yet

Now that the government, aka known as “the people” own General Motors, can we expect to see a quick turnaround that has eluded GM management for decades?  If GM cannot come up with products at a competitive price that buyers in a free market will purchase, the huge taxpayers subsidies will have been nothing but “stimulus waste”.

Atlas Shrugged book sales continue strong

The truths in Atlas Shrugged continue to promote big sales of a book written half a century ago.  Government policies continue to protect and save the least productive while killing the overall economy.  Our present political system almost guarantees the continuation of self destructive governmental economic policies.

With no signs of real economic recovery in sight, consumer confidence grows

Is the increase in consumer confidence in the economy justified?  Although we seem to have avoided the economic collapse widely feared just several months back, what has really changed?  Balance sheets and incomes have not improved and job losses continue.  Do not expect a “V” shaped recovery.

Mortgage Mod And Foreclosure Scams: Saying Goodbye To The Mortgage May Be Better

Home Sweet Home?

Home Sweet Home?

FDIC Advice Good But Too Late

The FDIC Consumer News is warning homeowners to avoid falling prey to loan modification and foreclosure rescue scams.  Many financially distressed homeowners are  preyed upon by firms that “guarantee” financial salvation, take the homeowners last few dollars and deliver nothing in return.

Foreclosure Rescue and Loan Mod Scammers Prey on Stressed Homeowners

Many homeowners having difficulty making their monthly mortgage payments are being targeted by criminals who charge large upfront fees and falsely “guarantee” to rescue a home from foreclosure.

Try to deal only with lenders, businesses and other organizations you already know or that have been recommended.

You don’t need to pay a lot of money for help or information.

“But scam artists will demand a large upfront fee, often thousands of dollars, and they do very little to actually help the homeowner,” said Robert W. Mooney, FDIC Deputy Director for Consumer Protection and Community Affairs.

Be especially suspicious of unsolicited offers that arrive via phone, e-mail or a knock on your door.

“Some companies have falsely advertised or represented that they are part of a government-endorsed mortgage assistance network

Be particularly wary of any organization that says it guarantees foreclosure relief or that it has a near-perfect success rate.

“Also be wary of anyone who promises to pay off your mortgage or repair your credit if you ‘temporarily’ sign over to them the deed to your home, because you may be permanently losing your home to a thief.”

Ironically, the job of the con men engaged in loan mod and foreclosure rescue schemes is made easier due to widely advertised government mortgage relief programs.  The lure of “something for nothing” from a government program that the con men claim to be affiliated with is one of their most successful sales tactics.

The FDIC advice comes very late for many people who would have been far better off financially had they never purchased a home beyond their means to begin with.  None of the government mortgage agencies require a potential homeowner to evaluate the true financial obligations and risks of home ownership.  Many homeowners currently obtaining government mortgages are being approved with debt ratios that almost guarantee a future default and are not in the home buyer’s best interest.

One Option For Distressed Homeowners The FDIC Does Not Mention

The FDIC offers those in financial difficulty some good advice in their newsletter but what is not mentioned is whether the homeowner should consider becoming a renter. In addition, many of the government loan mod and Hope programs, etc. have done little to put homeowners in a better financial position and many default soon after they were “helped”.

For a homeowner struggling with the mortgage, constantly spending in excess of income and living a financially depraved existence, why not look at the benefits of becoming a renter?  In many locations, renting is cheaper than owning.

Although not mentioned by the FDIC,  government makes walking away from the mortgage an easy option.  A mere two years after a bankruptcy or three years after a foreclosure,  current FHA guidelines allow a borrower to apply for mortgage financing.

Do The Math

Here are  a couple of web sites that can tell you whether it makes sense to own or rent.



More On This Topic:

Loan Modification Scams and Fraud Widespread – Mortgage Servicing News

Frugality The New Lifestyle For Many

savingsHard Times Bring Back Thrift

Without the aid of easy credit, matching income with expenses has required cutbacks in consumer expenditures and forced price reductions and layoffs by businesses.  Frugality has become the new mantra for many as we can see from the following examples.

Dumped Pets Pay The Price Of Recession

From fancy cars to foreign holidays, Britons have had to relinquish all sorts of luxuries as the credit crunch takes hold. To this list we can now add pets: 57% more animals were abandoned last year than in 2007, according to figures from the Royal Society for the Prevention of Cruelty to Animals (RSPCA).

The number of abandoned cats rose by half; dogs by nearly a third. Horses, farm animals and exotic pets were also being left to fend for themselves.

Tim Wass, chief officer of the RSPCA inspectorate, said the cause was “everything to do with the economics about owning a pet”, from paying for food to veterinary bills.

In Glum Times, Repair Shops Hum

Economic fears are driving a resurgence for repairmen. When it comes to autos, computers and all kinds of appliances, consumers are more likely to repair what they have, rather than buying a new replacement.

Appliance-repair businesses, too, have seen an uptick in business in recent months, says Michael Donovan … even though the appliances he works on are not very expensive to buy new.

He and other business owners are surprised by the repair work people authorize these days. “Much to my amazement, people are spending $60 on repairing a vacuum that they bought for $100 new,” he said, adding that limiting new purchases is “definitely a factor on everyone’s mind.” Mr. Donovan has even seen a rise in repairs of small home items, such as electric razors.

Cars, however, are the most visible signs of the new frugality, with new-vehicle sales down sharply. Opting to keep cars running, consumers are extending the lives of their vehicles to nearly 10 years on average from eight just two years ago, says the Automotive Services Association, a trade group for repair businesses.

Starbucks Sales Down

Like many retailers in this difficult environment, Starbucks experienced further declines in comparable store sales in both its US and International stores during the quarter. Consolidated comparable store sales declined by 9% for the first quarter of fiscal 2009, with comparable store sales declines of 10% in the US and 3% in International for the period. Management believes that the negative comparable store sales are in large part a result of the ongoing global economic crisis and its effects on consumers’ discretionary spending…

Expect to see continued poor sales at Starbucks as consumers realize that one upscale beverage per work day can amount to over $800 per year.

Falling sales caused by frugality are  forcing businesses to cut costs and slash prices in an attempt to stimulate sales.

Yankees Slash Prices to Fill Costly Seats

Acknowledging their prices were too steep even by Yankees standards, the 26-time world champions announced a plan to fill thousands of empty high-priced seats by reducing prices and giving away much of the unsold inventory.

The Yankees cut season-ticket prices on some of their premium seats by as much as 50% — to $1,250 from $2,500 for some seats and to $650 from $1,000 on others. Customers who purchased such season tickets will receive their choice of a refund or a credit.

Mr. Steinbrenner said the team reviewed its pricing “in light of the economy,” and stated the changes were for the 2009 season only.

Whether or not Mr. Steinbrenner’s optimism is warranted remains to be seen.  I would expect further price cuts in the future as incomes remain weak and demand for premium priced services diminishes further.

Newcomers Challenge Office-Supply Stalwarts

In the grinding recession, companies are finding ways to save even on the cost of the lowly office pen. And that has created an opening for discounters to steal business from the office-supply industry’s big three.

The result: a wave of price-competition that is benefiting lower-cost vendors and encouraging companies to switch suppliers.

Count Me In for Women’s Economic Independence, a New York group that promotes women entrepreneurs, switched its business to Sam’s Club after a review of its Staples invoices. “It turns out we’ll be saving more than $7,000 on an annual basis,”said Nell Merlino, president and chief executive.

Franchise Sales Pull Back During the Recession

Annual applications from franchisers who want to do business in Maryland are down significantly so far this year, says Dale Cantone, an assistant attorney general for the state. First-quarter franchise-registration applications in Maryland fell 16% from a year earlier to 367.

Other states report similar falloffs. For instance, California’s filings from Jan. 1 through its April 20 deadline fell nearly 20% from a year earlier to 769. New York’s first-quarter registrations dropped 22% to 348 — the lowest number in five years.

The fall off in franchise sales is being blamed on a lack of financing.  Hopefully, the real reason is a more rational allocation of capital by lenders.  Does the average American city really need more fast food outlets, real estate firms or home decorators?

Forced Frugality

Have American consumers rejected the notion of  credit fueled economic prosperity or is something else at work?  The reason for the new found frugality correlates to the fundamental economics of adjusting spending to income levels.  Lower income levels, the threat of unemployment, lack of savings and the destruction of stock and real estate values have created a fundamental shift in consumer behavior that is not likely to change in the near future.

Salary Cuts: Ugly, But It Could Be Worse

A growing number of employers are resorting to salary cuts as the recession drags on. This month alone, A.H. Belo Corp., publisher of the Dallas Morning News, and the Atlanta Symphony Orchestra have announced pay reductions of as much as 15%.

At some companies, the cuts affect only executive and senior management levels, but many others are adopting an across-the-board approach or tiered salary reductions. Some companies are imposing permanent cuts, and some are promising to return employees to their full pay — eventually.

A January survey by global outplacement firm Challenger, Gray & Christmas found that of 100 human-resource professionals surveyed, 27.2% reported that their companies have imposed a salary freeze or cut.

Until the current recession, the practice of imposing pay cuts has been “very rare,” says John Challenger, chief executive officer of Challenger, Gray & Christmas, despite recent calls for capping executive salaries and bonuses.

Organizations in dire straits may have no choice but to slash salaries across the board. After being unable to make payroll in mid-March, South Carolina’s Charleston Symphony Orchestra cut the wages of all its staff and employees by 11.4%. Musicians in the orchestra also took a 11.4% hit in the form of unpaid time off.

Entrepreneurs Cut Own Pay To Stay Alive

A number of small-business owners have stopped paying themselves as they struggle to keep their companies afloat.

It’s impossible to know just how many owners are affected. But in a sign of the breadth of the trend, 30% of 727 small-business owners and managers surveyed by American Express Co.’s small-business services division said recently that they were no longer taking a salary. That’s a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years.

It’s not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.

“The situation overall is more dire,” says Jerry Silberman, chief executive of Corporate Turnaround, a debt-restructuring company in Paramus, N.J. Historically, he says, nearly half of his clients weren’t taking a salary when they come through his door. Now, it’s close to two-thirds. And if they do take a salary, it’s often not enough to cover expenses.

The prevalence of pay cuts, something rarely seen before, tells us that this economic downturn is different.  The unanswered questions are how much worse does it get and how long will it last?  Those businesses carrying heavy debts have the lowest chances of surviving as the downside of leverage shows its destructive capacity.

Newly Thrifty Americans Are Slashing Spending More Than The Numbers Show

How much have Americans cut back?
On the face of it, not much. The official data from the Bureau of Economic Analysis say that in February personal spending was down 0.4%, or $40 billion, from the year before. Certainly any drop is bad news, since consumer spendingrarely decreases–but $40 billion out of total spending of $10 trillion doesn’t seem like enough to wreak economic havoc.

A closer look, however, shows that Americans have tightened their belts more sharply than the numbers report. The reason? Official figures for personal spending include a lot of categories, such as Medicare outlays, that are not under the control of households.

After removing these spending categories from the data, let’s call what’s left “pocketbook” spending–the money that consumers actually lay out at retailers and other businesses. By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard.

For those American consumers concerned with their financial future, harsh realities are setting in.  The massive structural imbalances caused by decades of stagnant income growth and huge increases in debt levels will not be cured quickly.  Household balance sheets will eventually improve but it will be a slow and painful process for many.  The Age of Frugality is here for the foreseeable future.

Not All Are Suffering

After reviewing the gloomy news above, let’s end on a positive note.  Many Americans are financially secure, by dint of personal effort or privileged positions.  Here are two examples of those in the later category.

CCAGW Opposes Congressional Pay Raise

(Washington, D.C.) – The Council for Citizens Against Government Waste (CCAGW) today urged lawmakers to make their first order of business when they reconvene in the nation’s capitol in January to introduce legislation to freeze congressional salaries at current rates.  All Members of Congress are slated to get an automatic pay raise in January, 2009 unless they vote to block it.  Each rank and file member of Congress is poised to see another $4,700 in his or her paycheck over the next year, an increase of 2.8 percent over their current $169,300 annual salary.

“Members of Congress don’t deserve one additional dime of taxpayer money in 2009,” said CCAGW President Tom Schatz.  “While thousands of Americans are facing layoffs and downsizing, Congress should be mortified to accept a raise.  They failed to pass most of their appropriations bills, the deficit is on pace to reach an unprecedented $1 trillion, and the national debt stands at $10 trillion.  In addition, this Congress has been ethically challenged, plagued with corruption allegations, convictions, and sex scandals.”

The list of monetary benefits (beyond salary) that goes along with being a member of Congress is too long to list, but suffice it to say that most members of Congress will continue to live the “American Dream”.

Money For Nothing-Paul Krugman

On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, (C) who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.

All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

Few could argue with Mr. Krugman’s well penned article but will anything change?  With their high powered Washington connections, my bet is that the boys at Citigroup, AIG, Bank of America, et al will continue to do just fine.

More On This Topic

Recession Has Changed Lifestyles

A Reality Check For Economic Optimism


Financial interests in companies mentioned – None

Banks And Consumers Say No To More Debt

More Debt Rejected As Solution For Debt Crisis

How many times since the current financial crisis began, have we been told by the Government that the key to an economic turnaround is easier credit and more lending? The Federal Reserve and Treasury have supplied virtually unlimited amounts of credit and guarantees to the banking industry to increase lending activity. The government is refusing to allow the return TARP funds, demanding instead that the money be lent out.

There’s just one problem with the government’s attempt to force more borrowing;  consumers don’t want to borrow and banks have few qualified customers.   In a Wall Street Journal report that must be causing fits in Washington, we learn today that the major recipients of TARP funding have dramatically reduced new lending activity.

Bank Lending Keeps Dropping-WSJ

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

Banks defend their lending, saying they’re eager to issue new loans, refinance existing ones and modify those in danger of default. Complicating their efforts, bank executives say, is a decline in demand among consumers and businesses.

But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. Commercial lending slumped by about 40% over that period, the data indicates.

Of the 19 banks, the only ones to originate more loans in February than October were BB&T Corp., a regional bank based in Winston-Salem, N.C.; Wall Street giant Morgan Stanley; and State Street Corp., a Boston-based company that provides financial services mainly to institutions and wealthy individuals.

One of the banks showing the biggest lending decline was J.P. Morgan Chase & Co. In October, the New York bank made or refinanced $61.2 billion in loans. That figure declined 35% to $39.7 billion in February.

J.P. Morgan executives defend their lending levels. In the first quarter, the bank extended about $150 billion in new credit to consumers and businesses, “despite the fact that loan demand has dropped dramatically,” a spokesman said. In March, the spokesman said, J.P. Morgan made $65.5 billion in new loans — slightly more than it made in October.

So Why Aren’t The Banks Making Loans?

Banks are in business to lend money so why the decline in lending activity?  The extension of credit under normal circumstances is vital to economic growth and prosperity.  The reality of the current situation is that the banks (and every other financial institution) have for decades recklessly extended credit without regard to the to the ability of the borrower to service the debt from income.

This financial crisis is different and will not be solved by extending additional credit to over extended borrowers.  The banks and their customers recognize the risk of too much debt while the Government continues to mindlessly encourage more borrowing.

US Consumers Facing Reality

As noted above, a JP Morgan spokesman stated that “loan demand has dropped dramatically”.  The reasons for reduced loan demand are obvious and include the following: declining income, a low savings rate, an already intolerable debt load and a trend towards frugality.  The American consumer has wisely concluded that more debt will only make his financial situation worse.

Debt Levels Soar As Incomes Stagnate

Household Debt Ratio

Median Family Income

The 2nd chart’s blue data curve since 1979 (in 1993 dollars) can be compared to the above chart’s 1970-1978 – showing next to nil growth. The pink data curve from 1979-2007 expresses this in 2007 dollars. This computes real income compound growth for this 37 year period (1970-2007) of a measly 0.26% per year (about $10/month) average, compared to 12 times faster income growth of 3.7% annually in the prior 23 years 1947-1970.

Income growth for the average wage earner has been essentially flat since the early ’80’s.  The early 80’s was also the beginning of the greatest credit expansion in history.  Easy credit growth on a massive scale did not increase real incomes in the past nor will it do so going forward.  The statistics on income will be even more abysmal when updated to 2009,  reflecting salary decreases and an unemployment rate approaching 10%.  The nation does not need more debt but rather more income.

Savings And Home Equity Decline

The false “prosperity” of the past based on credit fueled asset appreciation caused many consumers to believe that saving was no longer necessary.   The  collapse of values in stocks and real estate has now left many consumers with little net worth or liquid savings.

Personal Savings Rate

Owner Home Equity

The American consumers have recognized that borrowed money is not income and that taking on more debt is not the path to prosperity; they  are making the necessary sacrifices to improve their financial future.  The US Government, obsessed with pushing more credit onto over leveraged borrowers, would do well to follow the example of its Citizens.

More on this topic:

What Americans Are Willing To Give Up

French Warn America About Runaway Spending and Stimulus

Second Mortgage Investors Facing 100% Losses


Risky Lending

Second mortgage liens have always been considered risky lending.  Investors in second mortgages are about to find out that the risk was higher than anticipated.

WASHINGTON, April 6 (Reuters) – The U.S. Treasury will soon finalize details on a plan to extinguish and modify second-lien mortgages as part of its overall housing program, a senior Treasury official said on Monday.

The second liens — home equity loans that were often written in tandem with a primary mortgage during the housing boom years — have been an obstacle to refinancing and modifying loans to make them more affordable.

The official, speaking to reporters on condition of anonymity, said assistance would be provided and also guidelines that “comprise a clear path for the reduction of second lien debt.”

He said these range from extinguishing them to keeping them in place as a part of mortgage modifications done under a $75 billion program the Obama administration is implementing to make failing mortgages affordable to home owners.

Under the “old rules” obtaining a second mortgage was not easy.  There were tough restrictions on loan to value levels and the borrower needed sterling credit.   Investors are now discovering why the old rules made sense as they face total losses on second mortgages approved during the lending boom.

Mortgages Secured By Negative Equity

During the peak years of the housing boom it was common for second mortgage lenders to allow borrowing up to 100% of a home’s value.   As housing prices cratered over the past three years, the collateral backing these high risk second mortgages was vaporized leaving lenders  with an essentially unsecured note.

It has become somewhat of an open industry secret that second mortgage investors  do not even bother trying to foreclose or collect since recovery would be minimal.   The second mortgage lien remains on title, however, preventing homeowners from selling or refinancing unless they can come to a settlement with the second mortgage lender.

It now appears that most of the underwater second mortgage investors will be forced to recognize a 100% loss of investment based on legislative decree.

Many Losers, Some Winners

The end result of the second mortgage easy lending fiasco is a total loss for many second mortgage investors.  Most of the companies that specialized in second mortgage lending are no longer in business.  Many future applicants looking for a second mortgage loan will be out of luck as lenders abandon second mortgage lending.

Every disaster, however, seems to have some winners. Those homeowners who borrowed to the max and used second mortgage money for cars, furniture or exotic vacations and such are no doubt smiling at the prospect of having their debt extinguished.

China Questions US Solvency – US Says Not To Worry

US Insists China Fears Over Debt Unfounded

The Obama administration rejected China’s concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.

In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.

“There’s no safer investment in the world than in the United States,” said presidential spokesman Robert Gibbs.

The premier’s comments were unusually pointed and raised the possibility that Beijing’s appetite for U.S. debt could wane. In the worst-case scenario, a significant new aversion to U.S. investments could drive down the dollar and drive up interest rates, worsening the U.S. recession.

But in the last year, Beijing has become increasingly vocal about what it sees as U.S. economic mismanagement making U.S. investments riskier.

Obama Says Investors Can Be Fully Confident In US

March 14 (Bloomberg) — President Barack Obama said investors can have “absolute confidence” in Treasury bills as he sought to assuage China’s concern about the safety of its holdings of U.S. debt.

Chinese Premier Wen Jiabao, whose country is the single largest overseas owner of U.S. government debt, said two days ago that he was “worried” about holdings of Treasuries and wanted assurances that the investment is safe. The U.S. is counting on overseas purchases of its debt to finance Obama’s $787 billion package intended to help pull the world’s biggest economy out of a recession.

Obama’s Catastrophe

US creditors are getting nervous about the ability of the United States to repay its huge and fast growing debt load.    The fact that the US has to explicitly tell its creditors not to worry makes them worry more.  Obviously, if there was no need to worry, China would not have raised the issue of US solvency and the US would not have had to assert it’s credit worthiness.   We need to go very far back in history to revisit the last time that the credit worthiness of the United States was questioned.

China is not likely to be swayed by the latest spin out of Washington.  Actions speak louder than words and the Chinese view the US debt rampage as economic mismanagement.  Perhaps the Chinese concerns arose after Mr Obama stated that the US was facing an economic “catastrophe” if we did not borrow and spend more money.  When  China couldn’t see the logic of our strategy of curing a debt crisis with more debt, they started to reassess the US credit rating.

China Should Act Like A Real Lender

Hopefully, this entire situation will have a happy ending.  If China implements sound lending practices, they will not continue to lend more money to an already over leveraged borrower, or at a minimum, demand a higher interest rate for the higher risk.  If China can help the United States find the fiscal discipline it lacks by imposing harsher terms as a condition for additional loans, both parties will benefit.