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September 9, 2011 – After the housing market collapsed in 2008, many subprime mortgage-backed securities issued by U.S. financial firms became toxic, causing major losses for Fannie Mae and Freddie Mac. Taking action on Friday, Sept. 2, the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, filed a suit against 17 firms for alleged violations of federal securities laws and common law in sales of subprime mortgage-backed securities.
Among the 17 institutions facing these allegations are Bank of America Corporation, Citigroup, Inc., Goldman Sachs & Co. and JP Morgan Chase & Co. The suits indicate that the toxic securities Fannie Mae and Freddie Mac purchased from these entities totaled almost $200 billion in losses, although this number does not represent the amount of compensation the FHFA is seeking. It has not yet announced an amount for its compensation, saying that “actual recoveries will be determined based on filings by the parties, evidence and judicial findings.”
The FHFA argues that these institutions did not accurately present the characteristics of the mortgages backing these securities when they presented them to Fannie Mae and Freddie Mac. It said it “seeks compensatory damages for negligent misrepresentation,” such as misstating the owner occupancy percentage and loan-to-value ratio.
It claims these reports violated the Securities Act of 1933. More broadly, the FHFA filed these complaints it accordance with its authority under the Housing Economic Recovery Act of 2008.
In a statement issued on Sept. 6, the FHFA stated, “Some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings.”
In a statement responding to the lawsuit, Bank of America said that it did not portray false characteristics or misleading information to Fannie Mae and Freddie Mac about the securities. Fannie and Freddie, the statement said, “claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so.”
The lawsuits against these institutions were filed in federal and state courts in New York and in the federal court in Connecticut. They follow a similar one against UBS Americas, Inc. on July 27, 2011.
September 19, 2011 – A borrower’s poor credit score might no longer keep him or her from getting a new or used car loan. After becoming more cautious as a result of the financial crisis of 2008, auto lenders are now showing that they are more willing to lend to subprime borrowers.
On Tuesday, August 30, Experian Automotive announced the results of its study on auto lending in the second quarter of 2011. The study reported that the rate for subprime new vehicle loans increased by 22.4 percent from 2010, from 18.21 percent to 22.29 percent.
“Even with a tepid economic recovery in the first half of the year, automotive lenders were willing to increase their level of risk,” Experian Automotive Director of Automotive Credit Melinda Zabritski said in a press release. “This was good news for automotive manufacturers, as nearly half of all consumers fall into non-prime, subprime and deep subprime risk categories. Providing loans to these risk tiers opens the market to significantly more prospects.”
The area that saw the greatest increase was in new car loans for borrowers in the highest risk category, deep subprime, which soared 44.1 percent from 1.48 to 2.13 percent. In addition, the average credit score for both new and used auto loan borrowers decreased by an average of 8-10 points and the average time period for loan repayment extended by one month.
Overall, the total percent of subprime auto loans made in this last quarter was 40.8 percent, up from 37.2 percent at this time last year. In 2007, before the financial crisis, this rate was 46.2 percent.
This recent increase, Experian Automotive experts suggest, marks an increase in the risk lenders are willing to take on auto loans to increase their business – especially in a lagging economy. Some experts also suggest that auto loans are easier to grant to subprime borrowers because repossessing a vehicle is much easier than foreclosing a home.
Ally Financial, the former financing branch of General Motors Co (GMAC), said on Monday that it will sell some of its international operations in order to repay the United States Government $12 billion it received in bailout money. In the same announcement, however, Ally claimed it “absolutely not” sell its U.S.-based auto loan lending business, according to Reuters.
As part of its liquidation process, Ally declared bankruptcy for its mortgage unit called Residential Capital, or ResCap. ResCap filed Chapter 11, effectively bringing all of the company’s home equity loans to a halt.
“We believe that combination of these actions is a very, very strong result for Ally and makes the prospects for the company substantially brighter,” said Michael Carpenter, Ally’s chief executive, in response to the company’s closures, according to a recent article by Market Watch.
Analysts seem to agree with Carpenter, agreeing that the selling of international businesses will leave Ally in a great position to manage their auto loan financing industry here in the United States.
“My perspective is that we’ve kind of unlocked a box and… created [options] and opportunity as a result of these steps,” said Carpenter.
To further bolster the morale of investors, Carpenter continued to say, “From a credit point of view, this is going to be as strong of a company as there is in the banking business. I don’t think there is a better credit environment than auto loans in the U.S.”
The company was rebranded from GMAC in 2009, and since that year it has assumed the name Ally Bank. Its original bailout from the United States taxpayers amounted to $17 billion. Since it received money from the government, the lender has repaid roughly one-third of the bailout.
Ally is the preferred auto loan lender of the exotic brand Maserati in North America.
Student loan debt, which has soared past $1 trillion, has taken center stage in the minds of students, parents and now financial aid officials.
“What I’ve noticed a change in is people want to talk about debt. In the past, people were like, ‘This is my dream, we’ll figure it out later, and [debt] is a short-term band aid. [Now] they want to be more educated about strategies and financing,” said Carly Eicchorst, the associate director of financial aid at Augsburg College in Minnesota in an interview with US News.
Many prospective students raise questions about the debt they will have to take on in order to attend college. At Eckerd College in Florida, many potential students inquire if they will be forced to take on $100,000 in student loan debt in order to attend.
“When we talk with students, we try to figure out, ‘Where are you getting that figure?’ It’s, ‘Well, that’s what I heard’,” said financial aid director Pat Watkins in a US News interview.
Despite student concerns, the majority of students do not acquire six figures in student loan debt. In fact, according to a financial aid analysis, from 2007 to 2008, only 0.2 percent of undergraduates acquired six figures worth of student loan debt.
Students that get into substantially higher amounts of debt usually do so as a result of extenuating circumstances such as school transfers or a lack of parental contributions.
Borrowers that obtain private loans are also tend to be more heavily in debt compared to those that only borrowed federal loans. This is because private loans lack the limits and regulation that accompany federal loans.
“We explain what the monthly payments will be, as well as explain to them what the potential for cancellation of their loan will be if they’re going into nonprofit sectors. It’s basically saying, unless you’re borrowing privately…the students won’t [owe] $100,000,” said Watkins.
Despite assurances that the average student will not need to borrow six figures in order to obtain a degree, it remains important for prospective students to research prior to borrowing.
Some colleges are trying to help students with this research process.
“There is much more emphasis, not only in the financial aid office but in our orientation programs and in our first-year seminars for them to be good financial stewards—so they’re not borrowing more than they have to. We try to work with them from the beginning—and it’s not just the student, but it’s also the family. Through our orientation program, we work with parents and students so that they understand what the ramifications are of decisions…including borrowing,” said Phil Conroy, school president at Vermont Technical College in an interview with US News.
With financial anxiety high on the minds of many students, proper due diligence, such as research on majors, student loan debt, college costs and post-graduate salaries can help allay the fears of borrowing.
“I don’t know if this year was just an anomaly because there was so much chatter about student loan indebtedness, [but] students are being much more diligent about their borrowing. They are actively seeking outside scholarships that they can use to replace student loans, and some students will say, ‘No, I can’t afford to come.’ I think they’re being more realistic,” said Watkins.
Here’s some bad news for recently married couples: according to a new report from TransUnion, newlyweds don’t talk much about their personal finances until after tying the knot.
It turns out, almost one in five couples do not discuss their financial situation until after marrying. The report also found that 14.4 percent of couples never discuss personal finances at all.
Those couples that did discuss finances found it to be beneficial. A massive 45.1 percent of couples said they felt prepared and organized following a discussion about finances. Almost 20 percent said they felt relief and reassurance following a financial conversation.
Heather Battison, Senior Director at TransUnion Responsible for Consumer Education, told loans.org that marriage only affects a couple’s credit situation upon the opening of a joint account or the borrowing of a joint loan, such as a personal loan. She explained the matter using a home loan as an example.
“If they apply for the mortgage together, it may be reported on both of their credit reports and may affect both of their scores. Therefore, the couple should discuss their financial situation together and determine if it makes sense to apply for a mortgage together, under only one individual’s name, or work to get both individuals’ credit in good shape—and then apply for a mortgage together,” said Battison.
Battison explained that credit reports don’t merge together automatically once a couple is married. Instead, records only appear upon the opening of a joint account.
Should individuals have good credit, combining their finances would lead to a lower interest rate on major purchases. Of course, the opposite also holds true, and an account could receive damage if two people joining accounts together have bad credit.
As a result, Battison advises couples to evaluate their credit situation first, and then decide whether it is more advantageous to apply for a loan together or individually.
The Consumer Financial Protection Bureau (CFPB) issued a report stating that payday loans and deposit advance loans lead customers into a cycle of debt.
The report attributes loose lending standards, high costs and risky loan structures to the impact short-term loans have on consumers’ financial health. Loans offered by both banks and payday lenders are given as a way to “bridge a cash flow shortage between paychecks.”
The CFPB study found that a high sustained use is common for these consumer loans. Nearly half of all payday loan borrowers take out 11 or more loans per year. The median borrower took out 10 loans and paid $458 in fees alone.
Deposit advance loans did not fare any better. For deposit advance borrowers, more than half took out advances of $3,000 or more. Of these borrowers, more than half paid off one loan and went back for another within 12 days.
The CFPB said this high usage can likely be attributed to several factors. A lack of underwriting is a major factor, according to CFPB director Richard Cordray.
“Lenders may rely on their ability to directly debit the consumer’s account when the consumer’s next paycheck or benefits payment is due rather than assessing whether the loan is affordable in light of the borrower’s income and other expenses,” Cordray said in a press call.
Cordray continued stating that the Bureau is concerned about these types of loans in particular because the cycles of debt can “disrupt the precarious balance of consumers’ financial lives.”
He said despite being labeled as short term, deposit advance loans and payday loans are debt traps.
“The stress of having to return every two weeks to re-borrow the same dollars after paying exorbitant fees and interest charges becomes a yoke on a consumer’s financial freedom,” Cordray said.
The study looked at over 15 million storefront payday loans and other depository institutions over the course of a year. Despite its large size, all organizations are not convinced the evidence is sufficient.
Advance America provided loans.org with a response to the CFPB’s actions. Jamie Fulmer, senior vice president of public affairs, said the study is not based on customer experiences and leaves out options for where payday loan borrowers would turn if denied a loan.
“The Bureau cannot draw any meaningful conclusions to inform policy until it follows up this preliminary review with the difficult work of understanding the rationale of cash advance customers; the choices and consequences faced by those in need of short-term credit; and the risks of driving people to higher-cost productions, expensive penalties or less-regulated providers,” Fulmer said.
The CFPB recognized that there is still work to be done to determine how to protect consumers and also give them access to responsible credit.
“We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances,” Cordray said. “Debt traps should not be a part of their financial futures.”