says:
Consumer borrowing falls for 9th straight month
WASHINGTON – The Federal Reserve says consumers borrowed less for a record ninth straight month in October. It was another sign that consumer spending will remain weak, making it harder for the economy to mount a sustained rebound.
The Fed says consumer credit fell at an annual rate of $3.5 billion in October, although that’s significantly lower than the $9.3 billion decline that economists had expected.
The Fed report says consumer credit overall dropped at an annual rate of 1.7 percent in October, compared with a 4.2 percent drop in September.
Demand for revolving credit, the category that includes credit cards, fell 9.3 percent, while borrowing in the category that includes auto loans rose at an annual rate of 2.6 percent.
(This version CORRECTS amount in headline to $3.5 billion sted $9.5 billion.)
Obama eyes ’selective’ use of bailout dollars
WASHINGTON – President Barack Obama said Monday the massive federal bailout program for financial insititutions has turned out to be much less costly than expected and there may be ways to redirect some of the money toward creating new jobs.
Speaking in the Oval Office, Obama declined to say directly whether he would seek to redirect some of the repaid money from the $700 billion Troubled Asset Relief Program to jobs programs. He did say he would address the topic in an economic speech on Tuesday.
The president said the key question is determining whether the bailout money could be put toward selective job creation that meets the original intent of the law. He cited as an example directing bailout money to help small businesses get lending.
The president’s comments came as Democratic leaders on Capitol Hill were looking to tap as much as $70 billion in unused funds from the Wall Street bailout to pay for new spending on roads and bridges and to save the jobs of firefighters, teachers and other public employees. Republican leaders are voicing strong opposition to that idea, saying all the money should go toward reducing the federal deficit.
In particular, Obama signaled that money from the $700 billion financial rescue program could be used as part of a jobs package for the purpose of helping small- and medium-sized businesses get loans to invest and ultimately to hire workers. Congress passed the Troubled Asset Relief Program in October 2008.
Obama will give a speech designed to flesh out his latest jobs-creation plan on Tuesday. He said he would address the use of bailout money at that time.
The Obama administration will lose $200 billion less than expected from the federal bailout program, according to a Treasury official who spoke on condition of anonymity because that new projection had not been released. That’s down from the a $341 billion estimate of August. The lower estimate reflected faster repayments by big banks and less spending on some of the rescue programs as the financial sector recovered from its free fall more quickly than anticipated.
“TARP has turned out to be much cheaper than we had expected — although not cheap,” Obama said.
He said some of the money could be devoted to deficit reduction.
Obama spoke briefly on the economy during an Oval Office appearance with Turkish Prime Minister Recep Tayyip Erdogan.
Quarter in U.S. foreclosure plan late on payments
WASHINGTON (Reuters) – More than one-quarter of homeowners receiving help under a U.S. government foreclosure prevention plan are behind on their new mortgage payments, a Treasury Department survey has found.
Some 650,000 borrowers are participating in the trial phase of the Obama administration’s Home Affordable Modification Program, a $75 billion taxpayer-financed program launched this year.
Most home loan modifications result in lower monthly payments, although some lead to reduced principal on mortgages.
Trial modifications were initially for three months, but the Treasury added 60 days, effectively making them last five months.
Homeowners must submit more detailed documentation before they can have their loan modifications made permanent.
A Treasury Department survey of large mortgage servicers found “over 73 percent of borrowers are current in their trial plan payments,” Assistant Treasury Secretary Herbert Allison told a congressional oversight panel.
That leaves about 27 percent who are delinquent on the payments.
Allison provided written answers to questions raised at an October hearing before the Congressional Oversight Panel, which monitors the government’s foreclosure prevention plan and other financial rescue efforts.
Allison said that “while not all eligible borrowers will convert to permanent modifications, it is too early to estimate a failure rate, diagnose causes and predict future success rates.”
Experts say the conversion rate to permanent loans is the key to determining the program’s ultimate success or failure.
The Treasury has not published figures on how many trial loan modifications have been made permanent, but it said it will start doing so this month.
The next monthly report on the program will be released next week, Treasury Department spokeswoman Meg Reilly said.
This week Treasury officials threatened to fine mortgage lenders unless they speed efforts to give hard-pressed homeowners a permanent break on monthly payments.
According to a report from the congressional oversight panel, only 1,711 permanent mortgage modifications had been offered as of September 1, an indication of how reluctant banks seemed to move beyond trial offers.
(Reporting by Lisa Richwine; Editing by Xavier Briand)
Dollar makes a comeback and crude prices tumble
Crude prices have trended lower for well over than a month and grew even cheaper Monday, which might lead some to believe prices at the pump would follow along.
That’s not necessarily been the case so far.
Demand for gasoline, jet fuel and diesel is edging only slightly, but not enough for refiners to make much money so they’ve been cutting production to avoid losses.
Several refineries have completely shut down and while imports have helped push inventories of gasoline higher, gas prices have remained relatively flat during crude’s swoon.
Average regular gasoline prices edged down less than a cent overnight to $2.632. A gallon costs slightly more than it did last week, but almost 90 cents more than it did at this time last year, according to auto club AAA, Wright Express and Oil Price Information Service.
Benchmark crude for January delivery fell 2 percent, or $1.54, to settle at $73.93 on the New York Mercantile Exchange, the lowest level in about two months.
Energy experts say that at some point, fuel prices are going to have to rise or crude prices are going to have to fall.
It’s been the latter in recent days and the rebounding dollar may be the best ally that motorists have right now.
The dollar traded higher than it has for a month against the euro Monday and crude prices fell sharply, demonstrating how much heft the dollar has in energy markets.
Oil is bought and sold largely in dollars and this year the dollar has taken a beating compared with currencies like the euro. That has allowed investors holding euros and other stronger currencies to buy a lot more oil for less and they have.
While that has driven the price of crude higher, the same cannot be said for gasoline because the demand isn’t there. That is why energy experts believe something’s got to give.
With the crude falling as the dollar rises, that may finally be happening.
Consumers that want to get an early indication of where the price of gasoline, diesel and other fuels are going in the coming weeks might want to watch the movement of the dollar. The rising dollar on currency exchanges could mean more bang for the buck on your pocket at the gas station.
In other Nymex trading in January contracts, heating oil fell 1.71 cents to settle at $2.0097 and gasoline slipped 3.44 cents to settle at $1.9406. Natural gas jumped 38.5 cents to settle at $4.971 per 1,000 cubic feet.
In London, Brent crude for January delivery lost $1.09 to settle at $77.53 on the ICE Futures exchange.
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Associated Press writers Alex Kennedy in Singapore and Pablo Gorondi in Budapest, Hungary, contributed to this report.
Ahead of the Bell: Consumer Credit
WASHINGTON – Consumers likely borrowed less for a record ninth straight month in October as households faced tight credit conditions and unemployment that hit a 26-year high. A further decline in borrowing would be more evidence of weak consumer spending, making it harder for the economy to mount a sustained rebound.
Economists surveyed by Thomson Reuters expect consumer credit declined at an annual rate of $9.5 billion in October. The Federal Reserve is scheduled to release the report at 3 p.m. EST Monday.
Consumer credit fell at an annual rate of $14.8 billion in September, the biggest decline since July and the eighth straight drop.
Americans are borrowing less as they try to replenish depleted investments. Many are finding it hard to get credit as banks, hit by the worst financial crisis since the 1930s, have tightened lending standards.
In September, borrowing for revolving credit, including credit cards, fell at an annual rate of 13.3 percent, a record 12th consecutive decline. Borrowing for non-revolving loans, including auto loans, fell at an annual rate of 3.7 percent after a slight increase in August. The August gain reflected the surge in car sales as consumers rushed to take advantage of the government’s Cash for Clunkers program.
While economists have worried for years about the low rate of U.S. savings, the concern is that consumers could derail the recovery if they sock away too much of their incomes. Consumer spending accounts for 70 percent of total economic activity.
Consumers have been reluctant to spend partly because the labor market has been so weak. But the government reported Friday that the unemployment rate actually improved in November, dropping to 10 percent, after hitting a 26-year high of 10.2 percent in October. Analysts cautioned that they expect the jobs recovery to remain subpar in coming months because the overall economy will continue to be lackluster.
After consecutive gains, the nation’s retailers reported a decline in sales in November, an ominous warning sign for the holiday shopping season.
According to sales results released last week, a diverse group of stores including Macy’s Inc., Saks Inc., Abercrombie & Fitch Co. and Target Corp. posted sharper-than-expected sales declines in November.
ALL BUSINESS: Help needed for underwater mortgages
NEW YORK – Stop paying your mortgage.
That’s the underlying message from a University of Arizona law professor, whose new paper is hitting a nerve as the nation’s housing crisis enters its fourth year.
Brent White denies advocating walking away from a mortgage that is bigger than the value of a home. Nonetheless, he lays out a case of how it can be done, and his suggestions have gone viral, popping up online, in newspapers and on television.
It’s a move that can save some people money, but at the expense of wrecking their credit.
The topic is central to what’s crippling the housing market: About one in four homeowners, or 10.7 million Americans, are considered underwater, meaning their mortgage exceeds their home value, according to real-estate information company First American CoreLogic.
In the markets hardest hit by the nation’s housing bust — Florida, Arizona, California, Michigan and Nevada — the share of homeowners who are underwater is 40 percent.
“Millions of Americans would be better off financially if they did walk away,” says White, who authored the paper “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
What White is saying goes against everything that we’ve been taught about contracts. If you make a mortgage commitment, most people think you have a responsibility to pay.
On top of that, White suggests those who decide walk away should consider getting a new car or house before they default on their mortgage, which will constrain their credit.
Imagine if everyone who is underwater walked away. It could cause economic havoc. Home prices would plunge even more. Banks would have even more bad loans on their books, which would lead them to make fewer loans to consumers and businesses.
There are personal financial risks, too. A foreclosure shows up on an individual’s credit report for seven years, which will make it hard to get any loans during that time, according to John Ulzheimer, president of consumer education at Credit.com.
People who go into foreclosure but otherwise have good credit might escape in less time if they continue to pay their other bills on time. There is no magic number for how long that could take.
Mortgage lender Fannie Mae won’t back another loan for five years for someone who was involved in a foreclosure, except when the default occurred because of an extreme circumstance like a medical event or unemployment.
“Walking away undermines the basis tenets of mortgage lending,” said Brian Faith, a spokesman for the government-controlled Fannie Mae.
Despite all that, White’s views resonate because he highlights a double standard in the home lending industry.
Banks and other lenders doled out mortgages during the boom, often without demanding down payments or checking to see if borrowers had enough income. After the housing crash, many of these same lenders took billions in taxpayer money, yet now are slow to modify troubled mortgages.
The government’s efforts to fix this mess haven’t worked. The Obama administration acknowledged on Monday that it has struggled to get lenders to permanently modify interest rates on home loans.
The government’s plan now is to shame lenders into to modify mortgages. The latest strategy: Publish a list of those companies participating in the government $75 billion effort to stem foreclosures that are lagging on the modifications.
“Wall Street gets to maximize profits and minimize losses irrespective of concerns about morality, while Main Street is told to keep their promises,” White says.
White knows what he’s talking about. He is a scholar of behavioral economics and the law — two areas at the heart of the housing crisis. He believes homeowners worry about the shame involved with foreclosure and have an exaggerated anxiety over what a foreclosure will mean for a person going through it.
For those living in the most distressed markets, it could take years for home values to rebound to peak levels — if they ever do. Those who bought high and put relatively little cash down might be able to save money by walking away and renting, White says.
White estimates that someone who bought a home in Miami for $355,400 at the market’s peak may now have a home worth $198,000. If the homeowner put 5 percent down at the time of purchase, he currently owes $132,000 more to the lender than his home is worth.
If that homeowner walks away, he wouldn’t have to pay mortgage interest, mortgage insurance, taxes or homeowners’ insurance. White estimates that homeowner would save $116,000 by giving up on his mortgage and renting a comparable home.
Easing the terms of an existing mortgage can keep a borrower in his home, but the banks have little incentive to do so. Now the government is trying to shame banks into action, but that’s hardly enough. Congress considered a bill that would have let bankruptcy judges rewrite mortgages, but that legislation died last spring.
When abandoning a home sounds attractive, it’s time for better choices.
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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