naked capitalism

Small businesses have fair weather friends.

Policymakers love to extol entrepreneurship. And in the last business cycle, even in the upswing, large corporations shed jobs while mid-sized and particularly small businesses added them. But when things get ugly, the best connected players get the breaks, and the little guy is left out in the cold.

The latest evidence is an amusingly schizophrenic set of headlines in the New York Times. A story by Eric Dash tells us, “Pace Slows on Losses for Banks“:

Just a year ago, many of the nation’s biggest banks were in such bad shape that their losses threatened to topple the financial system.

Today, by all appearances, their vast problems seem to be easing: a seven-month rally in financial stocks has driven the shares of Citigroup and other troubled behemoths up sharply. And the economy has shown modest improvement, slowing losses that only recently threatened the survival of some big banks….

“There is more pain to come, but they have enough Band-Aids and tourniquets to slow or cut off the bleeding,” said David A. Hendler, a financial services analyst at CreditSights in New York.

In fairness, the article is only cautiously optimistic, but it still has a “the worst is over” subtext.

But the article by Peter Goodman on small business lending makes clear that the banks are not taking any chances:

Many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth, even as the country tentatively rises from its recessionary depths.

Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board. The enduring credit squeeze appears to reflect an aversion to risk among lenders confronting great uncertainty about the economy rather than any lingering effects of the panic that gripped financial markets last fall…..

Some 14 percent of small businesses found loans harder to secure in August than in July, according to the most recent survey by the National Federation of Independent Business. Among companies borrowing regularly, less than one-third reported that all their credit needs were being met.

Yves here. Notice the “great uncertainty about the economy.” Translation: “We don’t see signs of recovery in our local market.”

The article cites economists who argue that the banks are being unduly risk averse, yet are also going to be hit by commercial real estate losses. Um, if your equity base might shrink, it isn’t exactly a sound move to expand your balance sheet.

The article neglects to tie in two other issues: credit cards and CIT. Credit cards are an important, often the only , source of funding for small businesses (the Small Business Administration deems any business with fewer than 500 employees as “small”, but the low end of that range can seldom get bank loans. One colleague who had a 100 employee businesses maxed out his credit card three separate occasions to keep his venture afloat). So the scarcity and higher cost of credit card funding has a direct impact on many small companies.

CIT, another key source of funding to smaller enterprises, looks destined to file for bankruptcy. What is remarkable is that this takedown is arousing so little hue and cry. Goldman, one of CIT’s creditors, will do better if CIT fails, to the tune of $1 billion. Oh, yes, the firm claims it has merely hedged its risks, that all it will get is what it would have earned over the life of the facility if CIT survived. If you believe that, I have a bridge I’d like to sell you. An acceleration of income is more valuable that waiting for it to come in. If nothing else, you get to pay yourselves bonuses on it now. And if CIT is like a pretty much every other recent bankruptcy, there are more CDS outstanding than cash bonds, meaning more winners if it is dead rather than alive (although I’d be curious to know who were the protection writers on these policies).

In case you had any doubts that small businesses were the engines of job growth, Robert Oak at the Economic Populist gives a good recap. 65% of the jobs created in the last 16 years came from small enterprises. And they are now shedding workers at an unprecedented rate:

The Wall Street Journal story, “The ‘Democratization of Credit’ Is Over — Now It’s Payback Time,” is a solid piece of reporting on how credit that was once offered liberally to lower income consumers has now left a very big hangover. It’s worse than with other income strata for an obvious reason, namely, low income consumers are almost by definition budget stressed, so adding debt to the mix has high odds of leading to a bad outcome (save when used prudently as a short-term bridge, or for a long-term investment, and even then only when conservative cash flow projections confirm the debt service is manageable).

I wish the story had more on how this looked from the lenders’ side, as in what their margins and default assumptions were, but even with the focus on borrowers, the article is revealing. It focuses on Karen King, who admits that, at $36,000 in debt, she had too much of a good time and is now paying for it, literally and figuratively.

But the story glosses over two issues. Of her $36,000 owed, $26,000 is student loans:

Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate’s degree from a community college — loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather’s two-bedroom apartment, where her mother, uncle and sister also live.

The story dwells on the lifestyle she had (dining out 2-3 times a week, going to movies) that presumably was a big contributor to the $10,000 she now owes, but skips past the $26,000. Ms. King worked in a shoe store and now drives a tour bus for $13 an hour plus tips. Did that associate degree do her any good in the job market? And I have to wonder if the student debt, which she was not doubt told was sensible (”an investment in your future”) desensitized her to taking on more debt. I admittedly came of age in the era before education inflation kicked in, but my mother recently found one of the old bills from college. I made some crude assumptions and compounded forward the Harvard tuition, room and board forward, and it came a bit over $20,000 a year in current dollars. Ms. King no doubt overspent, but a more important contributor to her current mess is that she threw away a lot of money on a useless degree.

The second interesting bit is she has decided not to declare bankruptcy, the reason apparently being that her impaired credit record has led her to be turned down for jobs. Her debt management decisions are driven by the impact on that scorecard:

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person’s credit report when it is settled for a partial payment.

She rejected any idea of a bankruptcy filing for the same reason. “It takes forever to come off” the credit report, she says.

Before the way to punish debtors was to send them to debtors prison. Now it appears to be to restrict their access to work. Perverse, but effective.

Repeat after me: the credit crisis was the result of too much cheap and easy lending. Ergo, any return to healthier practices means more expensive and less readily available debt.

The problem is that the powers that be don’t quite grasp the implications, or to the extent they do, are still trying to have their cake and eat it too. They want a sounder banking system (or so they say, but with the banksters in charge, this is likely all talk). But heavens no, we cannot restrict credit, bad thing will happen, like a recession/depression, cheaper assets, and fewer campaign contributions.

The reality is that there is no nice, painless way out of the mess, as our high and rising unemployment rate attests. And how the new FASB rules 166 and 167, due to become effective next year, come into play, will tell alot about our tolerance for pain in the interest in getting the financial system on a more solid footing.

The reason I particularly cynical is what transpired with FAS 157. That rule went into effect at the end of 2007 (I believe November 2007 so that securities firms with November fiscal years would comply). It gave us Level 1, 2, and 3 assets, and required companies to disclose which fell in which valuation bucket. The higher the number, the fuzzier the basis for the price used. Level 1 assets were in actively traded markets where prices could be readily observed (think stocks and foreign exchange). Level 3, often described as “mark to make believe” was based on “unobservable inputs”. An accompanying rule required companies to put assets in the lowest numbered category, meaning most concrete valuation bucket, possible. In other words, no calling an asset Level 3 and valuing it as you damned well pleased when there was a more objective way of deriving a price.

So what happened? Bear Stearns crisis, FAS 157 is relaxed, banks can put assets in whatever category they choose. And what did we see? Huge increases in Level 3 assets, with banks contending markets had become illiquid and they therefore could not price a lot of stuff on their balance sheet.

If you believe all the increases in Level 3 assets were due to difficulty in getting prices or market inputs, I have a bridge I’d like to sell you.

These new FASB rules will require consolidation of QSPE, which is “qualified special purpose entities.” Off balance sheet entities were targeted to be killed as a result of Enron, but the financial services industry howled, since real estate securitizations and credit card conduits were off balance sheet vehicles. The compromise was QSPE, with the idea that a truly arm’s length entity like a real estate securitization, with no recourse to the parent if the vehicle go tin trouble, should be OK. Of course, that created a second set of messes, that assets, like subprime loans, which were not suitable for the “Q” treatment (accountants like to say “not Q-able”) were nevertheless put in these very sort of entities (this is one of the many reasons we are having difficulty with mortgage mods: these vehicles and the related arrangements were designed to be pretty passive once they were set up). But that is another topic.

The new FAS rules will eliminate the QSPE, which will have the effect of requiring banks to consolidate their off balance sheet vehicles. This makes perfect sense with credit cards, which are arguably not arm’s length (banks have in the past and are now intervening to rescue credit card trusts that have gotten in trouble. If they let one flounder, they would have a great deal of difficulty doing future deals). Consolidating these vehicles will reveal the banks to be even more thinly capitalized than they appear to be now. While investors in theory ought to understand the extent of bank off balance sheet exposures, in practice, few do. This change is likely to affect investor psychology and will probably lead lead banks to be far more stringent in extending credit. (An aside: I am surprised at mortgage securitizations being included. Banks have not acted to shore these up, and I can see a strong case for not consolidating them).

And that is why I expect this rule to be gutted shortly after launch, if it even gets that far. From Reuters:

The Federal Reserve’s program to revive the markets for U.S. securitized debt may be disrupted and credit to consumers choked off if planned accounting changes are implemented in 2010.

New rules by the Financial Accounting Standard Board, in the form of FAS 166 and 167, will force banks to put securitized debt back on balance sheets and retain continued exposure to the risks related to transferred financial assets, by eliminating the concept of a “qualifying special-purpose entity.”

The amount of capital available for making new loans to consumers for credit cards and mortgages may be restricted as a result.

“There are potentially huge consequences of the FASB changes. There are concerns over whether bank balance sheets will be stretched to the breaking point because of the amounts recorded on balance sheets,” said John Arnholz, partner at law firm Bingham McCutchen…..

“If you get off-balance sheet treatment, that provides a more efficient use of your balance sheet and has been the foundation of the structured finance market. Bringing it back on balance sheet would have an impact on all your various financial ratios,” said Mike Kagawa, portfolio manager at Payden & Rygel.

The American Securitization Forum recently asked U.S. bank regulatory agencies for a six-month moratorium relating to any changes in bank regulatory capital requirements resulting from the implementation of FASB’s 166 and 167…

The role that securitization has assumed in providing both consumers and businesses with credit is striking with currently over $12 trillion of outstanding securitized assets, including mortgage-backed securities, asset-backed securities and asset-backed commercial paper, the ASF said.

Industry experts said the accounting changes threaten to setback the huge strides made by the Fed’s emergency loan program, the Term Asset-Backed Securites Loan Facility, known as TALF, launched earlier this year.

Through the program, the Fed was able to bolster consumer lending and reopen the securitization market for consumer ABS, nearly shutdown by a deep credit crisis in 2008. The program also drove the high costs of funding dramatically lower.

However, issuance under the program may suffer a sharp setback if banks retrench from making new consumer loans amid capital constraints created by heavier debt loads and new accounting and administration costs. The increased costs to banks are likely to filter down to the consumer in the form of higher borrowing costs, as well….

William Bemis, portfolio manager at Aviva Investors said he expects asset back securities issuance to decline as a result of the new rules.

“Credit card issuance will decline going forward, primarily because the debt will be going on balance sheet now. The attractiveness of being able to get financing and remove assets off balance sheet will be less now,” said Bemis.

While banks may still opt to lend, some may not meet the ratings criteria under TALF, which requires top ratings from credit agencies, as they carry heftier debt loads.

“This could really stifle issuance under the program because you need two ‘AAA’ ratings to issue under TALF. The accounting rules have the potential to reduce lenders’ access to TALF, which the Fed has devoted $1 billion in funds to,” said another industry source.

Meanwhile, as the deadline looms closer, market participants are expecting the Federal Deposit Insurance Corp. to weigh in with further clarification on off-balance sheet rules for securitizations.

“People are getting discouraged because the clock is ticking and this is going to help dry up money that would be available for consumer lending. The Fed knows how important it is to keep credit flowing but it seem that’s not getting through to the FDIC.” said the industry source.

Submitted by Edward Harrison of Credit Writedowns

Why is everyone saying consumer credit is falling? It’s not. But, everywhere I look, everybody is saying it is.

I would like to be true to the data and not just take the government’s seasonally-adjusted numbers at face value.

Judge for yourself. Here’s the data:

This is what everyone is focused on – the seasonally-adjusted data. The part in red shows consumer credit down $12 billion.

But, what about the actual unadjusted data?

What do you know, it’s up $7 billion. It is indeed down $4 billion for revolving credit as banks are cutting credit card limits. But, non-revolving credit is up over $11 billion.  It was decreasing and is down 4.4% year-on-year (see the section highlighted in green above), but that ended this month.

Yes, I too believed that consumers were poised to begin deleveraging, but with stocks up 60%, interest rates at record lows, and house price declines stalled, why would you do that?

Conclusion: consumer credit is increasing, not decreasing. I wish people would actually look at the data.

The question you should be asking is not whether consumer credit is increasing, but whether it will continue to do so after August and cash for clunkers.

And I did a full review of the asset-based economy during economic turns yesterday. All indications are that the consumer is not deleveraging as I would have anticipated (see post here).

Sources

G.19 Current – Federal Reserve

G.19 Historical – Federal Reserve

Wells Fargo is hardly alone in treating credit card customers badly. Whenever I run a post on credit cards, I get a raft of comments and e-mails about various bank misdeeds, which generally involve rate increases when the borrower is current and has not suffered a fall in his credit score. The other common complaint is a cut in credit lines for no apparent reason (well, save that the banks are trying to please Wall Street).

But consumers are nevertheless, correctly, galled. Banks are getting massive subsidies via the TARP, super-low interest rates, and a host of rescue facilities. And what do they turn around and do? Gouge customers, typically the ones who already have balances and thus are least able to pay higher charges.

Wells is either clumsy or brazen enough to implement its rate changes so as to merit coverage in Bloomberg. Although I have received similar complaints about Chase, Bank of America, and Citigroup, they apparently put their increases through surgically enough so as to keep them largely out of the media.

From Bloomberg:

Wells Fargo & Co. plans to raise interest rates on a majority of credit-card customers by 3 percentage points before federal rules limiting such increases take effect, a company executive said.

“This is something we’ve been contemplating for quite a period of time,” Kevin Rhein, group head of card services for the San Francisco-based bank, said today in a telephone interview. “We had just reached the point that we don’t think we can offer credit cards at the current pricing and keep credit flowing.”

Wells Fargo began advising customers this week that the change takes effect on Nov. 30. That’s a day before House Financial Services Committee Chairman Barney Frank wants curbs on rates and fees to become effective under the new U.S. credit- card law.

The story does note that most other card issuers put through increases much earlier.

Even though there has been an increasing level of revolutionary saber-rattling in comments, it’s hard to see what the outlet for the anger against the banking industry will be. The brief surge of letter-writing, e-mails, and calls to Congressmen to forestall the TARP proved useless. But Americans don’t go to the barricades or do general strikes, much the less put heads on pikes.

But this sort of revolt does fit, that of a debtors’ strike. It doesn’t require violence or even public assembly.

The first test of public mood will be whether this video (hat tip Karl Denninger via reader Scott) goes viral.

If you do decide to go this route, check your state’s statue of limitations on this type of debt. And even after that time has passed, if you establish a new relationship with the institution (as in get a new credit card or open a bank account), my understanding is that they can reactivate the obligation. Of course, anyone who gets in this sort of fight would presumably never want to do business with that institution again, but a lot of retailers and affinity groups have cards that are operated by one of the big credit card issuers, so you need to be careful.

This blog normally steers clear of the consumer finance space, except when it is amusing or has macroeconomic effects. But once in a while I cannot contain myself.

Why does anyone have a debit card? I am deadly serious about this question. Not long ago, I switched banks, going from one end of the spectrum to the other. I had been with US Trust, which has great service if you are doing anything complicated and can live with their 9-5 schedule, but costly if your needs are more plain vanilla. They were bought by Bank of America, the good people all left, and I figured if I was going to be with a regular retail bank, I might as well go with one that was cheap, had 24/7 service and good branch hours, and I wound up at Commerce Bank, now TD Bank.

Commerce tried foisting a debit card on me. It took some doing to get an ATM card instead. I do not know why people use debit cards, so perhaps readers can explain this mystery to me.

If your wallet is stolen, someone can pretty quickly drain your account and even go into overdraft. Unlike credit cards, where your losses are limited, you have no recourse. Having had my wallet taken more often than I care to recount and having had the perps run up truly impressive credit charges charges in a mere 10 minutes the last instance (they seem to be getting more savvy over time), the last thing I would want to carry is a debit card. The ATM pin affords you some protection; you have none with a debit card.

Now that would seem to be a sufficient reason not to carry a debit card. Then we have the fact that banks charge particularly aggressive over-limit fees on debit cards. From the New York Times:

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

Peter Means’s bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge…

This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.

In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

I don’t get it. Debit cards are inferior to ATM cards (less security) and in some cases, higher fees (at my bank, if you have a line of credit established, you do not incur an overdraft charge if you go into the credit line). So why does anyone have a debit card? Is this a perverse example of behavioral economics, where the bank offers the worst “opt in” alternative (debit card) and consumers have to take the energy to opt out and get the better products?

And these debit cards, which ten years ago were deemed to be losers for the industry, have been redesigned into cash cows:

Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.

Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.

Yves here. But we are already getting the usual defenses:

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Yves here. I bet you he does not keep a running balance on his checking account. Back to the story:

Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

Yves here. Garbage in, garbage out. Does not distinguish between debit card overdrafts and check overdrafts. The two are mingled. Back to the story:

For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.

“You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.

Yves here. Favor? Banks are not in the favor business. This is an insult to the reader’s intelligence. Here is a key bit:

But many of the nation’s banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject…

Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.

Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.

Reuters reports that a number of credit card issuers reported modest improvement in their chargeoff rates for July. While any improvement is good news, it is way too early to break out the champagne. First, some of the improvement may be related to tax refunds being used to pay down debt, a strictly seasonal affair. Second, the chargeoff rates are so elevated and the reduction so mild that the fundamentals still look pretty bad. The one bit of supposed cheer is that American Express posted a second month of improvement and contended that the result was not seasonal. However, readers have also told me that Amex is offering very hefty balance reductions (20%) to business accounts who pay off balances early on credit line products that Amex has discontinued. Being willing to take a 20% loss (with guaranteed adverse selection’ the best credit quality customers will take up this offer, leaving Amex with weaker credits on balance) is not a sign of optimism, at least as far as those accounts are concerned.

From Reuters:

Bank of America Corp (BAC.N) in a regulatory filing on Monday said credit card default rates dropped in July after several months of a steep deterioration. JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), and Discover Financial Services (DFS.N) also said bad-loan levels fell.

“It just seems to bear out what we heard in the second-quarter calls, that things seem to be getting marginally better — and I would stress marginally — on the consumer side,” Nancy Bush, founder of NAB Research, said of Bank of America.

Bank of America, the bank with the highest default and delinquency rates among the top credit card issuers, said its charge-off rate — debt the company believes it will never collect on — inched down to 13.81 percent in July from 13.86 percent in June….

Even more encouraging was JPMorgan’s report that defaults fell to 7.92 percent from 8.04 percent for second straight month, while Citigroup’s default rate declined to 10.03 percent from 10.51 percent.

Discover’s charge-off rate fell to 8.43 percent from 8.75 percent.

Capital One Financial Corp (COF.N) bucked the trend, however, as its annualized net charge-off rate rose to 9.83 percent in July from 9.73 percent in June, but beat analysts expectations…

Analysts were also pleased by a continuation of the decline in delinquencies — an indicator of future defaults — in American Express, Bank of America, and JPMorgan….

Credit card defaults usually track unemployment, which is expected to peak at more than 10 percent by year-end. It was at 9.4 percent in July.

If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today’s action should put your mind at rest.

The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.

The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers’ income.

But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.

Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let’s face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill if prices fail to recover by the time the forgiveness window closes (2012?).

Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.

But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.

From CNBC (hat tip reader Marshall):

Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes’ value under new regulations enacted Wednesday.

The rule changes, part of the government’s attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.

Yves here. Huh? This is beyond Orwell, it’s patently silly. “Housing affordability” has traditionally meant “let’s do things so people can afford to BUY houses.” It even once included stuff like Section 8 housing, giving tax breaks for rental housing targeted to lower income people. The intent is to prop up prices by keeping stressed borrowers from selling their houses and possibly also sending an information signal through the 125% figure, that housing really ought to be priced higher. That is anti affordability. And the concept of “affordability” to my knowledge has never before been extended to keeping homeowners in place. Back to the article:

Previously, homeowners could borrow up to 105 percent of their home’s value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.

“By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,” Treasury Secretary Timothy Geithner said in a statement….

The new LTV rate will be offered only to borrowers who are current on their mortgages that are owned by either Fannie or Freddie.

“This is a change that will put affordable refinancing opportunities within reach of performing borrowers who have suffered the effects of local home price erosion,” Freddie Mac Executive Vice President Don Bisenius said in a statement.

Home values in many markets have sunk by 18 percent in the last 12 months, according to Standard & Poor’s/Case Shiller home price index…..

In a separate move, the government is encouraging borrowers to take advantage of a chance to lower their mortgages from 30-year to 25-year in order to save on interest charges.

The government will reduce the processing fee for borrowers who take advantage of the 25-year option.

Update: Reader RueTheDay tells us that Housing Wire reports that only 6% of agency loans have LTVs between 105% and 125%. While this may seem small, Fannie and Freddie have such large books that even a small percent is a whole lotta mortgages. But the key unknown is the uptake rate, which could prove to be modest.

In a bit of synchornicity, we had two posts on credit cards yesterday. Lo and behold, Versus released a new song parody on the joys of plastic: