A Common Story These Days

Economy's As Solid As Fool's Gold

IN MY OPINION - MARK WASHBURN
Charlotte Observer 4/16/08

Those with advanced degrees in global economics can just skip this and move on to the funny pages.

This is strictly for people who don't understand high finance and desire a cogent explanation for the recent unpleasantness affecting one of our bedrock businesses -- banking.

All the bulging foreheads are gone? Good. Now, just between us morons, here's what's what.

Q. Explain the monetary system.

Simple. It's called the "Big Wheel of Capital." Banks take your money. They lend some of it out. People pay interest. That gives banks more money. They lend more money to more people. That gives banks even more money. They take that money, call it a performance bonus, and give it to the bank's big wheels.

Q. What is the dynamic of our banks?

For years, the soundtrack of Charlotte banking has been that gobble-gobble-gobble of PacMan. Our guys snarfed up other banks. That means they showed growth. That meant people with advanced degrees in global economics bought their stocks. Stocks went up. Everyone was delirious.

Q. What's the soundtrack of Charlotte banking now?

That kerronk-kerronk of PacMan ghosts. It's actually the theme song for a bank Wachovia acquired in California named Fool's Gold West.

Q. Why was that a bad idea?

People with advanced degrees in global economics didn't notice it at first, but the housing market in California was out of control. Turns out, Fool's Gold had been loaning people like $600,000 a pop so they could afford a tent in the woods. When the tents collapsed, it turned out they weren't worth that much because under the law of emerging market economics, most people had taken to living under highway bridges.

Q. What will Wachovia do?

It will follow strict industry protocol -- lay off hundreds, then throw a fancy golf tournament.

Q. What about the recession?

There is no recession. Recession is a technical term meaning the economy shows negative growth for two consecutive quarters under a Democratic president.

Q. So the economy's good?

Excellent. Ask anybody. While the bottom has dropped out of a few minor industries -- airlines, auto-making, banking, housing, retail, newspapers, dry goods, wet goods, soggy goods and "American Idol" talent -- other key sectors of the economy are showing stunning growth, like Internet manly-man potions, bankruptcy filings and Bobcat ticket prices.

Q. Are there international implications?

Sure. People willing to cross borders clandestinely in search of better earnings will go back to Mexico.

Q. Is the situation at Wachovia serious?

Desperate. In fact, word on Tryon Street is that customers who walk in to deposit a mason jar of change will no longer be treated like puss-oozing carriers of plague.

Q. Surely there must be some good news for Wachovia.

Absolutely. Come Monday, quarterly results are due from Bank of America.

IN MY OPINION Mark Washburn

Mananging Our Business

CNW: Subprime Approval Rate Hardest Hit

Special Finance eWeekly: Apr 22, 2008

Brandon, Ore. As 2008 began, dealers were already feeling the effects of the credit crunch. To add to all the predictions for new-vehicle sales to drop this year, lenders are making it harder for dealers to get those customers who do buy financed.

CNW reported that from Jan. 1 to March 20, loan applications that are eventually approved were down from a year ago. And that was the trend across all tiers, with subprime buyers being hit the hardest.

Approvals for subprime loan applications fell to 57 percent, and only 1.36 percent of all loan approvals were subprime in the first quarter of the year. For the same period last year, more than 12 percent of all loan approvals were subprime.

In addition to lower approval rates, fewer lenders are accepting applications, a trend that is causing dealers to shop multiple financial institutions when submitting an application for approval. In CNW’s research, loan applications for prime borrowers were sent to three different lenders before being accepted. Subprime applications were sent to more than five institutions to get approval.

So here's my take on this:

After spending a few days with a dealer client, I agree that we are all feeling the effects of the credit crunch. Lenders are taking a harder look at the business their doing, and those little green check marks on DealerTrack are becoming harder to find. Now is the time for all of us in the car business to manage our business better.

This means that we have to stop fishing for an approval that fits the customer. Instead, why not get an approval and let the customer decide if it works for them, We spend so much time looking for the "magic" approval, the one the customer will lay day for and sign on the dotted line, that we loose sight of the fact that 100% of the customers who don't get the opportunity to buy, can't! If you don't give the customer the opportunity to determine whether they can meet the terms and conditions of a lenders approval, regardless of how far off it may be from what that customer originally was hoping for, how do you know they won't find a way to meet those terms. "Get money down or a co-signer" is the common response from the sales desk, and with those words, the customer leaves and goes down the street to a competitor that gives them the "opportunity to buy".

After all, isn't that what the car business is all about...getting customers to buy from your dealership!

1 In 7 Worry They'll Miss Mortgage Payments

ALAN FRAM - Associated Press 4/15/08

One in seven mortgage holders worry they may soon fail to make their monthly payments, and even more fret that their home's value is shrinking, according to a poll showing widespread stress from the nation's housing crisis.

In an ominous snapshot of how the sagging real estate market and sour economy are intersecting, the Associated Press-AOL Money & Finance poll also found that 60 percent said they definitely won't a buy a home in the next two years.

That was up from 53 percent who said so in an AP-AOL poll in September 2006. Only 11 percent are certain or very likely to buy soon, down from 15 percent two years ago.

In today's economic climate, even holding onto what they already have is a challenge and source of distress for significant numbers of homeowners.

Nearly three in 10 said they are concerned their home's value will decline over the next two years, while 14 percent of mortgage holders expressed worry that they might miss payments in the next six months.

While other parts of the country have suffered from big drops in housing values, Charlotte's housing market has been healthier than those of other big cities. Last month, in a national report, Charlotte was the only one of 20 cities that continued to see average sales prices rise, though at a slower pace than in the past.

In one of the worst housing markets in the country, one nervous homeowner is Daniel Gallego, a warehouse worker in Stockton, Calif., who said he may have to sell his house at a big loss.

"We may have to move in with my wife's parents or my parents," said Gallego, 30, who has two young children. "I could pay off some debt, then we could rent, and maybe buy another house in a few years."

He said the rising cost of gasoline and other expenses have made his adjustable rate mortgage unaffordable. Because he doesn't expect his home's value to recover soon, he said he may be better off moving now before his rates rise.

One in 10 have adjustable rate mortgages, half the number who said so two years ago. These mortgages generally start at a low interest rate and are later adjusted to market conditions -- which has often meant steep, unaffordable boosts that have forced many to refinance or even lose their homes.

The growing reluctance to dip into the housing market seems to stem partly from worry that housing prices will continue falling -- good if you're buying a house but bad if you have to sell one.

The number envisioning falling prices in their area has grown to one in four, while four in 10 think prices will rise, a decrease from two years ago. Expectations for rising prices are highest in the South, with Westerners likeliest to predict they will drop.

"This is a great time to buy, but not necessarily to sell," said Robert Jackson, who lives in a two-bedroom house in Ferguson, Mo., with his wife and four young children. He said he would love to purchase a larger home but can't because even if he found a buyer, he would probably lose thousands on his house, which he bought less than two years ago.

"We're just going to have to slap a Band-Aid on it and stay here until the market gets a little bit better," said Jackson, 30.

The poll also found:
• The biggest worriers are those expecting to buy soon. Of that group, 43 percent fret that their home's value will drop in the next two years, compared with 25 percent of those not expecting to buy soon.
• Fifty-nine percent think now is a good time to buy.
• Half think this is a tough time for first-time buyers, an increase from two years ago. Nearly two-thirds think it's harder for first-home buyers than it was five years ago.

About the poll
The AP-AOL Money & Finance poll was conducted March 24-April 3 by Abt SRBI Inc. It involved telephone interviews with 1,002 adults nationwide, for whom the margin of sampling error is plus or minus 3.1 percentage points.

Included were interviews with 769 homeowners, for whom the sampling margin of error is plus or minus 3.5 percentage points. The margin of sampling error for other subgroups was larger.

My 2 Cents on the Credit Crisis

Every one seems to have an answer to the “credit crisis” we are facing today. Some folks want to tighten up credit policy. Some want to make lenders more accountable, some want the federal government to intercede and establish stringent rules and regulations to prevent this “subprime meltdown” from ever happening again.

That’s all fine and dandy, buy none of it goes to solving the problem first and foremost on most of the public’s mind these days…”What about me? What is going to happen to my_______________?” Just fill in the blank with whatever asset you might think of. After all, isn’t almost everything at risk these days?

My personal feeling is that we must be do something to protect the core investment that most consumers have made in their homes, vehicles, and their lives in general. Repossession or foreclosure, charge offs and relentless, unsuccessful collection attempts do nothing to preserve the integrity of the economy as we know it. Foreclosed homes sit vacant and fall into disrepair, and often sell at a significant and substantial loss for the creditor holding the loan on the property. Forced sales lower prices, and, in turn, lower the values of the surrounding properties. This in turn can cause additional foreclosures when property values decline to the point where it becomes pointless to continue to pay on a home no longer worth anywhere close to the mortgage balance.

Repossessed vehicles produce significant losses for lenders, when they are sold at auction to recover as much of the outstanding balance as possible. The remaining balance becomes an often uncollectible debt, as a consumer has little reason to pay off a debt on an vehicle they no longer have. The only ones who profit are the collection agencies who continually buy and resell these debts, often for pennies on the dollar.

My point is very simple. Instead of writing off a mortgage, auto loan or charge card as uncollectible, lenders might want to consider preserving the balance and foregoing the profit from the interest THEY PROBABLY WON’T EVER COLLECT WHEN THE DEBT GOES BAD! Why not consider restructuring the loan to make it affordable to the debtor to continue to pay. If there is going to be a significant loss when the debt goes sour, why not restructure the debt to the amount that may be recoverable and keep the collateral producing some income or interest or profit, instead of producing the inevitable loss.

Now, I’m not saying that all debts should be reworked, but maybe, in those cases where a debtor has an ability to make payments, why not restructure a loan to make it affordable? In cases where there is no chance of repayment, well, that’s another story. But why not work to preserve principle, and forgo profit where profiut is clearly unachievable? After all, if the likelihood of repayment never really existed in the first place, was the profit anything more than a phantom, a wisp in the wind that never really had a chance to materialize? To me, the idea of preserving the principle amount of the collateral works in everybody’s best interest.

Mr. President, Mr. Bernanke, members of Congress, lenders, creditors, and bankers alike - we all want to believe there is a solution out there somewhere that doesn’t mean financial doom for all of us. Let’s find a way to preserve the things we have all worked so hard for – our homes, our cars, our and our children’s futures – instead of just writing them off!

That’s my 2 cents…

What's next?

Slipping Scores

(from Auto Finance News, 3/3/08)

Credit scores are sliding fast. In just a single month, deteriorations in average risk scores among car buyers nationwide are noticeable, according to data from Experian Automotive. The maps below color-code risk scores for October and November 2007, the most recent months for which

data was available. Average scores in California, for instance,dropped to the 676-to-691 range in November, from 700-to-702 a month earlier. Some Northeast states realized 15-to-20-point declines in average scores. Call it the Color of Credit.

Lenders Ease Throttle on Car Loans

by Eleanor Laise - The Wall Street Journal, Apr. 2, 2008

The credit crunch, having knocked around the American home, is now rolling into the garage.

Even as the Federal Reserve slashes interest rates, it's getting tough for many consumers to find attractive terms on auto loans. Many lenders are making fewer loans and instituting stricter standards on loans they do approve, often requiring higher credit scores, making smaller loans and demanding bigger down payments. GMAC Financial Services tightened lending standards three times last year and firms like AmeriCredit Corp. and Sovereign Bancorp Inc. have recently raised the minimum credit score required for borrowers to avoid an automatic rejection of their car-loan application.

Where you live can make a difference. Some lenders are applying especially tough standards for borrowers in states hard-hit by the housing crisis, such as California and Nevada.

While "subprime" borrowers with poor credit will bear the brunt of the shifting lending standards, even "prime" borrowers with good credit may be affected by some changes. And some consumers may not be able to get a car loan at all. This year through March 20, about 90 percent of auto-loan applications from prime borrowers were approved, down from 92.5 percent for the same period last year, according to CNW Research, which tracks consumer spending. Among subprime applications, 57 percent have been approved this year, down from 68 percent early last year. Loan applications for all types of borrowers are also being sent to a greater number of financial institutions before being approved, according to CNW.

When Michael Staggs, 36 years old, of Spring Hill, Fla., set out to buy a 2006 Dodge Dakota truck last month, he was looking for an auto loan with an interest rate below 10 percent and monthly payments between $250 and $300. But Mr. Staggs, an engineer for a telecom company who says his credit isn't bad, but not great, didn't get the terms he was banking on. He put down $1,500, and his $14,000, 72-month loan came with $298 monthly payments and a 13.5 percent rate. "That's a lot higher than I wanted," he says.

Borrowers hoping to get attractive terms on a car loan should do some spadework before heading to a dealership. First, get a copy of your credit report and have any errors corrected. Then, shop around local banks, credit unions and online for pre-approval on an auto loan. Having secured the best rate you can find, head to the car lot and ask the dealer to beat that rate. "You want an offer in your back pocket because that gives you maximum flexibility when you're weighing dealer offers," says Greg McBride, senior financial analyst at Bankrate.com.

Lenders are tightening standards as more cash-strapped consumers become delinquent on their auto loans. Delinquencies hit a 10-year high in January, according to Fitch Ratings, though they declined slightly in February. Also, many auto loans are bundled into securities to be sold, but the credit turmoil has caused investors to lose their appetite for these securities. That leaves lenders with less money to lend.

The changes come at a time when many consumers have fewer options for financing a car purchase. Many people with good credit in recent years have financed a car purchase by tapping their home equity, but that source of cash is also drying up as home values drop.

In addition, a growing number of consumers are "upside down" on their current auto loan, meaning they owe more on the loan than the vehicle is worth. Among people who traded in a vehicle in February, 27 percent were upside down on their loan, up from 24 percent in October according to Edmunds.com, an automotive Web site. On average, they owed nearly $4,400 more than their car's value, a record high.

Not all borrowers will see tougher terms. In some cases, lenders are "being more generous and creative for prime consumers because they want to attract (them)," says Jesse Toprak, executive director, industry analysis at Edmunds.com. The average rate on a prime five-year new car loan is now 7.2 percent, according to Bankrate.com, down from 7.7 percent before the Fed started cutting rates in September.

But some borrowers may find they can't get as large a loan as they'd like. Whereas lenders in recent years have made loans substantially exceeding the car's worth - a common practice in the era of easy credit - some are now keeping loan amounts closer to the vehicle's value.

AmeriCredit last year reduced this "loan-to-value" ratio that it allows for subprime loans. Jon Garcia, finance manager at a Toyota dealership in Janesville, Wis., says he's seeing subprime lenders supply only 85 percent to 90 percent of the car's book value, down from as much as 140 percent previously. The changes are preventing customers from buying the cars they want and have cut the dealership's sales to customers with blemished credit by about 10 percent, relative to last year, Mr. Garcia says.
Indeed, terms are getting especially tough for subprime borrowers. At GMAC, 12 percent of new loans booked in North America in 2006 and 2007 were nonprime, but that figure dropped to 9 percent in December. Capital One Financial Corp. has stopped originating loans for the riskiest segment of subprime borrowers, according to a recent presentation by Chief Executive Rich Fairbank. J.P. Morgan Chase & Co.'s Chase Auto Finance recently stopped originating subprime loans longer than 72 months. The firm also boosted by 10 points the credit score required of subprime customers borrowing more than 110 percent of the car's value. "We're trying to lend to people who will be able to pay us back," says Thomas Kelly, a Chase spokesman.

Even borrowers with good credit may find tougher loan terms if they live in areas where home prices are dropping. Chase Auto Finance has tightened lending standards across the country, but they're "even tighter in places with declining home values," Mr. Kelly says. Falling home values generally reduce borrowers' financial resources and may hurt their ability to make loan payments. Chase is requiring more collateral on longer-term loans in "high risk" states like Arizona, California and Nevada. Sovereign in January stopped originating auto loans in the Southwest and Southeast and now limits its auto lending to the Northeast. The Southwest and Southeast "were experiencing more challenges" and "the housing market was a big driver of those challenges," says Tom Nadeau, president of consumer lending at Sovereign.

In states that have been hard-hit by the housing crisis, auto-loan approval rates have dropped more dramatically than the nationwide rate. This year through March 20, 86 percent of California prime auto-loan applications were approved, down from 94 percent for the same period last year, while 84 percent of Florida prime auto-loan applications were approved, down from 90 percent a year earlier, according to CNW Research.

Fannie Mae Tightens Rules for Mortgages

By JAMES R. HAGERTY- The Wall Street Journal - April 2, 2008

Fannie Mae announced a new round of tightening in its standards for home mortgages it buys or guarantees.

The government-sponsored provider of funding for home loans told lenders Monday it will require a minimum credit score of 580 for most loans it buys on an individual basis. Credit scores, which range from 300 to 850, are designed to measure borrowers' likelihood of repaying loans. In the past, Fannie had no minimum score. The company said it will still acquire loans with lower credit scores in certain circumstances.

Among other changes announced to lenders, Fannie also said it will increase the period needed for borrowers to "re-establish" their credit history after a foreclosure to five years from four years. Fannie said it would allow shorter recovery periods for borrowers with "documented extenuating circumstances" that caused the foreclosure.

Separately, Fannie last week told loan servicers -- companies that collect loan payments -- that they can increase their forbearance period on delinquent borrowers to as much as six months from four months to allow more time to seek alternatives to foreclosure. Fannie hopes that move will reduce the number of loans on which it needs to recognize losses, though it may be only delaying the pain in some cases.

In response to growing default-related losses, Fannie and its main rival, Freddie Mac, have tightened their loan standards and added fees for riskier types of loans in a series of steps announced over the past few months. Those moves have raised costs for borrowers and drawn protests from some politicians and home builders.

Buy-Here, Pay-Here May Grow

Arlena Sawyers - asawyers@crain.com
Automotive News 3/31/08

Home foreclosures. Vanishing jobs. Even good credit histories are at risk. As the economy worsens, people who once had good credit may be unable to get car loans through traditional sources. But one consumer's loss might be a gain to a buy-here, pay-here dealer, industry experts say.

"This is going to be a pretty good growth year for any dealer that's in the buy-here, pay-here business,” predicts Mike Unn, president of the National Independent Automobile Dealers Association. About 1,000 of the association's 20,000 members are franchise dealers who operate standalone used-car lots. Some people, he says, "can't get credit anywhere else."

Buy-here, pay-here dealerships sell older, higher-mileage vehicles to people with bad credit. The dealerships hold the loans and assume the entire risk. They charge interest rates of 25 percent or more, depending on state usury laws. 50 far, there's scant evidence that dealers are having problems obtaining credit for their customers. That could change.

Ken Shilson is president of the National Alliance of Buy-Here, Pay-Here Dealers, an organization representing 10,000 dealers in the United States. He says buy-here, pay-here business may pick up, but not until about a year to 18 months from now.

Last year in Florida, some buy-here, pay-here stores suffered as many of their traditional customers - construction workers in the housing industry-lost their jobs, Shilson says. Now, those same stores are seeing an increase in business from consumers who lost their homes and good credit standing in the home mortgage mess.

Shilson predicts that as other parts of the country are hit by the deep downturn in real estate that has plagued Florida for more than a year, buy-here, pay-here dealers will see their business grow.

"People who are losing their homes are not our customers now," Shilson says. 'The traditional buy-here, pay-here customer rents. He doesn't own a home. All those losing their homes are new customers.”