Archive for August, 2009

The government, through its $787 billion stimulus package, hopes to create more than 600,000 jobs. Federal agencies have injected billions into public works and other projects in an attempt to create employment. President Obama reiterated his commitment to stimulate the economy in a statement yesterday. “Surely and steadily, we will turn this economy around,” said Obama. Unemployment has reached a 25-year high and hundreds of thousands of Americans are losing jobs each month. Skeptics are questioning whether the stimulus package, which was approved for funding in February, has been effective. Senate Minority Leader Mitch McConnell says, “I think the economy is just as likely to begin to recover on its own, wholly aside from this, before much of this has an impact. So I’m very skeptical that this massive sort of spending binge that we’ve engaged in is going to have much of an impact.” David Axelrod, an adviser to President Obama, argues that the drop in job cuts in May is a si gn of effectiveness of the stimulus program. “It feels as if we’re moving and the stimulus package now is not nearly done, it’s just really at its beginnings,” said Axelrod.

According to TransUnion, a credit reporting agency, credit card delinquency, defined as the ratio of borrowers 90 days or more delinquent on one or more of their credit cards, jumped 11% to 1.32% in the first quarter this year. This is a 9.1% jump over the last quarter of 2008. “This increase could be an indication that tax refund checks, typically used to pay down balances during the first quarter in years past, are now being used to cover daily living expenses,” said Ezra Becker of TransUnion. The agency, on the basis of its analysis of 27 million individual credit files, said the average borrower debt rose 4.09% from the previous year to $5,729. Delinquency rates were highest in Nevada, at 2.44%; Florida, with 1.9%; and Arizona, 1.68% while South Dakota and Alaska had the lowest delinquency rates at 0.77%. With unemployment reaching a 25-year high, credit card delinquencies may continue to climb up. TransUnion expects the delinquency rate to reach 1.7% by the end of 2009.

The report said the impact of the recent changes to credit card regulations on delinquency rates is still unknown.

The Treasury Department is expected to allow 10 banks to repay funds the banks had received under the Troubled Asset Relief Program (TARP). This follows the “stress tests” conducted on the largest banks in the country to evaluate how they would fare if the economic situation worsened. The banks that are likely to be allowed to repay TARP funds include JP Morgan Chase, Goldman Sachs, and American Express. This is an indication of the government’s confidence in the ability of these banks to withstand economic downturn. The Treasury Department had said that banks will not be allowed to repay TARP funds if they were not adequately capitalized. “If you’re a bank regulator and are serving the public interest, you have no interest in having banks repay TARP,” said Christopher Whalen, managing director of Institutional Risk Analytics. The combined amount of repayment by the 10 banks could exceed $50 billion. The regulators will have an option, by way of warrants to buy common stock,

to inject funds into banks, if their capital adequacy falls below a certain level, even after banks repay TARP money. Banks have been railing against TARP funding after receiving the bailout money, due to government scrutiny and restrictions that came with it.

Real Estate Econometrics, a property research firm, has estimated that default rates in commercial mortgages will rise to 4.1%, a 17-year high, in the fourth quarter of this year. Commercial mortgages are defined as loans on non-farm, non-residential buildings such as offices, retail centers, and warehouses. A loan is considered delinquent when it’s 30 to 89 days late while a default is said to have occurred when a loan is 90 or more days past due. The market for refinancing has been hit as the recession has taken its toll on rents. “The dramatic decline in real economic activity and labor markets since last September has undercut property fundamentals. The decline puts an increasing number of loans at risk,” said Sam Chandan, chief economist of Real Estate Econometrics. Commercial mortgage defaults already are at a 15-year high after climbing to 2.3% in the first quarter of this year. Real Estate Econometrics projects the default rate on commercial mortgages will reach 5.3% in 2011 before starting to decline.