The Irish Independent reports that more than 1,000 people a month are turning to the Government for help to pay their mortgages.
But as many as half of them are being turned down some months.
The dramatic rise in the numbers who cannot afford to meet their monthly mortgage repayments has underlined the scale of the crisis affecting a growing number of desperate homeowners.
The mortgage interest relief supplement is designed to cover the interest portion of the home loan. Those seeking aid have to show they negotiated to reschedule the mortgage payments with their lender. They also have to be means tested. And both husband and wife must be out of work.
The increase in applications comes at a time when mortgage interest rates are at record lows. Expected rises in the next year are likely to push substantially more people to the financial brink.
Figures obtained by the Irish Independent reveal that the Government expects to have to spend €60m this year helping homeowners to pay their mortgages. This is double the amount spent on the mortgage interest supplement scheme last year.
About 400 households a month are now getting an average of €367.40 every four weeks from the State to help them cover part of their repayments, the Department of Social and Family Affairs admitted yesterday. A total of 14,136 people are now receiving the mortgage assistance. This is expected to increase to 15,500 by the end of the year.
New figures show an average of 1,000 people a month are applying for the mortgage supplement, with up to 2,000 applying some months. However, large numbers of families are being refused the payment because of strict rules on who can qualify.
A report obtained by the Irish Independent reveals 2,116 people had claims for the mortgage interest supplement registered in May this year, but just 1,644 of these were granted assistance. This means close to 500 were turned down for State help that month.
The largest number of applicants was in the eastern part of the country, with the south-east also heavily represented in the figures.
Consultants who help people to appeal refusals for the state assistance said up to one-third of applications for the mortgage supplement were being turned down every month.
Director general of the Free Legal Aid Centres (FLAC) Noeline Blackwell said thousands of people were being refused assistance every month as the rules were so strict.
The supplement is designed to cover the interest portion of the home loan only, not capital payments.
It is assessed by community welfare officers, who are part of the Health Service Executive, but the funds are provided by the Department of Social and Family Affairs.
To have a successful application, people seeking the supplement must show evidence of having negotiated to reschedule the mortgage payments with their lender. They also have to be means tested, and both the husband and wife must be unemployed.
The rules also specify that a homeowner must have been in a position to meet the repayments when the home loan was taken out.
But many community welfare officers are concluding that anyone who took out a mortgage during the housing boom that was between five and six times their income could not afford to repay it, so the mortgage assistance is being refused.
Applications are also refused if the level of arrears is regarded as unreasonable.
People who re-mortgaged during the boom on the basis that their house increased in value are also finding themselves shut out from the scheme.
Ms Blackwell said thousands of people who took out mortgages with sub-prime lenders such as Start, but had since lost their jobs, were finding that they were not qualifying for the mortgage interest supplement.
Minister of State at the Department of Finance Dr Martin Mansergh told the Dail last week: "Applications to the scheme are lagging unemployment by some months and the rise in numbers is expected to continue for some time."
The Department of Social and Family Affairs said last night it was reviewing the operation of the scheme. This is to see if the scheme"can better meet its objective of catering effectively for those who need short-term assistance when they are unable to meet their mortgage interest payments".
A spokesman for the State-supported Money, Advice and Budgeting Service (MABS) said a huge proportion of its clients were people having difficulty paying their mortgages.
Some 69pc of people who seek help from MABS are either in a job, have recently lost their job, or are self-employed.
Only one-third of those seeking MABS assistance are social welfare recipients.
Traditionally, the majority of those going to MABS were social welfare recipients.
The Irish Independent also reports that Bank of Ireland could raise over €900m by buying back another lot of subordinated bonds at a steep discount, according to NCB Stockbrokers.
The group generated €1bn through a similar move over the summer.
"With €1.5bn of these instruments still outstanding and currently trading at about 40c of par (100c), we see a useful opportunity for BoI to swap these for another instrument for equity and generate a significant profit in the process,"said Ciaran Callaghan, an analyst with NCB, in a 35-page tome on the bank.
The European Commission has been more vocal in recent months on the subject of burden-sharing between equity and debt investors.
"It is highly likely that coupon payments on this subordinated debt will be stopped for the next few years,"Mr Callaghan said.
"While holders of these instruments have already rejected a cash buyback offer, they may now be persuaded to swap for another instrument or equity (debt for equity swap) in the context of a full recapitalisation of the bank," he added.
BoI, which last week reported an almost €1bn underlying pre-tax loss for the six months to September, filed a restructuring plan with Brussels at the end of September -- necessitated by its €3.5bn cash injection from the state in March.
NCB believes the bank can start redeeming the state's preference shares from the second quarter of next year through the proceeds of another bond buyback and a €1.5bn 'rights issue' share sale.
All told, the group needs to raise €2.9bn over the next few years to bring its equity tier 1 capital ratio -- a key measure of a lender's financial stability -- to 8pc over the next few years.
NCB believes that BoI's pre-tax profits should "normalise" at about €1bn by the time it posts full-year figures to March 2013.
This would follow over €9bn of bad-loan writedowns over a five-year period, it estimates.
Bank of Ireland forecasts that it will lose €6.9bn on soured loans over the worst three years of the economic crisis to March 2011.
The Irish Times reports that the European Commission is preparing to extend by one year the Government’s deadline to restore stability to the public finances, a move that raises the prospect of swingeing cutbacks and taxation measures continuing into the middle of the next decade.
Although trade union leaders have called on the Government to ease spending cutbacks by extending the duration of its recovery programme beyond the current target of 2013, the commission will not give the Government any additional headroom as it seeks to impose €4 billion in cutbacks in the budget next month.
EU sources say economic and monetary affairs commissioner Joaquín Almunia will declare tomorrow that Minister for Finance Brian Lenihan is taking “effective action” to address the crisis in the public finances.
But the commissioner will also say that the deterioration in the State’s economic performance since the start of the year – due to weakening tax receipts and higher social welfare spending – is such that the Government should now be given until 2014 to reduce the budget deficit to a sustainable level.
Informed sources suggested the Government did not seek the extension, which follows a routine review by the commission under the excessive deficit procedures of the EU’s Stability and Growth Pact.
The one-year extension is in line with the parameters of the pact, under which euro zone members are obliged to keep their budget deficit within 3 per cent of gross domestic product.
Some other countries are likely to receive a similar extension tomorrow following similar case-by-case reviews, while the excessive deficit procedure may also be initiated in respect of France, Spain and Britain.
A new EU forecast last week projected that Ireland’s deficit will rise to 14.7 per cent in 2010, among the highest in the euro zone and the wider EU, from 12.5 per cent this year and 7.2 per cent in 2008.
Given the commission’s conclusion on the basis of current information that the 3 per cent target cannot be reached by 2013, further cutbacks or taxation measures will be required in the following year.
The proposed extension will have to be approved by EU finance ministers at their routine meeting next month.
The likely scale of the measures required in 2014 remains unclear. The Government is already obliged under its current agreement with the EU to follow the €4 billion package in the forthcoming budget with another €4 billion in measures in 2011, a further €4 billion in 2012 and €3 billion in 2013.
The commission said in its forecast last week that the general government deficit was expected to widen in 2009 beyond the target set in the supplementary budget last April – 10¾ per cent of GDP – largely due to weaker tax revenue growth than expected.
“Based on the no-policy-change assumption, a further worsening of the deficit is projected over the forecast horizon,”it said.
“In 2009, a series of tax-increasing measures moderated the revenue decline which followed the severe economic downturn and ongoing adjustment in the housing market.
In 2010-11, tax revenue developments are in line with expected economic growth, while also reflecting the full-year effect of measures taken in the course of 2009 (as well as the disappearance of some deficit-reducing one-off measures in 2009).
“The shift away from tax-rich domestic demand-driven growth to export-led growth, with sluggish employment and consumption growth, would lead to only a moderate tax revenue increase once the economic recovery takes hold.”
The extension comes as the EU economy at large comes out of recession, having reached a turning point after the deepest and longest recession in its history. However, Mr Almunia has warned that the outlook remained highly uncertain and subject to “non-negotiable but broadly balanced risks”.
The Irish Times also reports that developer Bernard McNamara is resisting an application by private investors for summary judgment orders for €96 million against him over his guarantees of the borrowings of a company involved in the €412 million purchase of the Irish Glass Bottle site in Ringsend, Dublin.
Martin Hayden SC, counsel for Mr McNamara and his company Donatex Ltd, told Mr Justice Peter Kelly yesterday they would contend that the investors, procured by Davy stockbrokers and suing through their Jersey-registered agent Ringsend Property Ltd, are not entitled to the sum sought because there has been no default by his clients.
He said his clients would argue that repayment was not due because the investors had invested in the loan stock for seven years up to 2014.
Mr Hayden also argued that the investors were at all times aware of a planning risk relating to the development and had assumed that regulatory risk.
A High Court decision in another case meant the permission issued by the Dublin Docklands Development Authority was not valid and the reason for the development not proceeding was default by the docklands authority.
Mr Hayden said another line of defence and a “major issue” in the case was that Mr McNamara’s guarantee of January 29th, 2007, over the borrowings of Donatex, related only to the principal sum borrowed and not to interest.
The guarantee for €95.8 million was provided to Davy Property Holdings Ltd in respect of Donatex’s liabilities under the loan stock instrument and was later assigned to Ringsend Property Ltd.
Mr McNamara and Donatex may bring a motion to have Ringsend Property provide security for the costs of the legal action, it was stated.
John Gleeson SC, for Ringsend Property, said Mr McNamara had acknowledged his guarantee of the loan obligations of Donatex, which was now seeking to rely on pre-contract documents to resist the claim when the contract documents set out the real obligations of the borrower.
On the possibility of a motion for security for costs, Mr Gleeson said Mr McNamara had agreed to indemnify the investors in relation to moves to enforce the guarantee.
Mr Justice Kelly admitted the case to the Commercial Court and listed the summary judgment application for hearing on December 9th.
The court heard that in its information memorandum of November 2006 relating to the Irish Glass Bottle site, Davy referred to “risk factors” for investors to consider while noting Mr McNamara was providing a personal guarantee “on the principal amount due”.
The memo said: “Although we understand that Bernard McNamara is currently of significant net worth, there is no guarantee that will be the case should the guarantee ever be called upon.”
The transfer of the Ringsend Property Ltd action comes just a week after the court also transferred to its list proceedings by Mr McNamara, Ailesbury Road, Ballsbridge, Dublin, and Donatex Ltd, Pembroke Road, Ballsbridge, against the Dublin Docklands Development Authority.
The Irish Examiner reports that the UK's part-nationalised Lloyds Banking Group today pledged to offer support to 300,000 new start-up businesses over the next three years.
Lloyds – 43% owned by British taxpayers – said its plans would help ’viable’ businesses gain access to credit as the UK recovers from recession and give “clearer and fairer” prices under a small business charter.
The bank has announced plans to raise £21bn (€23.5bn) to avoid a taxpayer-backed insurance scheme which would have seen the public stake rise to 62%.
Lloyds said in March it would lend an extra £11bn (€12.3bn) a year to businesses in return for taxpayer aid and reaffirmed the commitment last week.
Under the charter the bank said it would run a programme of 200 seminars to advise small firms, meet ’reasonable’ requests for finance and help viable businesses through temporary difficulties.
The bank will not change the terms of overdrafts as long as firms keep within agreed limits and will only charge higher margins “where there has been a material increase in risk”.
The bank’s commercial managing director John Maltby said optimism among businesses was the “foundation” of any economic upturn.
“We hope to give businesses across the country the confidence they need to grow and lead the UK out of recession,” he added.
Russel Griggs, chairman of the CBI business group’s small business council, said the charter was a “welcome step”.
“Anything that increases that transparency and understanding is welcome because small and medium-sized enterprises can then work more closely with banks to change or further enhance their business and address any concerns.”
Britain's Business Minister Lord Davies said: “This move by Lloyds TSB will improve access to credit for thousands of small businesses, which are the life-blood of this country. The government is listening to the needs of these businesses and through schemes such as the Financial Intermediary Service we are working to ensure solutions can be delivered.”
The Financial Times reports that President Nicolas Sarkozy will next year press ahead with measures to make people work longer for their pensions to reform France’s cash-strapped retirement system, according to a senior official.
Plugging the deficit in the pay-as-you-go pension system is regarded as a critical test of Mr Sarkozy’s appetite for further economic reforms as he enters the second half of his five-year presidency. There have been fears that reform could be postponed until after the 2012 election.
But the French official told the Financial Times: “There will be a decision. I have no doubt about that. It is unavoidable.”
The pensions shortfall in the social security system is forecast to hit €10.7bn in 2010 and is growing rapidly.
Gilles Moëc, senior economist at Deutsche Bank, said the issue was a litmus test of how serious French governments were in restoring public finances.
“It caused the collapse of Alain Juppé’s government in 1995. Nicolas Sarkozy needs to show that he can do better than the last burst of reformist zeal by a centre-right government,” Mr Moëc said.
Mr Sarkozy favours extending minimum contribution periods for a full pension, rather than raising the standard pension age beyond 60, the official suggested. The contribution period is already set to rise by one year to 41 years by 2012 but should be increased still further.
The aim would be to make reform more politically palatable, but have much the same effect: making people work longer for full benefits. The government was against radical reform, such as introducing UK-style second-tier occupational pensions, big hikes in contribution rates or cuts to pension levels that could more drastically reduce costs, he added. Any such changes would require fundamental modifications to the formula for pension reform agreed in 2003, which could prove politically explosive
Even a decision to raise contribution periods would be “considered negative by a large majority of French people but this a decision where there may at least be understanding” of the need to contain costs, the official said.
Mr Sarkozy is committed to pension reform because the alternatives of raising taxes or cutting spending would be riskier in political and economic terms, the official added.
Ministers are reluctant to talk openly about the nature of reform because of its political sensitivity and because the unions and employers – who jointly manage the social security system – are supposed to negotiate any changes.
The official predicted the unions would refuse to back even an extension of the contribution period, meaning the government would have to impose a solution.
While many European countries have put in place plans to raise their pension ages – albeit phased over several decades – in France the unions regard retiring at 60 as an important social achievement.
Mr Sarkozy already has a pension reform under his belt, after ending the special privileges enjoyed by public transport staff, electricity and gas workers. But critics say this came at a high short-term cost and for questionable long-term savings.
One estimate puts the pension deficit at 3.1 per cent of gross domestic product by 2050, lower than in some EU countries thanks to France’s high birth rate. A new official long-term estimate will be published next year.
The FT also reports that Kraft on Monday left open the door to increasing its hostile £9.8bn offer for Cadbury, refusing to rule out a higher bid to win over shareholders of the British confectionery group.
Cadbury defiantly rejected the formal bid from Kraft launched on Monday, describing the US food group’s offer as “derisory” after it did not alter the terms of its approach two months ago. Roger Carr, Cadbury’s chairman, declared the formal offer“worse than the proposal the board has previously rejected”.
A fall in Kraft’s share price since early September has reduced the value of the bid to 717p from 745p. Cadbury’s shares closed up 3p at 761p in London, while Kraft’s shares fell 31 cents in New York in midday trading to $26.47.
However, Kraft did not rule out making a higher offer during the formal takeover offer period, which could last up to three months as the US food group tries to get the approval of Cadbury shareholders.
Analysts said Kraft may wait until the end of the offer period before making any increase.
Jeremy Batstone-Carr, analyst at Charles Stanley, said: “Kraft will dig in and wait before raising its offer in the hope that Cadbury’s subsequent trading record deteriorates from the strong performance delivered over the third quarter.” The Kraft bid, which offers 300p in cash and 0.2589 shares in the US group for every Cadbury share, disappointed investors hoping to see a higher offer and an increased proportion of cash. Kraft said that its existing offer, which represents a 26 per cent premium to Cadbury’s share price of 568p in early September before the US group went public with its indicative proposal, would help it create “a global confectionery leader” at time when confectionery markets are consolidating and scale is becoming more important.
Irene Rosenfeld, Kraft’s chief executive, said: “We remain convinced of the strategic merits for both companies of combining Kraft Foods and Cadbury.”
Mr Carr countered: “The repetition of a proposal which is now of less value and lower than the current Cadbury share price does not make it any more attractive,” Top Cadbury shareholders supported Mr Carr’s decision to reject Kraft’s initial proposal in late August and have consistently said they will not seriously consider any offer that values Cadbury at less than 800p a share.
Kraft said a an acquisition of Cadbury would allow it to revise its long-term revenue growth targets to more than 5 per cent, from 4 per cent, and its earnings per share growth targets to 9-11 per cent, from 7-9 per cent.
The US food group noted that no other companies had shown interest in buying Cadbury to date. “Kraft Foods believes it is the most logical acquirer of Cadbury,” it said in its offer.
The New York Times reports that if the economy is getting stronger, why is the dollar getting weaker?
As the stock market surged anew on Monday, and the price of gold marched ever higher, the dollar took its biggest tumble since July. The American currency sank roughly 1 percent against other major currencies, to its lowest level since the financial crisis broke out more than a year ago.
But the seeming disconnect between the value of the dollar and the value of stocks is, in fact, not much of a disconnect at all. A growing belief that wealthy nations like the United States will forge ahead with efforts to revive economic growth is luring risk-shy investors back into the world’s stock markets. But with interest rates down and government spending up, the dollar is swooning. Many market participants assert that the currency is weakening with tacit approval from Washington policy makers.
While the faltering dollar will make everything from French wine to Korean televisions more expensive for American consumers, it will also make American exports more competitive overseas — a lift for multinational corporations like Caterpillar, Intel and Pepsi.
Indeed, shares of multinationals paced a stock market rally on Monday that left some analysts wondering if a new bull market was building. The Dow leapt 203.52 points, or 2 percent, to 10,226.94, its highest level since October 2008. The broader Standard and Poor’s 500-stock index rose 23.78 points, or 2.2 percent, to 1,093.08. The Nasdaq composite index was up 41.62 points or 1.97 percent, at 2,154.06.
Sharp gains in Asia and Europe set the stage for the big day on Wall Street. But if the stock market seems volatile lately, that is because it is. Since early September, the Dow has surged or plunged more than 1 percent during 18 separate trading sessions.
But while stocks seem to have regained their footing — the Dow industrials are now up 16.5 percent for the year — the dollar, once quite literally the gold standard of world currencies, is in retreat. The dollar has lost 16 percent of its value since March. It was hovering around $1.50 against the euro Monday.
In the “bad news is good news” paradigm of Wall Street, the dollar’s fall against nearly all the major currencies reflects the growing belief that major governments will keep interest rates low into 2010 and increase spending to revive growth. A weekend communiqué from the finance ministers of the Group of 20 wealthiest nations offered little support for the dollar: the G20 affirmed its support for keeping stimulus efforts in place but was silent on the dollar’s prospects.
Some investors read the statement as a sign that governments would let the dollar weaken more, without intervening in the currency markets.
“It was a deafening silence, another excuse to investors to keep selling the dollar,”said Brian Dolan, chief currency strategist for Forex.com.“A lot of it is sentiment-driven, and there the dollar is getting a vote of no confidence.”
A currency is usually regarded as a barometer of a country’s economic conditions. The stronger the currency, the thinking goes, the stronger the economy, and visa versa. But while a precipitous decline in the dollar might wreak havoc in the American economy and the markets, a moderate decline does not seem to be a big worry for Washington. Indeed, many economists contend that a devalued dollar helped the United States recover from the Great Depression.
As the dollar has fallen recently, the price of gold, which has been on a tear in recent weeks, surged to yet another record. The metal reached $1,103.65 an ounce in late afternoon trading. Its price has fluttered at record highs lately amid a frenzy for it by hedge funds and wealthy speculators. Other commodities also rose, with the price of oil flirting with $80 a barrel.
Rock-bottom interest rates in the United States have cemented the dollar’s reputation as a low-yield investment. Last week, in assessing the overall health of the economy, the Federal Reserve gave no indication that it planned to raise interest rates in the near future, stirring concern over inflation and prompting investors to reroute their funds toward gold, oil and the stocks.
“When you have zero percent inflation, zero percent interest rates, zero percent money markets rates, and when you have metals and gold that have skyrocketed to astronomical levels, stocks look pretty good in comparison,”said M. Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Okla.
But for some investors, a swelling budget deficit and low interest rates are a recipe for future inflation, which would erode the dollar’s value further.
In the midst of the financial crisis last year, investors the world over flocked to havens like United States Treasury notes. But now, with confidence growing about the global economy, many are shifting funds back into stocks, including many emerging markets. Brazil’s stock market, for instance, has jumped more than 11 percent in the last five days.
“If the world continues to heal, and investor confidence continues to rise, you will continue to see money leaving the safe, liquid arms of the U.S. Treasury and going back overseas in search of better returns and higher yields,”said Rebecca Patterson, global head of foreign exchange and commodities at JPMorgan’s private bank.
Policy makers, meanwhile, may face pressure to intervene if the dollar plunges too rapidly. But in the short term, they may see political and economic benefits in a slow but steady depreciation of the currency: a falling dollar could push up exports and send customers at home flocking to American brands.
The Treasury’s 10-year note rose 3/32 to 101 4/32. The yield fell to 3.49 percent, from 3.50 percent late Friday.
The NYT also reports that banks are struggling to make money in the credit card business these days, and consumers are paying the price. Interest rates are going up, credit lines are being cut and a variety of new fees are being imposed on even the best cardholders.
One recipient of new credit card terms is Anita Holaday, a 91-year-old in Florida, who received a letter last month from Citibank announcing that her new interest rate was 29.99 percent, an increase of 10 percentage points.
“I think it’s outrageous they pursue such a policy,”said Susan Holaday Schumacher, Ms. Holaday’s daughter, who pays her mother’s bills. “That rate is shocking under any circumstances.”
While the average interest rates charged by banks are lower than Ms. Holaday’s, her situation is not all that unusual. The higher rates and fees reflect the grim new realities of the credit card industry — the percentage of uncollectible balances has hit a record even as a new law may further limit the cards’ profitability.
Banks began raising interest rates and pulling back credit lines about a year ago as delinquencies crept upward and regulators discussed reforms. As banks have become more aggressive in making changes, lawmakers have accused them of trying to impose rate increases before many of the new rules take effect in February.
On Monday, the Federal Reserve provided new evidence of the banks’ actions. About 50 percent of the banks responding to the Fed’s survey said they were increasing interest rates and reducing credit lines on borrowers with good credit scores. About 40 percent said they were imposing higher fees. The banks also said they were demanding higher minimum credit scores and tightening other requirements.
A study by the Pew Charitable Trusts, released late last month, concluded that the 12 largest banks, issuing more than 80 percent of the credit cards, were continuing to use practices that the Fed concluded were “unfair or deceptive” and that in many instances had been outlawed by Congress.
In response to voter complaints, the House of Representatives voted last week to make the law effective immediately. The bill now goes to the Senate, where a vote has not been scheduled. The Senate Banking Committee chairman, Christopher J. Dodd, Democrat of Connecticut, meanwhile, is pushing legislation that would freeze interest rates on existing credit card balances until the law takes effect.
Whatever the starting date, the law makes it much harder for banks to change interest rates on existing balances, and requires more time and notice before a new rate can go into effect.
In their defense, banking officials say they have no choice but to raise rates and limit credit. Because of the new rules and the prolonged economic malaise, they say it is now far riskier to issue credit cards than it was just a few years ago.
“We sell credit; we don’t sell sweaters,” said Kenneth J. Clayton, senior vice president for card policy at the American Bankers Association. “The only way to manage your return is through the price of the product or the availability.”
The nation’s largest banks are scrambling to figure out a new business model that fits within the new rules and current economic conditions. Those banks made handsome profits over the last decade by charging high interest rates and penalty fees to a small group of customers who routinely paid late or exceeded their balances.
Already, banks are shifting to a model in which a smaller pool of Americans will be eligible for credit cards, and customers with cards will probably pay more for the privilege through annual fees and higher interest.
Meanwhile, the banks are in the process of shedding customers considered too risky. That means tens of thousands of Americans will no longer be able to splurge on Nike gym shoes or flat-screen televisions unless, of course, they have enough cash to pay for them.
Still, even consumer advocates have said that the banks were too quick in the past to give out credit. “You know, it doesn’t take a rocket scientist to figure out that if you keep borrowing and borrowing in order to consume now, eventually you crash and burn,” said Martin Eakes, chief executive for the Center for Responsible Lending. “That’s what we’re facing.”
In the 12 months that ended in September, the number of Visa, MasterCard, American Express and Discover card accounts in the United States fell by 72 million, according to David Robertson, publisher of The Nilson Report, an industry newsletter. There are 555 million accounts still in the marketplace, he said.
In roughly the same time period, banks lowered credit limits by 26 percent, to $3.4 billion, from $4.6 billion, according to an analysis of government data by Foresight Analytics.
Interest on credit card accounts, meanwhile, has increased to an average of 13.71 percent, up from 11.94 percent a year ago, according to federal records.
As to credit card charge-offs — industry lingo for uncollectible balances — the number tracks the unemployment rate and, therefore, is hovering at around 10 percent.
For the banks, this is uncharted territory. In the modern financing era, credit cards were long a profit center, producing tens of billions in annual profits with a default rate that hovered around 4 percent until the recession.
“We know we are going to lose a lot of money next year in cards, and it could be north of $1 billion in both the first quarter and the second quarter. And that number will probably only start coming down as you see unemployment and charge-offs come down,”Jamie Dimon, chief executive of JPMorgan Chase, said in an earnings call last month.
Banking officials said that because the new law limits their ability to reprice credit as a customer’s risk profile changes, they will instead have to price for future risk at the start, when a cardholder applies for a new card.
That means fewer applicants will be approved for new credit cards, and those who are accepted will increasingly be charged annual fees or variable interest rates, rather than fixed rates. Currently, about 20 percent of credit cards charge annual fees, a percentage that is rising, said Bill Hardekopf, chief executive of LowCards.com. Current cardholders, too, will be affected.
Asked to explain its rate increases, Citibank issued a statement saying the“actions are necessary given the losses across the industry from customers not paying back their loans and regulatory changes that eliminate repricing for that risk.”
Ms. Holaday Schumacher did not accept that explanation. She said she haggled with Citibank to try to get her mother’s bills forwarded to her house in Washington and, during the process, two bills were inadvertently paid late, resulting in the rate increase.
“How unbelievably unfair for an older person who might not understand what this is all about,”she said. Citibank declined to comment on the account.
Still, many of the nation’s banks are trying to repair their tarnished reputations with consumers.
American Express and Discover Financial, for instance, have vowed to stop charging fees when cardholders exceed their credit limits. JPMorgan has started a program that can help consumers categorize their spending and pay down their balances more quickly.
And Bank of America is promoting a line of consumer products so simple that the terms and conditions fit on one page. The BankAmericard Basic Visa, for instance, has no rewards and a single interest rate.
Andrew Rowe, Global Card Services strategy executive at Bank of America, said the new products represented a sea change in the bank’s attitude toward consumer products. Instead of benefiting from consumers who displayed risky behavior by penalizing them with fees, the bank is now trying to help them break those bad habits, he said.
“We succeed if our customers succeed,”he said. “That’s the paradigm shift.”
TreasurySecretary Timothy F. Geithner, for one, said he would welcome consumer products that were simpler and less risky. But, he added in an interview with the PBS documentary program “Frontline”: “It’s a bit of a late conversion. It would have been nice to happen earlier.”