Defaulting loans in 2009 – the huge write-off amount

In 2009, banks wrote off over $83 billion in credit card debt. That is a record-high number, and it shows how much strain consumers were under as a result of the recession. Since that makes up for the bulk of the decline in credit lending totals, is proves that lenders are going to move cautiously into the future. The Federal Reserve’s reports on outstanding loans reveal larger problems for future credit lenders. They are going to face a consistent lowered priority if the economy falters again. People become focused on survival and paying off mortgages, cars and monthly expense, rather than paying down debt. More and more consumers are willing to ignore debt and risk their credit scores in turn, in lieu of their property.

The Federal Reserve’s report also showed that credit card borrowing fell for 16 straight months prior to January of this year. That suggests that consumers have been paying down debt and spending less. People are no longer reliant on credit because they saw what credit lenders did when the economy got bad. They hiked up interest rates, lowered limits and added fees to mitigate their own losses. That was great for them, but exacerbated the problem of defaulting on unsecured loans.

More conclusive data

The report by the Federal Reserve also focused on last year’s overall performance when it comes to credit lending. Though borrowing fell, it wasn’t replaced by additional borrowing. Rather, people were just paying down their own debt, but also focusing on keeping their balances low. When experts consider how much banks are writing-off in bad debt, the question of consumer ability to repay debt comes into play again. In 2009, there was only one quarter where consumers were consistently paying down their debt. Early in Q1, debt was a priority, and consumers had the ability to chip away at it. In fact, over $46.9 billion came in from consumers trying to bring their balances down. After that though, credit balances either remained steady or went up.

The Future Financial Outlook

The charge-off rate was highest during the third quarter of 2009, and it hit a record 10.1% during that time. By comparison, around the same time in 2006, that rate was just 4%. Experts are predicting that the credit situation may get worse for banks in 2010. Moody’s Investor Service predicts that the charge-off rate may top out at 12% by the end of this year. The biggest part of the issue is that the unemployment rate is still high, and that may make paying down unsecured loans next to impossible for consumers for the remainder of the year.

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The Federal Reserve is rewarding people who are looking for mortgage, auto and personal loans with a continued near-zero interest rate. It’s good news for any borrower and considering the state of the economy, it most likely will last a bit longer. The Federal Open Market Committee sustained its target for the federal funds rate to stay between 0 and .25% throughout the month of January. The importance of the move is that banks make overnight loans to one another at the federal funds rate and that influences rates on short-term loans, variable-rate credit cards and short-term CDs. So far it’s been thirteen months straight that the Fed has kept the federal funds rate at the current near-zero rate.

A change is coming

Though the near future of interest is most likely safe, things could change. The first signs of legislators wanting to push the funds rate upwards are showing. One member of the Federal Open Market Committee Thomas Hoenig said he believes that the “economic and financial conditions had changes sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.” Chief economist for Quicken Loans Bob Walters said, the statement is the “first crack in the armor.” He believes once a few more committee members start agreeing with Hoenig, the rate most likely will start elevating.

Borrowers versus savers in the economy

For now keeping the federal funds rate low is good news for borrowers but not so good news for savers. Keeping the rate so low means that yields on insured bank deposits are going to stay low. For example, the national average on money market accounts in the beginning of January was just 0.24%. Certificates of deposit were about the same. For anyone looking to save, this is not the best time and that’s on purpose. The Fed is pushing people to start borrowing and lenders to start lending.

In addition to the federal funds rate being kept low, the Fed also bought more than a trillion dollars’ worth of mortgage-backed securities since the end of 2008. The goal for the purchase was to “reduce the cost and increase the availability of credit for the purpose of houses.” Anyone looking for a mortgage, auto or personal loan may find it much easier in this economic climate than they normally would. Walters added, “The Fed is making the loan process as easy for as many people as possible. The goal is to put money back into consumers’ pockets.” The Fed is hoping that increasing consumer’s assets causes them to return to their old ways of spending.

The future of the market

The Fed announced that after March of 2010 it will stop buying mortgage-backed securities. Everyone in the mortgage industry knows what that means: most likely, mortgage rates will quickly start rising. Mortgage analyst Adam Quinones thinks that the increase in mortgage rates might be moot. He said, “There isn’t a better time for the Fed to make an exit.” In addition, interest rates on securities will start rising slowly. For anyone looking to take out mortgage, home equity, auto or personal loans, now could be the best time to do it.

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In an effort to find new customers, banks are aiming to help with a big public concern: debt relief. TD Bank, located on the East Coast, hosted a free pizza night for potential customers. Citizens Bank has promised to give new customers $1,000 if they are saving for their children’s college fund. Bank of the Wichitas, in Oklahoma, is hitting the market hard with a new advertising campaign with “Where bankin’s funner!” as their slogan. Regardless of their geography, banks are looking for new customers and finding creative ways to reach out to a new market.

Since the Federal Reserve set an extremely low interest rate, banks are trying to work with the numbers. This explains why most banks offer bonuses , but with conditions. For example, Citizens Bank’s $1,000 college fund is available, but only if customers open a new account and deposit at least $25 per month. To qualify, families must have children younger than 6 and agree to contribute at least $25 every month until the child is 18. Another example is HSBC’s program to give away Amazon Kindles but only to customers who open a new account with $50,000 and agree to maintain a combined balance of $100,000 at the bank.

Small banks

To find good interest rates, some searching is required. First of all, smaller banks are now trying to compete with large banking centers. They are offering “rewards” checking accounts that often return 4 percent or more. Studies show that small banks often carry interest rates that are twice the national average. Gabriel Krajicek, CEO of BancVue.com, stated, “Most small banks have maintained the higher interest rate package for over a year, so their reliability is great.” BancVue.com is a web site that lists reward-running banking programs from around the country, at a community level. It’s a great tool for consumers to look for banks offering the best perks.

Online banks

For consumers looking for debt relief, searching online may also aid their financial positions. Online banks gained popularity a few years ago and managed to gain a strong market share almost immediately. Although online banks still have less than 4 percent of total retail deposits, their revenues have grown more than $160 billion since 2000. Part of the reason is their rates are normally better than brick-and-mortar banks. Online banks have smaller overhead costs and can pass the savings onto their customers. James Kelly, COO of ING Direct, the largest online-only bank, stated, “Despite the economy, we’re getting as much money as we need.”

The downside of online banking, however, is that most have limited online services. For extra accounts such as auto loans or credit lines, consumers still have to go elsewhere. Also, many online banks don’t have their own ATM networks, so getting charged a fee for using a debit card is inevitable. Check cashing can also be a hassle with banks that do their business solely online. Customers have to grapple with a traditional bank and explain their online status or mail the check to their online facility and wait for days, sometimes weeks, for their money.

Finding funds

In the end, debt relief is available to those to search hard for it. Fortunately in today’s computer age, there are web sites that do the work and research for consumers. Web sites like BancVue.com build their business on becoming a banking resource for their visitors. Consumers need to find tools like these and use them to maximize their savings.