Abusive practice by some credit card companies and banks

In the month of May 2008 Americans put another 8 billion dollars on their credit cards. This is an increase of 7% of credit card usage.

Banks and companies offering credit cards are becoming more and more wary of the recent meltdown in the mortgage market and are looking for additional indicators when monitoring credit risk. Another factor that worry’s the consumer credit market is that consumer bankruptcies are predicted to double this year

So now instead of just watching the paying habits of their customers some Credit Cards companies and Banks have started to pry into the buying habits of their customers to comb for any future warning bells of financial stress. For example if a person starts using his credit card to pay off utilities, food or doctor’s bills the credit card company may see this as a red-flag. The credit card companies are setting up codes for these potentially troubling danger signals of financial difficulty in order to trigger a reduced line of credit and or even raise the interest rates offered on future credit-card borrowing.

The Consumer Federation of America dubbed this practice is wrong as it too believes that is not what the consumer buys but how the customer pays coupled with their history of credit to determine credit worthiness.

So watch out the next time you buy cheap or refurbished stuff and pay for it by a credit card, as your credit card company may deem it to be a sign of financial trouble and penalize you…. when actually you may be exercising financial prudence!

Indymac Bank Collapses - A Sub Prime Victim

Pasadena, California based Indymac Bank the 9th largest mortgage lender in the country with 33 branch locations in Southern California has gone bust. On Friday customers of the Bank were met with closed doors and a notice announcing the collapse of the institution. This is the second largest financial institution ever to go insolvent in the history of the United States.

The financial position of the Bank has been deteriorating since last quarter. The bank lost over 900mn dollars when home owners defaulted on their mortgages. Their “Alt-A” lending practice is blamed for their demise. “Alt-A” loans are loans with relaxed scrutiny where little or no evidence of assets or income is required for getting a loan.

Last month when the liquidity problem of the bank was made public there was a run on the bank and depositors in the past two weeks ended up withdrawing close to $1.3 Billion. This further worsened the liquidity of the bank.

The regulators, Federal Deposit Insurance Corporation (FDIC) have seized the bank and placed John Bovenzi in charge as the CEO. Before the appointment Mr Bovenzi served as the Chief Operating Officer of FDIC.

The FDIC maintains a list of “problem banks” and Indymac was on the list. It was made public that currently there are about 90 banks on the list.

The federal regulators are now trying to market Indymac and put it back the bank in to private hands. They expect this to be done within the next three months. FDIC wants to prevent customer panic and is assuring customers with under $100,000 in deposits that for them it will be business as usual. But, customers with deposits over $100,000 would have to wait and see how much they'd be able to realize as it will depends on what the Bank can fetch on its sale.

Friday also brought in bad news as shares of Fannie Mae and Freddie Mac slumped further. This is particularly concerning as between these two giant almost half of America's mortgage debt is either owned or guaranteed.

The government is now attempting to avert a crisis of confidence. The Treasury Secretary, Henry Paulson, in trying to calm fears on Wall Street said that the government is trying to give more credit to Fannie Mae and Freddie Mac and the treasury may even buy stock in them. The President's office has also voiced concern as the collapse of any one of these institutions will cause recession in the US and will also have a significant cascading impact globally. The statement issued by the White House read “It is crucial that Congress quickly works to enact this legislation as a complete package along with the strong oversight reform legislation recently passed in the senate.”

These are signs of the times and the seriousness of the sub prime and credit crisis in the US.

Link: What Is and Is Not Protected by FDIC Insurance