Citi Raises Rates Before Rules Take Effect
According to the Financial Times, Citigroup has increased the interest rate on up to 15 million credit card accounts that the bank co-brands with retailers such as Sears.
The increase comes months before the Obama Administration’s credit card reform is scheduled to take hold.
The Credit Cardholders’ Bill of Rights Act, slated to go into effect in early 2010 — pushed up from the originally launch date of July 2010 — is designed to,
Among other things, prevent credit card companies from raising interest rates without the cardholder’s knowledge:
Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent –
Or nearly 3 percentage points – between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research.
Citi’s response to the increase was the same as Bank of America’s regarding their recent increases in rates and fees.
Financial institutions have cited that the cost of doing business has increased due to the voluminous defaults and volatility in the current market:
After FT.com broke news of the hike, Citi issued a statement saying: ”We have adjusted pricing and card terms for some customers as part of our regular account reviews.
This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles.
These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit.”
Citi’s move came as the economic downturn caused record defaults among US card users and prompted many issuers to raise rates,
Both to cushion their losses and pre-empt the new restrictions set to come into effect in February.
However, Citi’s increases have been larger than those of its main rivals, according to Lightspeed, which tracks about 12,000 US credit card accounts.
We expect many credit card companies to rush in many of the practices that will be banned under the legislation while they still can.
We urge consumers to guard themselves against rate increases by buying only what you know you can afford, paying your bill in full and on time every month,
And read your contract so that you understand the terms and conditions of your account.
HARP Now Accepting Loans With 125% LTV
HUD Secretary Shaun Donovan announced this afternoon that Fannie Mae and Freddie Mac will now begin refinancing loans with a loan-to-value (LTV) of up to 125% under the Home Affordable Refinance program.
Federal officials have concluded that by expanding the eligibility of the effort, more underwater homeowners will be able to refinance, spurring the recovery of the housing market:
“This decision is part of our ongoing efforts to maximize the effectiveness of the Making Home Affordable program and adapt to an ever-changing housing market,” said Treasury Secretary Tim Geithner.
“By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly.
It’s a crucial step in our broader efforts to get America’s housing market and economy on the path to recovery.”
How much relief will this expansion really bring to underwater homeowners?
We crunched the numbers and found that a borrower with a 6.5% rate on a 100,000 Mortgage Calculator refinancing to 5.5%.
Will see a monthly savings of about $64 — only about a 10% savings on their monthly payment.
Assuming 2% in closing costs ($2,000), it will be almost three years before any savings begin.
Even if a borrower isn’t concerned about any savings but instead is hoping for significant improvement to their cash flow, the $64 difference doesn’t provide much of that, either.
What about ARM borrowers? “Prime ARM borrowers with recent resets who want to refinance under this program will see a step up in interest rates from the mid-upper 3% range to the mid-fives; that’s why they are unlikely to participate, at least right now,” said HSH VP Keith Gumbinger.
“It’s also worth noting that if home prices don’t appreciate, it will take homeowners who are 25% underwater [125% LTV] 10 years to get back to zero [100% LTV].
If these homeowners want to sell their homes in less than 10 years, it could result in massive short sales for Fannie and Freddie.
Which means more losses for the American taxpayer,” explains Gumbinger.
