Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Legislators on both sides of the aisle have assured credit unions that they will not support any proposal that would eliminate the industry or marginalize its role in the financial services sector.

“Given the appreciation members of Congress have of the role that credit unions play, there is no chance of anything that would diminish that role going through,” Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said in an April 3 letter to Dan Mica, president and CEO of the Credit Union National Association CUNA).   Frank was addressing the high anxiety in the credit union industry triggered by Treasury Secretary Henry Paulson’s blueprint for regulatory reform, which calls for, among other changes, a consolidation of the bank, thrift and credit union charters into a single bank charter.  The effect, credit union executives have warned, would be to eliminate their industry. 

“This is a proposal that will go nowhere,” Frank told Mica, repeating an assertion he had made a few days earlier at a hearing on an unrelated measure.   The influential congressman told a credit union representative testifying at that hearing, “Please tell my good friend and former colleague [Dan Mica] not to worry about the Treasury proposal to eliminate credit unions.  We would never do that.”

Rep. Ron Paul (R-TX), who recently ended an unsuccessful campaign for the Republican presidential nomination , offered the same assurance to the Texas Credit Union League, promising  to “do all I can to make sure this provision [the Paulson proposal] or any other regulatory change detrimental to the interests of credit unions” is not enacted.

Separately, Rep. Paul Kanjorski (D-PA), a long-time credit union supporter, said he shares their concern about the impact of the regulatory restructuring plan.  In a press statement commenting on that plan, Kanjorski emphasized his belief that credit unions should compete fairly with banks, but he also said that establishing a level playing field “should not come at the expense of eliminating the current regulatory system, which has worked well and serves the financial needs of more than 90 million Americans.  We must preserve and protect the unique cooperative nature of the American credit union system,” Kanjorski added.


The rising tide that is supposed to lift all boats lifted only some of them during the most recent economic boom, widening the gap between the richest and poorest and leaving the middle class struggling against a financial undertow. 

That’s the message from a recent report by the Center on Budget Policy Priorities and the Economic Policy Institute, which found that the incomes of the richest 20 percent of Americans have increased by an average of 9.1 percent since the late 1990s while the incomes for families occupying the bottom r20 percent of the economic ladder have declined by 2.5 percent.  As a result, the report notes, average incomes of the top 5 percent of households are now 12 times the average for the bottom 20 –percent. 

Incomes for the middle class, meanwhile, have stagnated during the last decade, growing by only 1.3 percent over the past eight years, leaving households accustomed to making steady economic progress instead struggling to avoid losing ground.

Reflecting these gloomy statistics, a survey by the Pew Research Center found Americans to be more pessimistic about their economic health than at any time in the past 50 years.  Rising energy and food costs, falling home values and stagnant or declining incomes have taken a toll on the national mood, with only 4 in 10 respondents to the survey saying their finances have improved in the past 5 years, compared with 57 percent who felt they were making progress 10 years ago.  Only 20 percent of those who describe themselves as middle class said they “live comfortably” today; the same number (20 percent) said they are barely able to meet expenses, and 80 percent said they are finding it more difficult to maintain their standard of living.

Despite the economic hard times many are facing, the belief that things will get better remains strong, leading the majority of respondents to say they expect their own situations to improve and expect their children to enjoy a higher standard of living then theirs. 

But the downward shift in the economic winds is affecting the retirement outlook, making workers of all ages less confident about their financial future.  In a recent survey by the Employment benefits Research Institute, only 18 percent of the respondents said they were confident they will have sufficient resources to ensure a comfortable retirement, down from 27 percent last year and the largest year-over-year decline in the 18 years the EBRI has been conducting this poll. 

Retirement income fears were shared by all income groups, but the youngest workers and those with the lowest incomes were most pessimistic, according to the EBRI report.  Current retirees area also becoming more concerned, with only 29 percent saying they were confident about their retirement compared with 41 percent last year.

If there is any good news in these results, it may be that Americans are becoming more realistic about their retirement income needs, according to Matthew Greenwald, president and CEO of Matthew Greenwald & Associates, which compiled the data for the EBRI survey.  Higher confidence levels reflected in earlier surveys were largely unrealistic, given the long-standing lag in retirement savings levels, Greenwald said.  “From one perspective, it is disheartening but understandable that retirement confidence has gone down,” Greenwald told the Washington Post.  
However, it is my view that a lot of the confidence observed in previous years was false confidence, and perhaps people are now getting more realistic and this is a precursor to more effective financial preparation for retirement.” 


These may not be the worst of times for the automobile industry but they are close enough for auto manufacturers, auto dealers, and the lenders originating, of trying to originate, automobile loans.  Sales of domestically produced cars and light trucks plummeted in March to 1,356,868 vehicles, down 12 percent from the same month a year ago, with all of the “Big Three” manufacturers reporting double digit declines.  A slowing economy, rising rule prices, and rising costs for food and other basics are making consumers more cost-conscious and less inclined to buy anything other than essentials – a list that does not include new cars for most households.  The longer-term auto loans and leases that have become common are also impeding sales, leaving borrowers without the trade-in value they need to purchase a new car. 

As debt-laden consumers struggle to keep up with rising expenses, exacerbated by declining home values, delinquencies on auto loans are rising.  The number of borrowers more than 60 days late on their car payments reached a 10-year high in January, according to a recent report by Fitch Ratings, which cited “increasing pressure on consumers” as a major factor driving that trend.  Some analysts say the rising auto delinquencies represent another shoe poised to drop on an economy that is already reeling from the subprime crisis, the battered housing market, and constricted credit markets.

“We’re talking about a half-trillion-dollar industry, and if you take away a quarter of it, that’s one point of [gross domestic product],” Lawrence Lindsey, CEO of the Lindsey Group and former director o the National Economic Council, told USA Today.  Auto dealers are counting on the rebates households will be receiving this spring, courtesy of the economic stimulus package Congress approved a few weeks ago, but Lindsey thinks that confidence is misplaced.  “Washington is focused on the checks they’re about to send out, and that’s great because a $1,200 check is a down payment on a car,” he noted.  “But if you can’t borrow the other $25,000 to buy the car, then you can’t buy it, period.”   


The Federal Bureau of Investigation (FBI) is dealing with a “tremendous surge” in mortgage fraud investigations that has diverted agents from other fraud investigations and is expected to continue dominating the agency’s agenda for the foreseeable future, according to the agency’s director, Robert Mueller.  Testifying at a recent Senate hearing, Mueller said the FIB is currently investigating an estimated 1,300 mortgage fraud cases, 19 of them involving subprime lending practices at regulated depository institutions. 

“We’ve had a tremendous surge in cases related to the subprime mortgage debacle,” Mueller told legislators, adding, “I’m not sure at this point we can see the extent of the surge” or predict when it will begin to recede. 

Many of the fraud investigations involve reverse mortgages, which, Mueller said, “is something we are seeing and may well need additional resources to address.”  FBI investigations and unrelated studies have found that many older borrowers are using reverse loans to get out from under high-cost subprime mortgages they can’t afford. 

Separately, the Treasury Department’s Financial Crimes Enforcement Network reported recently that reports of suspected mortgage fraud filed by lenders increased more than 40 percent last year., making mortgage fraud the third most prevalent type of suspicious activity flagged in the ‘Suspicious Activity Reports” lenders are required to file.   FinCEN officials attributed the increase in part to increased vigilance on the part of financial institutions. 

“FinCEN’s analysis indicated that the financial community is becoming increasingly adept at spotting and reporting suspicious activities that may indicate mortgage fraud,” the agency’s director, James Freis, Jr., said in a press statement.

The Treasury report blamed mortgage brokers for much of the increase in mortgage fraud, citing their failure to verify the information on loan applications. Misrepresentation of income or assets was the most common type of fraud, according to the report, followed by forged documents, misrepresentation of borrowers’ intentions to occupy units they are actually purchasing as investment properties, and inflated appraisals.


Condominium buyers who are finding it more difficult than they anticipated to obtain financing may be bumping into new underwriting guidelines adopted by Fannie Mae and Freddie Mac.  The new rules, outlined in notices to lender generally require lenders to review the documents and finances of existing and new condominiums with four units or less and warrant that the project complies with the companies’ legal requirements.  For new condominiums with more than four units, lenders must have an attorney review the documents and verify that they comply with Fannie and Freddie’s requirements.  “The attorney may be the same person who prepared the legal documents or an attorney employed by the lender,” Fannie’s guidance explains, “but he or she cannot be an employee, principal, or officer of the developer or sponsor of the project.”

Among other changes, loans secured by new condominium projects and investor-owned units will no longer be eligible for Fannie’s “limited review” process; for qualifying loans on existing projects, the maximum loan-to-value ratio has been reduced to 90 percent from 100 percent. Additionally, under Fannie’s new “expedited review process, for existing projects, no more than 15 percent of common fees can be delinquent by more than one month.  Spokesmen for Fannie and Freddie say the tighter guidelines are needed to protect borrowers and to address increased credit risks in the current residential mortgage market.  But the new rules also create added administrative burdens and potential liability for lenders, who are being asked ‘to make absolute judgments on things that are not absolute,” Phil Sutcliffe, a principal in Project Support Services of Lansdale, PA, told Washington Post columnist Ken Harney.

In another potential blow to condominium buyers, Harney reported that effective May 1, AIG United Guaranty, a “major” private mortgage insurer, will no longer insure loans on condominiums located in markets in which property values are declining.  In more stable markets, the company will require down payments of at least 10 percent and will not insure loans on units in developments in which more than 30 percent of the owners are investors.