Consumer Lending

Reports from the twelve Federal Reserve Banks indicated that economic activity continued to expand in June and early July.

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On balance, consumer spending rose at a modest pace, although a number of Districts indicated that sales were mixed or below expectations. Several reports indicated that capital spending increased, and expenditures for most business services continued to rise. Employment increased further in most regions and in many sectors of the economy. Most Districts said that residential construction and real estate activity continued to decline. Commercial construction and real estate markets were generally more active than during the previous reporting period. District reports indicated that manufacturing activity continued to expand during June and early July. Household lending declined in most regions, while commercial and industrial lending expanded at a modest pace. Contacts generally reported ongoing input cost pressures, particularly for petroleum-related inputs, while prices at the retail level continued to increase at a moderate rate. Energy and natural resource activity remained at high levels, or in some instances, rose further. Many Districts described overall wage gains as moderate and/or similar to the previous reporting period. Agricultural conditions varied widely, as the impacts of drought were felt east of the Mississippi River and heavy rains affected the Dallas and Kansas City Districts.

Beige Book

Countrywide said payments were at least 30 days late at the end of second quarter on 4.56% of prime home-equity loans serviced by the company, up from 1.77% a year earlier.

“The impairment charges on these residuals were attributable to accelerated increases in delinquency levels and increases in the estimates of future defaults and loss severities on the underlying loans,” the company said.

Payments were late on 23.71% of subprime mortgage loans, up from 15.33% at the end of the same period in 2006.
Further dampening enthusiasm, Mozilo commented: “During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result.”

MarketWatch

Consumer credit rose at an annualized 6.4% rate in May. Revolving credit rose 9.8%, while non-revolving credit rose 4.4%. Consumer credit was up $12.9 billion from April’s level. Economists surveyed by MarketWatch expected only a $7 billion increase.

Consumer credit release

As defaults pummel the home-loan industry, Mr. Shaikh represents an extreme case of one of the big vulnerabilities in the business: mortgage brokers. In recent years, these middlemen have assumed a crucial role in handling surging volumes of business for lenders. Today, mortgage brokers are involved in about 58% of home loans, up from 40% a decade ago, according to Wholesale Access, a research firm in Columbia, Md.

Mortgage brokers originate about half of loans made to borrowers with good credit. Their presence is even greater in other segments of the mortgage market where defaults are rising. Brokers originate about three-quarters of subprime mortgages made to borrowers with scuffed credit, according to Wholesale Access. They also originate 70% of so-called Alt-A mortgages, a gray area that falls between prime and subprime.

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Mortgage brokers didn’t set the standards for the many aggressive loans that are now going sour. But they provided the low-cost sales force that made it possible for lenders to quickly ramp up production without hiring employees. As business surged, some brokers put borrowers into loans they didn’t understand, couldn’t afford or were otherwise ill-suited for, one reason defaults have skyrocketed. In the worst cases, brokers have been known to falsify information and resort to other fraudulent means to get mortgage loans approved. Critics say regulators and lenders haven’t done nearly enough to insure the quality and integrity of this independent sales force.

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Around the country, efforts are now under way to improve quality control of mortgage brokers. Lenders are beefing up their scrutiny of mortgage brokers and other third parties. The Conference of State Bank Supervisors is setting up a national database that would allow consumers and regulators to check whether brokers are licensed or have been subject to regulatory enforcement actions. Sen. Schumer of New York in early May introduced legislation that would establish a fiduciary duty for brokers and others who arrange home mortgage loans to look after their customers’ interests.

WSJ article