Big banks have already said that they intend to enter the prepaid card market, but their success or failure is far from certain and could hinge on how they frame the purpose of the entire space.

Banks are no longer going to offer free checking willy nilly. You will have to have a hefty deposit account, or use other services that generate enough revenue to justify the costs to the bank. It is the (more…)

Plenty of students are defaulting on their student loans, a worrisome problem that should make us reconsider the value of a four-year college degree.

I would like to preface my thoughts on how more skills training might improve returns on education with a short departure into student loans.  Unemployment is probably behind the high rate of student loan defaults and deferrals.  It could also reflect the changing economy.  Either way, we have a problem. We are encouraging students to pursue college degrees, even though many have to borrow to finance that opportunity.  The payoff, for many, never comes. They are left with debt that changes the course of their adult life.

Lenders are ready to turn off the spigot of student loan debt. High default rates on student loans might underscore the need for better underwriting.  Banks are sure to make good on that fact.  Indeed, new data contradicts the idea that student loans are a poor fit for risk-based pricing. Even these loans can be adequately gauged for performance with credit scoring. A new study says that a 670 credit score seems to mark the difference between making good on private student loans or not.  For borrowers with credit scores above 670, only 1.8 percent failed to pay their debt. Below that number, and the default rate soars to 16.8 percent.

That is pretty powerful data, and it contradicts doubts about credit scoring for these products. Many students seek loans at a point in their life when they have little or no credit history.

Accepting that, what does this tell us about how and why we promote college? A government economist thinks it might be worth a million dollars. The College Board concedes that it is somewhat less valuable.  In many instances, all of that school appears to be  worthless.

Banks may make the decision for us. Lenders, particularly private student loan companies, could (more…)

The wisdom of crowds suggests that our economy is about to turn a corner. Bank stocks are surging, and even builders are coming back.  Recent data suggests that home sales are finally picking up.

Its almost magic the way that efficient markets can aggregate the perspective of many, smoothing out the optimists against the skeptics.

Still, one of the most prescient predictors of the past 18 months insists that we are hardly out of the woods. Nouriel Roubini argues that even estimates of losses developed by the IMF are overly rosy.  Those reports say that losses should ultimately reach $2.7 trillion.  Roubini insists that the number is more like $3.6 trillion. He even used the “I-word” to describe our banking system.

Housers finds the latest market reactions confusing.  Today we have news that 10 of the 19 banks undergoing stress tests are going to need more capital.  Many expected that B of A and Citi would need aid, but Wells Fargo is a surprise.  Yes, it is true that some approaches would not require more support from taxpayers.  Nonetheless, almost all of the responses imply that shareholders of common stock will face dilution.  How can this not lower share prices?

We also know that a lot of the mortgages still have time remaining to go bad.  The recession didn’t hit until December 2007.  Subprime lending didn’t fall off until the last half of ’07.  The 3-27 adjustable rate mortgages written after the summer of 2006 still haven’t reset.  Its likely that they will not enter default for at least a few months.  Its the same with the 2-28′s written after 2007. 

Other data only adds to our sense that we are not out of the woods.   Unemployment only ramps up the numbers.  Loan modifications, in most instances, are only delaying payments.  Many are actually increasing monthly payments.

Even worse, these stress tests are meant to give everyone a pass.  Its an all-too-serious version of championship trophies in Little League – we want everyone to be a champion.  It hardly makes sense for a hypothetical test to use data inputs for historical events that are more optimistic than the record shows.  That is what was done, nonetheless, when the tests assume an unemployment rate of 7.9 percent for Q1 2009.  The actual number was 8.1 percent.  Going forward, the most severe expectation puts unemployment at 10.3 percent by 2010.  The truth is that we may exceed that level this quarter.  Some states are well above that number, including North Carolina. Moreover, it undercounts newly downshifted workers now on part-time, or people who have given up looking for work.