Opening Bell: Credit Crunch Hits Poor Students

Want a loan for community college? Good luck; foreclosures are rolling; NYT Company’s fat dividend; etc.

The New York Times says the credit crunch is hitting students at two-year colleges and “other less competitive institutions” as some big lenders pull back loans completely and others make it more expensive to borrow.

The paper goes above the fold on page one with the story, reporting that if the trend continues “some of the nation’s neediest students will be hurt the most,” delaying or preventing them from going to school. The trend is being exacerbated by lower government subsidies to lenders. The Times says it could be a big problem:

Tuition and loan amounts can be quite small at community colleges. But these institutions, which are a stepping stone to other educational programs or to better jobs, often draw students from the lower rungs of the economic ladder. More than 6.2 million of the nation’s 14.8 million undergraduates—over 40 percent—attend community colleges. According to the most recent data from the College Board, about a third of their graduates took out loans, a majority of them federally guaranteed.

While some banks have been getting out of the student-loan business over the last year or so, the Times says it’s new that others, like Citibank, are “breaking the marketplace into tiers.” Those at high-quality (and/or expensive) four-year schools aren’t likely to have problems finding loans because they are more profitable for banks, because the loans are bigger and the borrowers there are more likely to repay.

Still, the cherry-picking strikes some as peculiar; after all, the government is guaranteeing 95 percent of the value of these loans.

The Times notes that Sallie Mae and Nelnet are still lending at any size or quality institution, and it doesn’t say exactly why students will be hurt as long as those two biggies are issuing loans.

A Bloomberg report shows why some lending has dried up. Brazos Group is paying 5 percent interest on auction-rate securities, up from 2 percent last year. Five percent doesn’t seem like a lot unless you have a huge portfolio of loans out that only earn you 4 percent.

“It’s an ugly situation,” (an) analyst said. “Every dollar coming in is going out to higher interest rates.”

Foreclosures just keep going, and going, and….

The number of foreclosures is soaring across the U.S., The Wall Street Journal reports on page three. Lenders and mortgage investors had taken over 660,000 homes as of April. That’s up nearly 170,000 from just three months earlier and nearly triple the number of January 2007.

And the worst is yet to come: projects the peak won’t be hit until the end of next year.

The Journal says as of April one in seven existing homes for sale in the country is in foreclosure. That’s despite lenders cutting prices to get rid of their rising inventory of homes. One Denver company says some banks are cutting the prices of homes that don’t sell every twenty days.

The paper and the Financial Times on page one note that mortgage rates soared last week, something the FT says is because investors are betting the Federal Reserve will have to start raising interest rates soon to combat rising inflation.

The FT says thirty-year fixed mortgage rates rose from 5.81 percent last week to 6.02 percent, the highest in nearly three months. That makes the housing crisis that much harder to pull out of.

Got to keep those family members happy

Bloomberg posts a story about companies who are paying more in dividends than they’re making in free cash flow, and notes that The New York Times Company is one of them.

The wire service writes that the Times Company paid out $125 million in dividends in 2007 at the same time it was a negative $270 million in cash. Reminds us of a certain company that helped spend its way into Rupert Murdoch’s hands with dividends.

Except in this case its Sulzbergers, not Bancrofts living off the non-existent fat of the company, which is slashing a hundred jobs—nearly 8 percent of its newsroom. Bloomberg reports that one media analyst is surprised they put reporters and editors on the chopping block before their thirty-one-cent dividend, which the company bizarrely raised by eight cents a little more than a year ago in what was the biggest increase in at least ten years.

Dividends are supposed to be for safe, cash-producing stocks, which in case its management and board has failed to notice, the Times is not anymore. That money would be better spent investing in the future of the company’s journalism, not lining the pockets of Sulzbergers and investors to prop up a sinking share price.

How to live beyond your means

The Journal on page one looks at how strapped consumers are still finding unconventional ways to dig up money to make ends meet. Credit cards are still popular, of course, with borrowing near a record and up 8 percent from a year ago, but even the big home-as-ATM movement of this decade hasn’t been totally upended by the housing bust.

But businesses are reporting greater demand for newer cash-raising techniques. Reverse mortgages are gaining new favor. Secured by a home’s equity, this vehicle can provide consumers with a lump-sum payout, a line of credit, periodic payments or a combination thereof.

Also flourishing: niche products that quickly unlock the value of a particular asset. Life settlements, once marketed mainly to the wealthy, have grown in popularity as companies target smaller policies, like Ms. Brunner’s. A number of companies cater to people who’ve won personal-injury settlements—which are often paid over a period of years—by buying them out up front, typically for a sum much lower than the amount of the payments sold. Reserve Solutions Inc. of New York offers debit cards to help workers access funds from preapproved 401(k) loans.

Americans have so much debt that the only way to handle it is to go into more debt and pray for the best, or make bad financial decisions because they have to.

The so-called life-settlement industry ends up on average giving sellers about 20 percent of the face value of their life-insurance policy and people who’ve won lawsuits lose much of the money they would have gotten by getting paid upfront. Not only that but a financial regulator has warned that people who cash out assets may make themselves ineligible for some benefits like Medicaid.

Here’s today’s Dude, You Live in a $1.8 Million House And You’re Griping About the Price of Eggs Quote of the Day, a sign of our screwed-up economy:

Daniel Petelin, 62, lives in a roughly $1.8 million house in Redwood City, Calif. His mortgage debt on the place, about $16,000, is minimal. But the freelance public-relations and event manager, who has an income of about $47,000, is still feeling pinched. “Eggs a few months ago were 79 cents a dozen. Now they’re $1.79.”

FT leaves us hanging on warehousing news

The FT reports on page one that international regulators are planning to make it more expensive for investment banks to “warehouse” bundled assets, like the mortgage-backed securities that have them in so much trouble.

In particular, supervisors believe that the rules will reduce incentives for banks to engage in so-called “warehousing” activities—the practice of keeping repackaged assets inside a bank for an indefinite period, before selling them to outside investors.

One senior western policymaker said: “These changes are significant. They are definitely going to make some warehousing activities more expensive.”

But the paper leaves out some pretty basic information—how exactly the regulators plan to make it more costly. We guess from reading between the lines that new rules would do so by increasing the capital required to back “low-risk” assets that they’ve held on their books, but we could be totally wrong.

Maybe they want to slap a tax on them for all we know. Help us out, FT.

Bad year for trial lawyers

Milberg (formerly known as Milberg Weiss) is close to settling with federal prosecutors over its alleged $11 million kickbacks to people who became lead plaintiffs in its class-action lawsuits against companies, the WSJ reports on page one.

The Journal notes its been a disgraceful year for trial lawyers, with Dickie Scruggs of Mississippi pleading guilty to criminal conspiracy for bribing a judge in a Katrina-related insurance lawsuit. He faces five years in prison.

Milberg’s fall has been a blow to the U.S. plaintiff’s bar. It is rare for any law firm to face criminal charges, especially one as powerful as Milberg. Led at one time by Melvyn Weiss and William Lerach, the firm pioneered the lucrative business of securities class-action lawsuits. After a dramatic drop in a company’s share price, the law firm typically would file suit on behalf of shareholders claiming the company misled investors about its financial health. The firm has helped win huge settlements against accounting firms, tech companies and many high-profile corporations embroiled in scandal, including Enron Corp. and Tyco International Ltd.

Corporate executives long have complained that the suits were designed primarily to enrich lawyers. The Milberg case has given a boost to that view, prompting some in Congress to call for tighter regulation of securities class-action suits.

No guaranteed income for these folks

USA Today takes a look on its Money front at what it says are the increasing number of workers who make “variable pay”—basically those based on commissions.

It says one in five workers, not including those who own their own businesses, are paid based on sales or tips and that the economic downturn is hitting them hard. They’re part of the hidden costs of the slide, with effects that won’t show up in stats immediately.

You won’t find these people reflected in the latest job figures. Nor do the unemployment figures include people, such as most sales clerks, whose hours have been cut because consumer spending is down. Or the small-business owners whose sales have plummeted. Though they’ve not suffered as much as workers who have lost jobs, these people have seen their living standards fall, with far-reaching consequences for themselves and the overall economy.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.