Explaining Southern California's economy

Cracking down on payday lenders

Obama Nominates Richard Cordray To Head Consumer Financial Protection Bureau

Mark Wilson/Getty Images

WASHINGTON, DC - JULY 18: U.S. President Barack Obama (C) shakes hands with former Ohio Attorney General Richard Cordray during a presser to announce the nomination of Cordray as head of the in the Consumer Financial Protection Bureau as Special Advisor on the Consumer Financial Protection Bureau Elizabeth Warren (L) watches in the Rose Garden at the White House on July 18, 2011 in Washington, DC. The new bureau was created under a reform bill last year and intends to make basic financial practices such as taking out a mortgage or loan more clear and transparent to consumers while weeding out unfair lending practices. (Photo by Mark Wilson/Getty Images)

If you want to see what loan sharking looks like in modern America, look no farther than the payday lending industry. As this blog from the White House (yes, 1600 Pennsylvania Ave. blogs) points out, 20 million Americans use payday loans — and the average interest rate charged on a two-week loan is 400 percent!

The White House used a $100 loan as its basis. From a payday lender, a Benjamin winds up costing the borrower $16. If you accept that 20 million figure, this means that on $100 loans, the payday lending racket is bringing in $320 million every two weeks. OK, that's simple math and may not represent reality. But perhaps not that far off, as some borrowers will borrow more, some less.

Just for context, 20 million Americans equals 6.5 percent of the population. That's an alarmingly high number of people who are exposed to a horrifically high level of short-term interest. But it also explains why the payday lending business has taken off.

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How will small banks handle Bank Transfer Day?

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An Occupy Wall Street image for Bank Transfer Day.

Even though Bank of America has made the unusual decision to rescind its proposed $5 debit-card fee, apparently bowing to the consumer revolt that this fee provoked, plenty of customers may still move their accounts to credit unions and community banks on Bank Transfer Day this Saturday. Credit unions are launching efforts to promote themselves to prospective depositors; some are also expanding their banking hours.

There's skepticism that customers really will migrate from big banks to small banks en masse; a previous attempt to spur a revolt, promoted by the Huffington Post, didn't have much impact. And even if hundred of thousands of customers make the move, that's unlikely to significantly damage large banks, like BofA, Wells Fargo, and Chase, which have billions in deposits. There would need to be a Bank Transfer Day...pretty much every day to make a difference.

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The Housing Crisis: Can prices fall even farther?

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Justin Sullivan/Getty Images

A foreclosure sign sits in front of a home for sale.

Another month, another Case-Shiller index on housing prices — and more bad news for the housing economy. This is from the Wall Street Journal:

The Case-Shiller data come on the heels of the White House's revamp of a mortgage-refinance program for "underwater" borrowers—those who owe more than their homes are worth. But economists say there are few quick fixes for the housing crisis, and easier refinancing rules will do little to address weak demand for homes.

"It was a very bad spring-to-summer-market season," said Nancy Wallace, a finance professor at the University of California at Berkeley. She said a turnaround in the housing market remains largely dependent on loosening credit and a surge in hiring. "People are almost afraid to apply for mortgages and lots of people have little scratches and dents on their credit right now."

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Visual Aid: What's dragging down the mortgage market

There are plenty of homes for sales, both in California and the nation. But new homes sales fell again in August, continuing a six-month trend of decline. What gives? Interest rates are at historic lows, and Federal Reserve monetary policy for the past two years has been designed to keep them there — and drive them even lower. The above chart, from the Federal Reserve Bank of Cleveland, is telling. To sell a house, you need three things: a seller, a buyer — and a bank that will write a mortgage. What we have right now is a distinct absence of banks willing to make loans, or only willing to make loans on restrictive terms. Until that changes, we're looking at below-average mortgage-origination levels for a while.

Also note that refinancing originations don't look too good, either. This is proof that plenty of borrowers are too far underwater in their homes to make refinancing an option. 

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