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Choose ABS makes the point that with CBs, investors have two borrower balance sheets to give them coverage, those of the issuer and the SPE that holds the assets.
Meredith Whitney of the Meredith Whitney Advisory Group believes the major banks, including Bank of America and Citigroup, are going to cut lines of credit in response to the worsening condition of borrower balance sheets and to get ahead of new government regulations that will restrict a bank's ability to unilaterally change credit card rates.
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It boosted inflation, bank bonuses and borrowers' balance sheets.
Margolin says that the seniority of the bank debt makes up for some of the weakness in the borrowers' balance sheets.
"When people are to the cusp," he said, referring to borrowers' balances near the cutoff for conventional loans, "I always bring that to their attention".
A bank's servicing fee is based on the principal balances of the loan — a strong incentive not to reduce a troubled borrower's balance.
What's more, about one in six loans incurs a repossession fee of about $350 to $400, which is added to the borrower's balance, leaving the consumer even more in debt, despite also losing the car.
So-called covenant-lite contracts, in which creditors give up certain rights but impose conditions on a borrower's balance sheet, are harder to come by, while banks are slowly forcing down leverage ratios.
In that case, future debt, or estimated future debt if the reverse mortgage is adjustable rate, is a shopping variable that the borrower must balance against the other shopping variables.
They also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with various rates.
In fact most lenders now offer a raft of options to borrowers that balance rate with fee, making the 'tipping point' question of whether you should go for a low rate and pay a high fee notoriously difficult to answer.
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