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5 studies on racism, climate change + aging populations

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Municipal bonds are loans state and local governments use to pay for everyday expenses and infrastructure projects that can take years to complete. Municipal bonds — also called “munis” — are attractive to some investors because states, counties, cities school districts and other government organizations are unlikely to default. From 1970 to 2016, 0.18% of municipal bonds defaulted, compared with 1.74% of corporate bonds that companies issued, according to the Municipal Securities Rulemaking Board, a non-governmental organization that regulates the market. Another reason investors buy municipal bonds: They typically don’t have to pay federal income tax on interest money they accrue.

The municipal bond market is huge and has grown exponentially in recent decades. There’s about $4 trillion worth of bonds held in the municipal market today, up from $1.2 trillion in 1996, according to data from SIFMA, a security industry trade association that tracks municipal bond data.

Despite a dip in municipal bond issuance around the start of the coronavirus recession, and defaults of some bonds issued by small municipalities — like Terre Haute, Indiana in April — year-to-date there’s been nearly $50 billion more in municipal bonds issued across the country, a 23.7% increase. Municipal bond issuances rebounded in April after the U.S. Federal Reserve said it would buy up to $500 billion worth of bonds from states, counties and cities, which have three years to pay back the Fed.

Covering municipal bonds may seem, at first glance, fun as chewing boiled cardboard. But these financial instruments have a direct effect on the social and cultural character of cities, metropolitan areas, counties and states. Munis may be the reason a new school is built or an aging bridge is replaced. They are also inextricable from local history, politics and forces beyond the control of a particular government — such as systemic racism.

The five studies that follow explore how municipal bond mismanagement can have disparate impacts on different racial groups, how climate change and aging populations affect bond interest rates, and provide insight on how credit ratings agencies — which can save or cost municipalities tens of millions of dollars — assess municipal credit risk.

Racism

The Violence of Municipal Debt: From Interest Rate Swaps to Racialized Harm in the Detroit Water Crisis
C.S. Ponder and Mikael Omstedt. Geoforum, July 2019.

C.S. Ponder and Mikael Omstedt argue that glaring examples of racial physical violence in cities, such as police killings of Black men, “are often underwritten by more abstract forms of financial violence.”

They explore municipal debt as “a condition of financialized racial capitalism” by investigating the massive debt the Detroit Water and Sewerage Department had taken on by 2014. Ponder is an assistant professor of geography at Florida State University and Omstedt is a doctoral candidate at The University of British Columbia.

Financialized racial capitalism refers to financial situations or instruments, like municipal debt and bonds, with seemingly neutral elements — such as bond ratings and interest rates — that end up negatively affecting members of a particular racial group, through actions like water shut-offs.

The authors chronicle in detail the mid-2010s saga of the Detroit Water and Sewerage Department. The department was established in 1839 with a $20,500 bond. As the city became a capital of industry, the department expanded to serve emerging suburban communities. Racial segregation entrenched in the 20th century, the result of white flight. The suburbs became largely white, the city largely Black.

“With this pattern of development, Detroit’s suburbs were not only able to avoid taking out debt in the muni-market, they were also able to purchase water from the city at wholesale rates while charging increasingly exorbitant retail rates to their own suburban customers,” Ponder and Omstedt write.

Around the turn of the century, the department agreed to several interest rate swaps. In the 1990s, banks marketed these swaps to cities as a way to hedge risk. Swaps could take a few different forms, but often the way it worked was that a city, or city department, would pay a fixed rate to a bank, which would in turn pay the municipal entity what’s called a floating interest rate that varied based on the London Interbank Offered Rate, “the interest rate at which big banks loan to each other for short periods of time,” the authors write.

If the LIBOR floated above the city’s fixed rate, the city would come out ahead. If the LIBOR dipped below the fixed rate, the city would end up paying the bank more than it would have on the open market. In mid-2012, several large international banks were caught manipulating the LIBOR. American cities had paid some $6 billion more in interest to banks than they should have since the early 1990s, and $4 billion in fees to get out of interest rate swaps.

The Detroit Water and Sewerage Department subsequently took out a $650 million bond to cover early termination fees to jettison its toxic interest rate swaps, according to the authors. Financial trouble trickled down to ordinary Detroiters in 2014 when the department shut off water to 33,000 households owing more than $150, “in an attempt to pay down $561 million of debt incurred by predatory municipal finance deals gone wrong,” the authors write. In 2015, another 23,200 households had their water shut off, and 27,552 households lost their water in 2016.

Ponder and Omstedt call it “financial whitewashing,” with the department focusing on delinquent accounts rather than its own risky debt practices. They further argue that “both the white suburbs and the white state have successfully used the trope of payment delinquency and departmental mismanagement to take over local water governance.” Black Detroiters are “scapegoats” and “the role of finance in the [department’s] insolvency has become exonerated,” Ponder and Omstedt conclude.

Climate change

An Inconvenient Cost: The Effects of Climate Change on Municipal Bonds
Marcus Painter. Journal of Financial Economics, February 2020.

Coastal counties facing rising sea levels pay more in fees and initial yields — which include interest rates — for issuing long-term municipal bonds, finds Marcus Painter, an assistant professor of finance at Saint Louis University. He finds no difference in bond fees and yields among short-term bonds that mature in less than 20 years.

Painter argues that “investors are more likely to account for climate change risk when investing in municipal bonds as opposed to corporate bonds or stocks.” This is because a company can move out of town if the town perpetually floods, but the town can’t move its infrastructure. Painter analyzes a sample of 327,152 bonds worth more than $1 million, 50,914 of them in counties at risk of climate change. Risk of climate change is defined as risk of monetary loss due to sea level rise — think homes and businesses under water — based on 17 at-risk cities such as New Orleans, Miami and Virginia Beach identified in a 2013 paper published in Nature.

“Because climate change risk is causing counties to be negatively affected today through higher debt issuance costs, these counties should be proactive in reducing the amount of damage that sea level rise is likely to cause to their municipalities,” Painter writes.

Aging populations

Aging and Public Financing Costs: Evidence from U.S. Municipal Bond Markets
Alexander Butler and Hanyi Yi. Rice Business Working Paper, January 2020.

Municipal bonds cost more for states with older populations, find Alexander Butler, a professor of finance at Rice University and Hanyi Yi, a doctoral student there. States like Arizona, which have relatively high numbers of people over age 65 compared with states like California, where the population leans younger, may pay nearly a quarter of a percent more in interest. The difference “reflects an additional $71 million in annual interest payment,” the authors find based on their analysis of more than 100,000 bonds issued by state and local governments across the country from 1996 to 2016.

Butler and Yi suggest two reasons for the higher interest rates in states with older populations. First, there’s not as much tax revenue, which governments use to pay bond debts. Older people are less likely to work and less likely to pay income tax. If there’s less tax revenue coming in to pay back lenders, those lenders will want more compensation in case of default in the form of higher interest.

The second reason has to do with pension obligations, which are constitutionally protected in some states. If a fiscal crisis hits, pensioners, who skew older, will get paid over municipal debt holders. So, just like with tax revenue, lenders want to be compensated for taking on more risk of default.

Bond ratings

Reading Risk: The Practices, Limits and Politics of Municipal Bond Rating
Mikael Omstedt. Environment and Planning: Economy and Space, October 2019.

Three credit rating agencies — Moody’s Investors Service, Standard & Poor’s Financial Services and Fitch Ratings — hold the keys to how much municipalities pay to issue bonds. If those agencies determine a municipality is a bad credit risk, that municipality is going to pay higher interest rates on their bonds. If the credit rating agencies determine a municipality is low risk, it will likely pay lower interest on bonds.

Omstedt, the doctoral candidate at The University of British Columbia, explains a paradox in the municipal bond market. In recent decades, the market has become increasingly complex, with varying laws across states and numerous types of issuers — from city governments represented by elected officials to organizations run by people who have been not elected, like water and sewage utilities. One former ratings analyst Omstedt interviewed said “you can’t even compare city to city.” And yet, as Omstedt points out, that is precisely what bond ratings do. They put cities in different geographies with different rules and different structures onto a simple ratings scale so that investors can assess their relative credit-worthiness.

Omstedt conducted 10 interviews with current and former ratings analysts and with 12 financial professionals working in New Jersey local governments. He finds that while municipal credit ratings are certainly based on financial data, such as whether a municipality owes huge sums for employee pensions, they’re also based on subjective measures. Ratings analysts go out to observe economic conditions in municipalities and use those on-the-ground observations to help determine credit ratings.

The final ratings are a product of what the data and observations say about a municipality’s budget flexibility. As Omsted explains, “their search for flexibility is essentially concerned with only one thing: the municipality’s ability to revise all other commitments that could stand between bondholders and the debt service in the event of a fiscal conflict.”

Do Rating Agencies Benefit from Providing Higher Ratings? Evidence from the Consequences of Municipal Bond Ratings Recalibration
Anne Beatty, Jacquelyn Gillette, Reining Petacchi and Joseph Weber. Journal of Accounting Research, March 2019.

The authors examine nearly 6,000 credit ratings for 4,237 muni bond issues in 2008, 2009, 2011 and 2012 in Texas and California, the only two states that provide data on ratings fees. The authors skip 2010 because that’s when two of the major credit ratings agencies, Moody’s and Fitch, recalibrated their ratings scales. The recalibration meant more than 500,000 bonds across the country got better credit ratings without any change to their underlying default risk. Standard & Poor’s, by contrast, didn’t change its credit rating methodology. The authors want to know whether “credit rating agencies receive higher fees and gain greater market share when they provide more favorable ratings.”

For bonds rated by the three major credit rating agencies, fees tracked consistently before recalibration. But in the two years after recalibration, Moody’s and Fitch charged on average 11% higher fees than Standard & Poor’s across the sample of bonds. The authors also find that for single-rated bonds — those that come with a rating from only one of the ratings agencies — issuers are more likely to go with Moody’s or Fitch.

“These results imply that by increasing their ratings, Moody’s and Fitch garnered new customers and increased their fees for both their existing customers and new customers,” the authors write.

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Bad Credit

If You Want Consumers to Lose, Network Regulation is a Must – Digital Transactions

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After the current U.S. Congress was sworn in, a predictable chorus of merchants, lobbyists, and lawmakers demanded new interchange price caps and other government mandates to decrease credit card interchange fees for merchants. The tired attacks on credit cards are an easy narrative that focuses almost exclusively on the cost side of the ledger, while completely ignoring the cards’ important role in the economy and the regressive effects of interchange regulation. 

To lawmakers blindly acting on behalf of retailers, regulation is a brilliant idea—regardless of how it affects their constituents. For decades, they have promised these interventions would eventually benefit consumers. But the lessons from the Durbin Amendment in the United States and price cap regulation in Australia is clear. Although some policymakers bemoan the current economic model, arbitrarily “cutting” rates for the sake of cuts completely ignores the economic reality that as billions of dollars move to merchants, billions are lost by consumers. 

For the uninitiated, let’s break down what credit interchange funds: 1) the cost of fraud; 2) more than $40 billion in consumers rewards; 3) the cost of nonpayment by consumers, which is typically 4% of revolving credit; 4) more than $300 billion in credit floats to U.S. consumers; and 5) drastically higher “ticket lift” for merchants. 

Johnson: “To lawmakers blindly acting on behalf of retailers, regulation is a brilliant idea—regardless of how it affects their constituents.”

These are just some of the benefits. If costs were all that mattered, American Express wouldn’t exist. Until recently, it was by far the most expensive U.S. network. Yet, merchants still took AmEx because they knew the average AmEx “swipe” was around $140, far more than Visa and Mastercard. 

Put simply, for a few basis points, interchange functions as a small insurance policy to safeguard retailers from the threat of fraud and nonpayment by consumers. Consider the amount of ink spilled on interchange when no one mentions that the chargeoff rate for issuing banks on bad credit card debt exceeds credit interchange.

Looking abroad, interchange opponents cite Australia, which halved interchange fees nearly 20 years ago, as a glowing example of how to regulate credit cards. In truth, Australia’s regulations have harmed consumers, reduced their options, and forced Australians to pay more for less appealing credit card products. 

First, the cost of a basic credit card is $60 USD in many Australian banks. How many millions of Americans would lose access to credit if the annual cost went from $0 to $60? Can you imagine the consumer outrage? 

In a two-sided market like credit cards, any regulated shift to one side acts a massive tax on the other. For Australians, the new tax fell on cardholders. There, annual fees for standard cards rose by nearly 25%, according to an analysis by global consulting firm CRA International. Fees for rewards cards skyrocketed by as much as 77%.

Many no-fee credit cards were no longer financially viable. As a result, they were pulled from the market, leaving lower income Australians, as well as young people working to establish credit, with few viable options in the credit card market.

Even the benefits that lead many people to sign up for credit cards in the first place have been substantially diluted in Australia because of the reduction of interchange fees. In fact, the value of rewards points fell by approximately 23% after the country cut interchange fees.

Efforts to add interchange price caps would have a similar effect here in the U.S. A 50% cut would amount to a $40 billion to $50 billion wealth transfer from consumers and issuers to merchants. For the 20 million or so financially marginalized Americans, what will their access to credit be when issuers find a $50 billion hole in their balance sheets? 

The average American generates $167 per year in rewards, according to the Consumer Financial Protection Bureau. Perks like airline miles, hotel points, and cashback rewards would be decimated and would likely be just the province of the rich after regulation. Many middle-class consumers could say goodbye to family vacations booked at almost no cost thanks to credit card rewards.

As the travel industry and retailers fight to bounce back from the impact of the pandemic, slashing consumer rewards and reducing the attractiveness of already-fragile businesses is the last thing lawmakers and regulators in Washington should undertake.

Proposals to follow Australia’s misguided lead in capping interchange may allow retailers to snatch a few extra basis points, but the consequences would be disastrous for consumers. Cards would simply be less valuable and more expensive for Americans, and millions of consumers would lose access to credit. University of Pennsylvania Professor Natasha Sarin estimates debit price caps alone cost consumers $3 billion. How much more would consumers have to pay under Durbin 2.0?

Members of Congress and other leaders should learn from Australia and Durbin 1.0 to avoid making the same mistake twice.

—Drew Johnson is a senior fellow at the National Center for Public Policy Research, Washington, D.C.

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Increase Your Credit Score With Michael Carrington

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More than ever before, your debt and credit records can negatively impact you or your family’s life if left unmanaged. Sadly, many Americans feel entirely helpless about their credit score’s present state and the steps they need to take to fix a less-than-perfect score. This is where Michael Carrington, founder of Tier 1 Credit Specialist, comes in. Michael is determined to offer thousands of Americans an educated, informed approach towards credit restoration.

Michael understands the plight that having a bad credit score can bring into your life. His first financial industry job was working as a home mortgage loan analyst for one of the nation’s largest lenders. Early on, he had to work a grueling schedule which included several jobs seven days a week while putting in almost 12-hour days to make $5,000 monthly to get by barely.

“I was tired of living a mediocre life and was determined to increase the value that I can offer others through my knowledge of the finance industry – I started reading all of the necessary books, networking with industry professionals, and investing in mentorship,” shares Michael Carrington. “I got my break when I was able to grow a seven-figure credit repair and funding organization that is flexible enough to address the financial needs of thousands of Americans.”

With his vast experience in the business world, establishing himself as a well-respected business leader, Michael Carrington felt he had the power to help millions of Americas in restoring their credit. Michael learned the FICO system, stayed up to date on the Fair Credit Reporting Act (FCRA), found ways to improve his credit score, and started showing others.

The Tier 1 Credit Specialist uses a tested and proven approach to educate their clients on everything credit scores. Michael is leveraging his experience as a home mortgage professional, marketing executive, and global business coach to inform his clients. He and his team take their time to carefully go through their client’s credit records as they try to find the root of their problem and find suitable financial solutions.

The company is changing lives all over America as it helps families and individuals to repair their credit scores, gain access to lower interest rates on loans and get better jobs. What Tier 1 Credit Specialists is offering many Americans is a chance at financial freedom.

Michael Carrington has repaired over $8 million in debt write-ups and has helped fund American’s with over $4 million through thousands of fixed reports. “I credit our success to being people-focused,” he often says. “The amount of success that we create is going to be in direct proportion to the amount of value that we provide people – not just our customers – people.”

Because of its ‘people-focused goals, the Tier 1 Credit Specialist is determined to help millions of Americans achieve financial literacy. It is currently receiving raving reviews from clients who are completely happy with the credit repair solutions that the company has provided them.

Today, Michael Carrington is continuing with a new initiative to serve more Americans who suffer from bad credit due to little or no access to affordable resources for repair.

The Tier 1 Credit Socialist brand is changing the outlook of many families across America. To do this, the company has created an affiliate system that will provide more people with ways of earning during these tough economic times.

As a well-respected international business leader and entrepreneur with numerous achievements to his name Michael Carrington aims to help millions of Americans achieve the financial freedom, he is experiencing today. Tier 1 Credit Socialist is one of the most effective credit repair brands on the market right now, and they have no plans for slowing down in 2021!

Learn more about Michael Carrington by visiting his Instagram account or checking out the Tier 1 Credit Specialist website.

Published April 17th, 2021



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Does Having a Bank Account With an Issuer Make Credit Card Approval Easier?

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Better the risk you know than the one you don’t.

When it comes to personal finance, nothing is guaranteed. That goes double for credit. That’s why, no matter how perfect your credit or how many times you’ve applied for a new credit card, there’s always that moment of doubt while you wait for a decision.

Issuing banks look at a wide range of factors when making a decision — and your credit score is only one of them. They look at your entire credit history, and consider things like your income and even your history with the bank itself.

For example, if you defaulted on a credit card with a given bank 15 years ago, that mistake is likely long gone from your credit reports. To you and the three major credit bureaus, it is ancient history. But banks are like elephants — they never forget. And that mistake could be enough to stop your approval.

But does it go the other way, too? Does having a bank account that’s in good standing with an issuer make you more likely to get approved? While there’s no clear-cut answer, there are a few cases when it could help.

A good relationship may weigh in your favor

Credit card issuers rarely come right out and say much about their approval processes, so we often have to rely on anecdotal evidence to get an idea of what works. That said, you can find a number of stories of folks who have been approved for a credit card they were previously denied for after they opened a savings or checking account with the issuer.

These types of stories are more common at the extreme ends of the card range. If you have a borderline bad credit score, for instance, having a long, positive banking history with the issuer — like no overdrafts or other problems — may weigh in your favor when applying for a credit card. That’s because the bank is able to see that you have regular income and don’t overspend.

Similarly, a healthy savings or investment account with a bank could be a helpful factor when applying for a high-end rewards credit card. This allows the bank to see that you can afford its product and that you have the type of funds required to put some serious spend on it.

Having a good banking relationship with an issuer can be particularly helpful when the economy is questionable and banks are tightening their proverbial pursestrings. When trying to minimize risk, going with applicants you’ve known for years simply makes more sense than starting fresh with a stranger.

Some banks provide targeted offers

Another way having a previous banking relationship with an issuer can help is when you can receive targeted credit card offers. These are sort of like invitations to apply for a card that the bank thinks will be a good fit for you. While approval for targeted offers is still not guaranteed, some types of targeted offers can be almost as good.

For example, the only confirmed way to get around Chase’s 5/24 rule (which is that any card application will be automatically denied if you’ve opened five or more cards in the last 24 months) is to receive a special “just for you” offer through your online Chase account. When these offers show up — they’re marked with a special black star — they will generally lead to an approval, no matter what your current 5/24 status.

Credit unions require membership

For the most part, you aren’t usually required to have a bank account with a particular issuer to get a credit card with that bank. However, there is one big exception: credit unions. Due to the different structure of a credit union vs. a bank, credit unions only offer their products to current members of the credit union.

To become a member, you need to actually have a stake in that credit union. In most cases, this is done by opening a savings account and maintaining a small balance — $5 is a common minimum.

You can only apply for a credit union credit card once you’ve joined, so a bank account is an actual requirement in this case. That said, your chances of being approved once you’re a member aren’t necessarily impacted by how much money you have in the account.

In general, while having a bank account with an issuer may be helpful in some cases, it’s not a cure-all for bad credit. Your credit history will always have more impact than your banking history when it comes to getting approved for a credit card.

For more information on bad credit, check out our guide to learn how to rebuild your credit.

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