Finance news. My opinion.

From the moment queues started to form outside branches of Northern Rock in the middle of September, the stock market has been asking questions about the other second-line mortgage banks Alliance & Leicester and Bradford & Bingley.

Now by magnificent coincidence they have shed some light on their affairs on the same day. The good news for savers is that both banks have managed to secure their sources of funding well into next year without having to rely on the Bank of England.

A&L has organised more than £10bn of funding with the assistance of Credit Suisse, which has taken a chunk of its mortgage book as collateral.

B&B revealed last week it had secured £4.2bn of extra funding, through pre-planned asset sales, and has covered its wholesale funding requirements well into 2008.

This is all just as well. A&L has disclosed that it is having to take a charge of £55m against investments in America’s ailing sub-prime mortgages. It is also concerned about the true value of complex debt instruments and is writing these down by a further £110m.

With so much uncertainty still surrounding slice and diced packages of debt known as ‘ collateralised debt obligations’, we cannot be sure this is the end of the story.

As of writing leading audit firms are still struggling to come up with a common policy for dealing with on and off-balance sheet debts in the approaching reporting season.

As big a challenge for free standing mortgage lenders like A&L and B&B in 2008 is the state of the housing market. The latest data from the Nationwide suggests that prices are in reverse, falling 0.8% in October, the first monthly drop since February 2006 and the biggest monthly fall for a decade.

The house price indexes from Hometrack, Rightmove, RICS and the Halifax are all pointing southwards. So far, despite reports of foolish lending during the boom years, defaults look to be modest.

The Council of Mortgage Lenders doesn’t think this will last and is predicting a 50% rise in defaults next year. All of those who lived through previous bust cycles will recognise how rapidly the mood can change and the impact that could have on future profits.

It may be that some high street banks might see the opportunity for what RBS’s Sir Fred Goodwin once described as ‘mercy killings’. That may be the only realistic hope for any sustained share price recovery.

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I found some interesting fresh article about payday loan industry in Canada.

The price tag for a payday loan in Nova Scotia should be $20 to $23 for every $100 borrowed, says the industry association representing about 40 per cent of payday lenders in Canada.

Consumers should also have to pay between 77 cents and $1 on every $100 borrowed to cover new provincial regulatory and licensing costs faced by payday lenders, according to the Canadian Payday Loan Association.

The group is one of several interveners at upcoming Nova Scotia Utility and Review Board hearings that will determine maximum rates that payday loan companies can charge for short-term loans up to $1,500.

The Cash Store and Assistive Financial Corp., subsidiaries of publicly traded Rentcash; Dalhousie Legal Aid Service, Money Pro$ Inc., and Service Nova Scotia and Municipal Relations are also listed with the board as formal interveners.

The public hearings, to start Jan. 21, stem from recent changes to Nova Scotia’s Consumer Protection Act to regulate the payday loan industry. The loan association is recommending the same borrowing rate in Manitoba. Hearings before Manitoba’s Public Utilities Board are underway to establish rates in that province.

The association’s position on rates is a change from earlier this year when it publicly recommended that payday loan outlets not be allowed to charge consumers more than $20 on each $100 borrowed. Since then, the association says it has commissioned more up-to-date studies on the cost of providing loans.

The earlier recommendation did not reflect “regulatory costs or anticipated increases in the cost of providing the service over time,” the association says in evidence filed recently with the Nova Scotia board.

A study by Lawrence Gould, a finance professor at the University of Manitoba, says the cost of providing payday loans ranges from $17 to $23 per $100 (excluding new regulatory costs), depending on the size of the loan company.

The association, which commissioned the Gould study, has filed it as evidence with the review board. Setting a lower rate would drive some smaller companies out of business, Mr. Gould says in the November study.

“Setting the maximum fee for payday loans at $23 would allow smaller companies to operate in Nova Scotia and to allow the entry of new companies,” the study says.

Money Mart and Rentcash, two larger payday loan companies and the only ones for which financial information is available, are not making excessive profits, Mr. Gould says in his report.

“It is apparent that the growth in Money Mart loan volumes has been modest in recent years and its profitability has not been excessive. The analysis of Rentcash shows that the loan volume and profits have been decreasing. In summary, there is no indication that the large payday loan companies are making excessive profits.”

Rentcash has not yet proposed a rate in its filings with the Nova Scotia board.

However, it has submitted a preliminary proposal to the Manitoba board for a rate in that province of $37.50 per $100 borrowed, plus optional card costs, documents show.

In evidence filed with the Nova Scotia board, Rentcash argues that competition among payday lenders is working to keep consumer fees in check.

“There does not seem to be a need for heavy-handed intervention across the board. Instead, it would be better to aim just at fees beyond the normal range.”

The Consumers’ Association of Canada unsuccessfully lobbied against recent changes to federal law that now allow the provinces to regulate payday loans. The changes mean it is no longer a criminal offence for payday loan companies to charge more than 60 per cent annual interest in provinces that have regulations governing the industry.

“We are watching what is happening,” said association spokesman Bruce Cran.

“We would have been far better served if they had left the thing alone and dealt with it as they should under the existing federal laws,” Mr. Cran said from Ottawa.

“What everyone should remember is not one single consumer asked for these changes. It was the industry.”

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