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Tilting at Windmills

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September 4, 2007
By: Kevin Drum

CREDIT WHERE IT'S DUE....This is sweet, isn't it?

As subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.

Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent.

Well, why not? One of the things that constrains card issuers from preying too aggressively on poor credit risks is the knowledge that their victims might go bankrupt and not pay their bills. Banks have very sophisticated models for this kind of thing, and calculating their likely losses makes them think twice about just how hard they pitch their wares to the bottom of the market.

So what happens when you reduce their exposure to bad credit risks by passing a bill that makes it all but impossible for people to declare bankruptcy and stop paying their credit card bills? The answer is obvious: banks start pitching their cards even more aggressively to consumers who are even worse credit risks. This was an easily predictable consequence of tilting the playing field in favor of credit card issuers by passing the egregious 2005 bankruptcy bill, and it's exactly what's happened. Thanks, Congress.

UPDATE: Via Megan McArdle, Yves Smith offers up another potent possibility: that the subprime lending bubble was partly caused by the bankruptcy bill in the first place. After the bill passed, consumers who were desperate to avoid the new, more onerous bankruptcy provisions ended up increasing their use of subprime cash-out refis to keep themselve afloat:

Lew Ranieri, the so-called father of mortgage backed securities, has stated that the overheated phase of subprime lending started at the end of the third quarter of 2005 and extended through most of 2006. When did the new bankruptcy law take effect? October 24, 2005. There is no ready way to prove a connection between the new law and the explosion phase of subprime growth, but consumers became much more cautious in taking on credit card debt after the law became effective. And the ones that had above median incomes which would force them into a Chapter 13 (meaning they'd have to repay their debts) might be even more eager to tap home equity if they saw themselves at risk.

I don't know how likely this explanation is, but it certainly has a lovely circular viciousness to it. Credit card companies lobby Congress to pass a bank-friendly bankruptcy bill. Consumers in financial trouble respond by avoiding extra card debt and instead tapping the subprime lending market. When that turns sour, credit card companies turn around and offer yet more card debt to desperate subprime borrowers, secure in the knowledge that their shiny new bill protects them from default. It's almost too beautiful a theory to not be true.

Kevin Drum 1:22 PM Permalink | Trackbacks | Comments (51)

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Comments

and reading around, there's considerable commentary that credit card exposure is the next huge financial bomb just waiting to hit after this mortgage blowout.

the u.s. economy is built on nothing but cheap credit and all those bills are coming due...

Posted by: linda on September 4, 2007 at 1:31 PM | PERMALINK

One does wonder whether the models factor in the "can't get blood from a stone" phenomenon, which eventually for some folks has to kick in.

I just finished reading A Demon of Our Own Design, about hedge funds and models. The book has a fairly grim outlook on what could happen to the markets.

Posted by: RickG on September 4, 2007 at 1:33 PM | PERMALINK

The market works!

Sing it, Al!

Posted by: Gore/Edwards 08 on September 4, 2007 at 1:33 PM | PERMALINK

the u.s. economy is built on nothing but cheap credit and all those bills are coming due...

Indeed it is, and the Mother of All Bills, the Iraq War, will be the third wave.

Posted by: pblsh on September 4, 2007 at 1:36 PM | PERMALINK

Well, it clearly is about time for the Chairman of the Federal Reserve to say, as clearly as possible given the requirements of Delphi, that people should begin signing up for these credit cards with all due speed.

It then will be necessary for him to say that the Fed stands ready to assist any lenders who might face sudden liquidity shortages as a result of any default on those credit cards.

It's really the only way to keep the system sound, you see.

Posted by: bleh on September 4, 2007 at 1:43 PM | PERMALINK

One of the things that constrains card issuers from preying too aggressively on poor credit risks is the knowledge that their victims might go bankrupt and not pay their bills.

This is very misleading Kevin. Almost all "victims" can pay their bills. For example, almost all of them have cars, houses, refrigerators, dishwashers, etc. If the victims say they can't pay, the courts should force them to sell these things so that they can pay the creditors the money they owe. And all this without the need of declaring bankruptcy. Pretty simple if you really think about it.

Posted by: Al on September 4, 2007 at 1:45 PM | PERMALINK

Don't forget debtors prison, Al. Bring back that fine tradition. Make it a punishable offense to be poor! Especially those deadbeats who are ill or infirm. Feh! They don't contribute, so warehouse 'em and give 'em a bowl of gruel once a day and wait for them to die!

Posted by: Blue Girl, Red State (aka G.C.) on September 4, 2007 at 1:49 PM | PERMALINK

But according to Megan McArdle, consumers themselves actually throttled way back on credit-card debt after the new bankruptcy laws were passed, responding rationally to the risk of having to spend the rest of their lives paying off their credit card bills. So while banks may have pushing the cards harder, apparently consumers weren't taking them. In fact, perhaps the increase in offers was a response to the decrease in takers?

On the other hand, I still find it hard to believe that the kinds of people who accumulate lots of credit card debt are the kinds of people who would respond carefully and rationally to a change in the bankruptcy law, so I'm not sure I buy what McArdle is saying.

Posted by: brooksfoe on September 4, 2007 at 1:53 PM | PERMALINK

I am helping three recent immigrants who have found, within two months of their coming here, some odd jobs. I was shocked to find out that a national bank where they opened their accounts with a few hundred dollars each has immediately given them credit cards, and they have been promised loans of at least $10K each to buy old cars. I see that and go what lending problem?

Posted by: gregor on September 4, 2007 at 2:02 PM | PERMALINK

AL sez:

"...almost all of them have cars, houses, refrigerators, dishwashers, etc. If the victims say they can't pay, the courts should force them to sell these things so that they can pay the creditors the money they owe."

You got it, Al-onator. The right to declare bankruptcy (set forth in our Constitution) is bad, bad BAD.

When somebody falls behind in their high-interest predatory credit card installments to CitiBank or Capitol One, let's have a public sheriff's sale of their "refrigerators, dishwashers, etc." right on their front lawns in front of their neighbors and children.

That'll teach 'em. And the pittance we get from selling those refrigerators in a distress sale will go directly to the financial services industry. Boo hoo if the customer lacks the basics for living or for getting to work afterwards.

As usual, the Al-ster parrots the mindless and fact-free talking points of the right wing and their corporate sponsors.

Most U.S. bankruptcies result from family catastrophes like divorce or costs from serious illness not covered by health insurance. But the financial services industry doesn't want us to do anything to change that (health care) either, does it?

Public policy decision-making in this otherwise terrific country has been corrupted by the corrosive influence of corporate money and lobbying. Until that changes, little progress will be seen.

Posted by: shystr on September 4, 2007 at 2:02 PM | PERMALINK

"Most U.S. bankruptcies result from family catastrophes like divorce or costs from serious illness not covered by health insurance. But the financial services industry doesn't want us to do anything to change that (health care) either, does it?"

Is this actually true? Do you have real numbers?
And so you have numbers disambiguating the ultimate cause from what happened before? After all, if you take out a loan to buy a fancy new car, so you are not in a position to save money, things will go fine until an unexpected expense.
That doesn't change the fact that you were an idiot to buy more car than you could afford (where, by afford, I mean, be in a position to save enough money to cover unexpected expenses).

I mean, christ. To be 21 and have no savings is one thing. To be 30+ and have no savings is something for which there's really no excuse.
I am sympathetic to the issues of health, but I suspect that, in my explanatory framework, they form a small fraction of the problem cases.

Posted by: Maynard Handley on September 4, 2007 at 2:14 PM | PERMALINK

Almost all "victims" can pay their bills. For example, almost all of them have cars, houses, refrigerators, dishwashers, etc.
Kidneys. Blood. Other bodily fluids. Hair. Labor. Children. Immortal soul. etc.

Posted by: Bill Arnold on September 4, 2007 at 2:16 PM | PERMALINK

As a bankruptcy lawyer, I find the connection with the 2005 bankruptcy law very dubious. There are many reasons, but two leap to the forefront. First, the changes were mostly technical ones designed to make bankruptcy more complicated and expensive; the substantive changes weren't actually that significant. Second, very few consumers understand their bankruptcy options, before or after the amendments, well enough to base other decisions on them, even if theoretically it might make sense to do so, which also is not clear in this case.

Posted by: Ken D. on September 4, 2007 at 2:16 PM | PERMALINK

In the marrow of my bones I loathe the greedy rich.

Posted by: felonius on September 4, 2007 at 2:20 PM | PERMALINK

Just a quick note on the characterization of the new bankrupcy guidelines:
Kevin writes "So what happens when you reduce their exposure to bad credit risks by passing a bill that makes it all but impossible for people to declare bankruptcy and stop paying their credit card bills?"

I wish I had more than anecdotes to support this, but I did want to chime in that it is not at all 'all but impossible' to declare bankruptcy these days.

Earlier this year I filed for a Chapter 7 bankruptcy. The paperwork would have been onerous, sure, and no doubt was worse than before the Bankruptcy law. But the total cost was much less than one month of 'minimum payments' on my credit cards:
1. Financial counselling [I believe this is a new requirement] - free if you meet the standards.
2. Counsel to prepare the forms - I decided not to use a lawyer, opting instead for the cheaper financial advisor. He cost $250. I believe lawyers would have come in at $500-$1000. For many with more complex finances, a lawyer is probably advisable, but for simple help completing the forms, the cheaper option is great.
3. Court Filing fees: $300, payable in installments over something like 6 months.

So, I paid under $600 where my monthly payments were over $1000.

I represented myself in the hearing -- no credit card reps bothered to appear, and the meeting with the judge took under 5 minutes to complete.

There were glitches, and a little tom-foolery by one of the credit card issuers, but overall it went more smoothly than I could have imagined.

And in the end, I've had $60K of debt removed and have lived now for 6+ months w/o debt.

Again, I'm sure the new law made things more difficult,but I believe it serves both sides interests to act as if bankruptcy were now impossible -- if others knew how manageable this option were, I think more deserving folks would avail themselves of this gracious option. The result in macro terms would eventually be that credit card issuers would revise their estimates of the riskiness of offering credit to all and would tighten their supply of credit. Over the long term, we'd have a society with lower debt.

Anyway, that's my 2 cents from the front lines,

Anon

Posted by: anon on September 4, 2007 at 2:23 PM | PERMALINK

And yet democrats plan to nominate Hillary Clinton, the primary mover of the Bankruptcy bill as their nominee.

Do you really think that the Republican nominee, who isn't likely to have been in the senate when this bill was passed, won't make use of that fact with dazzling success come 2008?

Posted by: soullite on September 4, 2007 at 2:25 PM | PERMALINK

Assuming for the moment that Al is a real person (I have my doubts; he seems so inhuman), I really hope that someday he finds himself backed into a financial corner with no resources, forced to sell his car and refrigerator to help pay his bills. It would be poetic justice.

Ye gods. What a despicable creature.

Posted by: Disgusted on September 4, 2007 at 2:35 PM | PERMALINK

The increase in the number of CC solicitation offers undercuts Mr. Smith's argument.

And personally, I doubt that most consumers were aware of the bankruptcy law changes.

Posted by: mcdruid on September 4, 2007 at 2:37 PM | PERMALINK

This is very misleading Kevin. Almost all "victims" can pay their bills. For example, almost all of them have cars, houses, refrigerators, dishwashers, etc. If the victims say they can't pay, the courts should force them to sell these things so that they can pay the creditors the money they owe. And all this without the need of declaring bankruptcy. Pretty simple if you really think about it.

The whole point of bankruptcy is that, while it does cost a sum to society to absolve someone of their debts, it costs far less than it would to have them mindlessly shackled to those they owe money to in perpetuity.

Viewed in this context, your idea that people should sell their refrigerators (how will they eat?) and cars (how will they get to work?) is nothing short of completely fucking insane.

Of course, shackling people to those they owe money to forever is a feature, not a bug, for you and your deranged ilk.

Posted by: Joshua on September 4, 2007 at 2:37 PM | PERMALINK

*..very few consumers understand their bankruptcy options..* Ken D., bankruptcy lawyer

But there are plenty of bankruptcy specialists who DO understand, and agressively market their services to this same demographic.

Posted by: wishIwuz2 on September 4, 2007 at 2:39 PM | PERMALINK

So, Kevin, what's the Democratic, "non-market" solution to this?

Pass liberal bankruptcy laws and multiple bailouts to allow people to continue unsustainable credit habits into perpetuity?

Posted by: harry on September 4, 2007 at 2:40 PM | PERMALINK

Isn't this the bankruptcy bill that Hillary Clinton, at the urging of her Wall Street contributors, supported? Why doesn't anyone call her on this when she yammers about fighting for change?

Posted by: Conran on September 4, 2007 at 2:42 PM | PERMALINK

The Democratic solution I've heard stated is to tame the credit industry's predatory tactics against the vulnerable.

Posted by: wishIwuz2 on September 4, 2007 at 2:43 PM | PERMALINK

I would counsel everyone with an upside down mortgage to default now. The only way to prevent the complete indenturing of the American working class is to bring down the finance industry as soon as possible. The finance industry wants to impoverish its clients for life. The clients of the finance industry should put lenders out of business first.

Posted by: Brojo on September 4, 2007 at 2:59 PM | PERMALINK

I have worked on and around Capitol Hill for nearly 20 years, and the bankruptcy bill was the single sleaziest thing I ever saw. I can't even think of a close second.

Posted by: Pat on September 4, 2007 at 3:02 PM | PERMALINK

"Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006."

What was the change in the number of overall subprime customers during this same time? If that number jumped drastically, a random mailing to all mortage customers would create the same result without specific targeting.

Posted by: harry on September 4, 2007 at 3:02 PM | PERMALINK

Oh, yeah. I forgot to add: Brojo is a douche.

Posted by: Pat on September 4, 2007 at 3:03 PM | PERMALINK

harry >"...what's the Democratic, "non-market" solution to this?..."

Well asswipe, the rational solution is to have a monetary system w/o externalities (look it up if you can use a dictionary) so that markets can actually work irrespective of which clique of frat rats (political parties in common speak) holds power. But then a functional fair market isn`t in their interests now is it ?

Your check from the fascists clear yet this month ?

"Enlighten the people generally, and tyranny and oppressions of body and mind will vanish like evil spirits at the dawn of day." - Thomas Jefferson

Posted by: daCasacadian on September 4, 2007 at 3:07 PM | PERMALINK

Ranieri is "the father of the mortgage business" if you mean that Lewie sold mortgage securities to S&Ls which helped create the S&L crisis. See Liar's Poker. Quite a respectable guy, now.

Posted by: TJM on September 4, 2007 at 3:08 PM | PERMALINK

To be 30+ and have no savings is something for which there's really no excuse.

If you entered law school when you were 26, you had no savings when you were 31. Do the math.

Let alone people who went to college on student loans and got jobs that pay considerably less than what lawyers make. Jerk.

Posted by: brooksfoe on September 4, 2007 at 3:17 PM | PERMALINK

So the CC holds no responsability for issuing cards to people they know will default.And did you know that if you pay your phone bill late as in later then normal but still in before due date the credit card banks will up your intrest rate even if you have been paying them on time.

Posted by: john john on September 4, 2007 at 3:21 PM | PERMALINK

And alot of people just don't understand money.My home loan is for 218,000 dollars at 5.3% when 30 years have gone buy and my home is paid for i will have paid 50% on that loan for a whopping 555,000 dollars.kinda sucks but what can you do, Live in a tent the rest of my life.

Posted by: john john on September 4, 2007 at 3:25 PM | PERMALINK

My home loan is for 218,000 dollars at 5.3% when 30 years have gone buy and my home is paid for i will have paid 50% on that loan for a whopping 555,000 dollars.kinda sucks but what can you do, Live in a tent the rest of my life.

This has been true of home loans for generations, now. You just find this out?

If that's a fixed interest rate, I wish I had your problems.

Posted by: harry on September 4, 2007 at 3:29 PM | PERMALINK

I don't follow the logic. Just because someone is prevented from filing bankruptcy doesn't mean they can pay their bills. They can and will still default. If they are really insovlvent, all the laws in the world won't give them the money to pay their debts. Unless there was massive amounts of debt relief for people who could have eventually paid their debts under the old bankruptcy laws, I don't see how it makes more sense to extend credit to these subprime customers now more than before.

Posted by: jussumbody on September 4, 2007 at 3:30 PM | PERMALINK

Maynard Handley asked if it's true that most bankruptcies result from divorce and uninsured medical costs.

Look for yourself. This study looks only at medical debt (not divorce) and says medical costs are a significant player in 54.5% of consumer bankruptcies:
http://content.healthaffairs.org/cgi/content/abstract/25/2/w84

This conservative think tank study (from the American Enterprise Institute) tweaks the data differently, saying medical costs are a player in "only" 27% to 36% of Chapt. 7 bankruptcies:
www.aei.org/docLib/20060719_MedicalBillsAndBankruptcy.pdf

This source says medical costs are a "leading cause" of consumer bankruptcies, pointing to the fact that there are 40 or 50 million Americans without health insurance. Well, duh. I guess that can lead to some accumulated medical debt, hmmm?:

"Medical debt, in fact, is one of the three leading causes of personal bankruptcy, according to the Consumer Bankruptcy Project.

Rising health care costs in the United States impact everyone. According to the U.S. Census Bureau, more than 45 million Americans are currently uninsured. And that's not only those living below the poverty line."
http://www.cccsstl.org/lifeandcredit/healthcareCosts.asp

Do you think these sources are wrong, Maynard?

Posted by: shystr on September 4, 2007 at 3:43 PM | PERMALINK

Kevin:a bill that makes it all but impossible for people to declare bankruptcy and stop paying their credit card bills?

According to the Fed. Judiciary: Filings for the 3-month period of January 1, 2007-March 31, 2007 were the highest of any quarter in the 12-month period ending March 31, 2007, totaling 193,641. This was a 66 percent increase when compared to the 116,771 filings in the 3-month period ending March 31, 2006. In addition, filings in the 12-month period ending March 2007 were higher compared to calendar year 2006 filings that totaled 617,660. All but impossible?

The stats show that bankruptcy filings surged at the passage of the new law, to get the old treatment, but since then, filings have returned to the flight path, albeit at lower levels.

One part of the new law is interesting (in the same sense that doctors use the word impressive when describing that lump you have), you must have 180 days of credit counseling (anon left that out of his/her story?) to qualify. If the foreclosure process began and that caused you to get counseling, being in counseling does not stop foreclosure. Banks, however, lose money in foreclosures and aren't all that eager to take the house.

Posted by: TJM on September 4, 2007 at 3:55 PM | PERMALINK

Almost all "victims" can pay their bills. For example, almost all of them have cars, houses, refrigerators, dishwashers, etc. If the victims say they can't pay, the courts should force them to sell these things so that they can pay the creditors the money they owe. And all this without the need of declaring bankruptcy. Pretty simple if you really think about it.
-Al

Al, baby, how do you think creditors can use the courts to force the liquidation of someone's assets? They would have to force the debtor into ... BANKRUPTCY. It is not something the debtor has to file for, if there are enough creditors. If that was a solution, how come the CC companies haven't become the biggest flea markets in the world? Besides a house, a car, and maybe jewelry, there is not much the credit card companies or anybody else would be remotely interested in recovering from CC debtors. Most of the stuff people own is just crap to anyone else.

I'm with Harry. I know the CC companies know our credit scores, but I doubt they are looking for people with bad credit. I think they are looking for homeowners, and I think that the amount of mortgage debt and refi debt that Americans have taken on has moved a lot more people from the prime column to the subprime column.

Posted by: jussumbody on September 4, 2007 at 3:57 PM | PERMALINK

Hello, Joe Biden, D-MBNA. When you look in the mirror each morning before hitting the campaign trail, I know you continue to try to burnish your hypocritical image.

As for Hillary, if she gets the nomination, that will sew up my Green vote.

Al aside, and mutilated bankruptcy laws aside, there is a legitimate issue of personal responsibility here, though, just as with subprime mortgages. If you can't understand the fine print, either get help, or don't take out the credit card, let alone the mortgage.

Besides that, there is no constitutional right to own a home.

Besides that, most of the home equity arguments are bullshit.

Posted by: SocraticGadfly on September 4, 2007 at 3:59 PM | PERMALINK

TJM Writes:
>One part of the new law is interesting (in the same sense that
>doctors use the word impressive when describing that lump
>you have), you must have 180 days of credit counseling (anon
>left that out of his/her story?) to qualify. If the foreclosure
>process began and that caused you to get counseling, being in
>counseling does not stop foreclosure. Banks, however, lose
>money in foreclosures and aren't all that eager to take the >house

Just a note of followup to say that while a credit counselling session is required, it is not at all a 180 day credit counselling program.

I had to attend one free meeting that lasted just about 1 hour.

Then, after all the filing and court meetings, I was required to go through one other session -- completed on-line and taking maybe 3 hours. This was also free.

It is definitely true that until you've taken that first session and filed the paperwork, debt continues to accumulate. A few weeks after filing, and before the court hearing, a stop letter is sent out to all creditors freezing everything in place and prohibiting them from any action to collect until the court has ruled.

The only thing I recall being related to 180 days was talk of how they now looked more carefully at your debt accumulation for the past 180 days to ensure you didn't excessively load up your credit cards right before filing.

On another front - as for seizures of property, there are some major exceptions to what might be seized. Sure, if you have lots of assets, those might be up for grabs. But my 5 yr old car and other apartment furnishings/books/cds were not in danger of being on the table, as far as I could tell. Realistically, how much would they be worth anyway?

Again, only my own anecdote, but not nearly as onerous as a '180 credit counselling' program sounds.

anon

Posted by: anon on September 4, 2007 at 4:40 PM | PERMALINK

there is a legitimate issue of personal responsibility

And there is the legitimate issue of recognizing bad investments have been made. I was listening to the Sec. of the Treasury late last week talking about the subprime issues. What bothered me is that when a business knows it has made a poor investment, it stops putting money into it and writes it off. Secretary Rubin knows that and has probably pulled the plug on bad investments during his career. Those who bought mortgages in 2005 have made very bad investments, and the best financial choice they can make is to abandon those investments.

The political economy has been gamed so that borrowers who abandon mortgage investments will have to pay a high opportunity cost in bad credit scores that will harm their future ability to consume. I think the political economy should be gamed the other way, so that mortgage buyers can default on loans without credit score penalties. That will not happen with the current political situation, as there is no political party or power concerned with the welfare of the majority of consumers. Still, one wonders which has the highest cost, a bad credit score or paying off a $300,000 mortgage that is now only worth $210,000.

Posted by: Brojo on September 4, 2007 at 4:48 PM | PERMALINK

jussumbody >"...I don't see how it makes more sense to extend credit to these subprime customers now more than before."

Keeps the "music" playing as in musical chairs which is what the current financial system is like ("...money makes the world go around..."). There are no "chairs" available (leverage on top of leverage on top of leverage etc) should the "music" stop so everyone wants to keep the "music" going.

It is the "not on my watch" syndrome applied in the financial sector.

Get it ?

"...economics runs around trying to figure out how people rationalized what they just did." - Stirling Newberry

Posted by: daCasacadian on September 4, 2007 at 5:50 PM | PERMALINK

IIRC, people just getting out of bankruptcy are among the most beseiged with credit card offers. Thanx to the new bankruptcy bill, subsequent bankruptcies are harder to declare than ever. If you've just escaped from drowing, keep treading water and they'll throw you an anchor.

there is a legitimate issue of personal responsibility

True dat.

When a lender solicits business from someone with no income and no assets, that lender is an idiot and the issue is between the rep who approved the credit, his/her CFO, and the shareholders.

This "personal" blade swings both ways, no?

Posted by: ThresherK on September 4, 2007 at 6:23 PM | PERMALINK

Why shouldn't the rule caveat emptor apply to the multi-billion-dollar corporations that purchase future income streams from individuals?

Posted by: cmdicely on September 4, 2007 at 6:47 PM | PERMALINK

The bankruptcy bill might have goosed the cash-out refis to some extent, but the real source of the problem was lowering interest rates way too much in the first place after 9/11 resulting in the credit glut coupled with the added silicone of financial deregulation. There seems to me to be a direct relationship between interest rate and the value of investment, but I'm not sure what that is (anybody got any links or ideas about that?). Basically, if money is too easy to obtain, more of it will get used for frivolous, speculative and unproductive pursuits that pay the society less down the road.

I'm concerned about this "reverse cascade" effect of running up credit card debt and then rolling that debt into other debt, etc. A package of candy bars that you put on a credit card that winds up in a 30-year mortgage can't be good for any of us can it? I was always taught that you never finance something beyond its useful life...

Well, I've got an anecdotal story about someone I know who is a divorced mid-boomer in her late 50's who just lost her job. She was generally bad with credit cards, but not killer during the '90s, racking up about $12K in total CC debt. Then she needed to fix up her roof and her siding, etc., and when rates were low a couple of years ago she went for one of those "a little higher interest rate" cash-out refis. Not ALL of her equity got cashed out (but MOST), enough to pay off that $12K credit card bill and get a new roof and siding. Now she's got the CC bills racked back up to $8K and she just lost her job. NOW, she is looking at cashing out about a quarter of her 401(k) to pay off the $8K CC bills and buy a decent used car to replace the beater she drives. IF she doesn't find a decent-paying job SOON (and the prospects don't look too good), she'll lose her house and it won't be worth what she owes on it if the housing market keeps dropping...

People we are running on empty.

Posted by: Doc at the Radar Station on September 4, 2007 at 7:01 PM | PERMALINK

Kevin,

I would say that indeed there is a connection between the subprime lending and the bankruptcy bill but for different reasons. Basically people got these loans because, especially here in So Cal, that was one of the few ways the average person could get a home. The banks on the other hand were willing to do these loans because the new bankruptcy bill would make it harder for people to avoid paying their debt, including loans.

The banks knew damn well what they were doing. However they were very shortsighted and saw money signs rather than seeing where things would be down the road.

It was predatory, pure and simple.

Posted by: dreggas on September 4, 2007 at 7:16 PM | PERMALINK

Lew Ranieri - didn't know he was still around. He was great in Liar's Poker.

Posted by: orion on September 4, 2007 at 7:52 PM | PERMALINK

al,

"This is very misleading Kevin. Almost all "victims" can pay their bills. For example, almost all of them have cars, houses, refrigerators, dishwashers, etc. If the victims say they can't pay, the courts should force them to sell these things so that they can pay the creditors the money they owe. And all this without the need of declaring bankruptcy. Pretty simple if you really think about it."

This is true. Milton Friedman proved that it is impossible for an individual's debts to ever exceed his assets. That means that when you are extending credit, as in the case of sub-prime lending, there is no need to check out the borrower's financial situation.

Posted by: bobo the chimp on September 4, 2007 at 7:57 PM | PERMALINK

Well, since the US government is now a wholly-owned subsidiary of Big Capitalism, what do we expect?

Posted by: craigie on September 4, 2007 at 8:33 PM | PERMALINK

Anon: While your story is most likely a red herring, with a slow evening at home, consider me hooked. A five year old car? The agony! You and your $60k of credit card debt are a perfect example of why these laws need to be changed, and even potentially tightened further. With universal health care we could eliminate the contribution of health care bills to the bankruptcy queue and you "Ant and the Grasshopper" folks can pay the piper. Predatory practices or not, you only owe what you spent. I lived for 5 years (2001 to 2006) on $18k per year putting myself through grad school (~$9 per hour) and never once had a single interest payment on my credit cards. My single mother earning $40k put 3 white sons through college (2 private, 1 public) without a second mortgage. Earn frugally, live frugally. It can be done, and without misery or privation.

This is the disease that afflicts America today. Escalade now, consequences never. Square footage equals happiness. War is peace. Someone else's blood for oil. I want my MTV.

Oh, and stay off my lawn.

-666

Posted by: horehound666 on September 4, 2007 at 11:12 PM | PERMALINK

Several people have commented that 'the banks lose money on foreclosures' (or words to that effect), and so they cannot possibly be deliberately trying to target bad risks.

I think we forget that the banks are not the ones holding the paper. You may get your mortgage from a bank, but that bank has sold the debt on to some hedge fund. I wonder about one thing: Are these hedge funds gearing up to foreclose on property en masse...If you turned forclosure into the object of the game, you could very rapidly end up owning most of the best real estate in north america. Foreclosure is unprofitable chiefly because it's an inefficent and painful process, but if you geared up and streamlined yourself into an organ for selecting and foreclosing on real estate, you could make a killing quite rapidly.

Posted by: charles parr on September 4, 2007 at 11:24 PM | PERMALINK

The law went into effect on October 17, 2005 not October 24, 2005.

Of course people understand something of their rights to file Bankruptcy.

Business sky rocketed for Bankruptcy attorneys in the months leading up to October 16, 2007. I filed almost ten bankruptcies in the week before October 17th. My average was 1 or 2 a month before the changes. The attorneys who specialized in bankruptcy did many, many more.

After the change in the law, I had maybe three inquiries until summer of 2006. My friends who did nothing but bankruptcies were letting staff go and talking about changing into another area of law. I was never more grateful for my general practice.

Now the word has gone out that the changes were just more onerous paperwork and silly requirements, and most people could still file bankruptcy. People are coming back and bankruptcies are on the rise.

Word of mouth takes a while to get out, but it always does. If you think you can't file bankruptcy, it doesn't take a rocket scientist to look elsewhere for a loan. A low (relatively) interest rate equity loan on your home will seem like a good idea until you and your babies are on the street after you lose your house.

I'm rambling. I'll stop after one last point. The law requires that you take your debt counseling within 180 days of filing bankruptcy. Debt counseling usually costs from $35 to $50, but most companies have low earner fee waivers.

Another thing...... Ok. I'm done.

Posted by: Scott on September 5, 2007 at 12:56 AM | PERMALINK




 

 

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