American Culture

Legacy of the bankruptcy bill: More foreclosures, financial meltdowns, and open corruption

By Martin Bosworth

One of my first big battles as a consumer advocate was campaigning against the 2005 bankruptcy bill overhaul, which sadly passed despite all our best efforts. Looking back, I still can’t believe that Congress so willingly supported such a horrific bill that penalizes consumers and condemns them to indentured financial servitude simply for having bad luck. Was it really worth it to ensure that credit card companies would be able to extract their pounds of flesh from debtors for years to come?

Well, karma is a bitch, and it seems that one of the net effects of the bill is that cash-strapped homeowners, who formerly would have let their credit card debt go into collection in order to preserve their mortgages, are now doing the reverse–letting their homes go into foreclosure in order to focus on paying credit card debt.

The mainstream media is picking up on what bankruptcy experts and consumer advocates knew would happen–that maxed-out families simply don’t have the means to pay off massive plastic debt and pay off ballooning “adjustable” mortgage payments. Since one is easier to walk away from than the other, the credit card debt wins (loses?)–and as Bloomberg’s Kathleen Howley notes, lenders are being bitten in the ass either way, since they hold both credit and mortgage debt much of the time:

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

In their overzealous effort to secure more profit for themselves through payments on credit card debt, the financial industry opened itself up to a much bigger problem, and exacerbated our current economic doldrums as a result. Of course they could’ve seen this coming, but chose not to–it was easier to just assume the housing market would stay strong forever, as if no economic collapses had ever occurred before.

What’s even worse is that the House is making progress on realigning bankruptcy law to protect homeowners–and as both Matt Stoller and David Sirota have noted, the effort is being cockblocked by a group of “Bush Dog” Democrats. As one OpenLeft commenter notes, Bush Dog Stephanie Herseth’s home state of South Dakota is ground zero for many credit companies, and we can’t forget that one of the most ardent supporters of the bankruptcy bill was Joe Biden, presidential candidate and senator from Delaware, also home to unregulated interest rates and many of the nastiest lenders around–earning him the sobriquet of D-MBNA, since renamed D-BOA after Bank of America bought MBNA out. Bipartisan corruption for the win!

The foreclosure epidemic isn’t close to being over yet–many more homes with adjustable-rate mortgages will reset in the spring of 2008, and more homeowners will simply walk away rather than try to placate their many masters, thus further contributing to our economy’s crash landing. As that happens, be sure to write love notes to people like Biden, Herseth, Carper, and every Republican who did their part to ensure that debtors couldn’t get out from under their burdens, thus saddling us all with a much bigger yoke as a result.

Thanks a lot, guys.

15 replies »

  1. I agree with you about the government’s dropping the ball on this. The financial industry also let short term gain interfere with long term strategery. With the fee based-commission structure of the mortgage industry, it’s easy to see how underqualified people were pushed to get credit. Mortgage brokers are essentially salesmen, that’s all they are. However, those negative amortization and all sub-prime loans that were foisted on the public were especially bad, in whatever market we’re in.

    I talked to a 23 year old girl the other day that has over $16,000 in plastic debt run up in less than two years. $14,000 of that is at a whopping 39% interest rate. When I asked how she got in this pickle, she said that “We didn’t ask for the cards in the first place.” Talk about avoidance.

    I’ve got to say that consumers should use credit judiciously, and stay away from plastic altogether. If one lives beyond their means, the piper has to be paid eventually.

  2. I worked as a legal assistant for 15 years in a small, but bustling, bankruptcy practice that downsized and cut all of us loose after more than half our practice’s income vanished with the Bankruptcy Reform Act. Clearly, the only “reform” was to enable the psychosis of greedy lenders whose “liar loans” are now catching in the throats of Bear Stearns and the others who bought up all that poisonous debt. Mortgage servicers are also lately revealed to have been pounding delinquent homebuyers with egregious fees for everything they could dream up. The current Washington regime has produced the triumph of everything that is worst about us, and I dread the avalanche that appears to be in the works. My first alarm went off when Ben Stein, months ago, said, “Don’t worry.”

  3. If millions of Americans agreed to simultaneously stop paying unsecured debt, what could the credit card companies do? No way the civil courts could process anything as these companies were forced into large scale loan forgiveness. Stop funding the forces that destroy us and use the money they naively gave away without securing collateral against them.

  4. So this is what “conservatism” is all about? You get rid of regulation, and falsify the claim that regulation gets in the way of true capitialism and depresses the free market…okay, so Reagan comes along and implements the deregulation theory..
    Bush I gets elected as prez he then furthers the implementation of deregulation and solidifies, the “new world order” and chips away at our tort rights, civil rights, and taunts that “socialism” is a bad thing for America. Not to mention his attempt to knock out Saddam, because he had threatened to stop trading oil for American currency.
    Then Billy-O comes in asserting his “manlyness” and caved into the conservative idea that we should end ‘lifetime welfare” and get these welfare mothers into jobs, anywhere and pay them very little income so they can remain dependant on something else other than care from their government.
    And finally, Georgie-O steps up to the podium and just opens the floodgates to all of those who taut their conservative views on how America should be. So we now conserve on supporting our troops in Iraq. We conserve on providing them care when our soldiers return home wounded. We conserve on providing help to child without health insurance. We conserve on helping those who come across finanical hardship. But we don’t conserve on Big Businesses who forge to gain BILLIONS on the poor and middle working class America. I don’t know about anybody else, but personally, I’m getting sick and tired of conservative initiative and the big push on capitalism. WE ALL NEED TO PUSH BACK FOR FAIR AND BALANCE OBJECTIVES FOR THE WORKING CLASS against the greedy capitialists of this WORLD!!

  5. You have to delve a little more into the muck to get a handle on this. Credit Card Lobbyists who wrote the Bankruptcy reform assumed that the equity in the homes would be more than enough to limit losses. Previously you could keep your home in Chapter 7 filings. The lawyers figured that if someone filed a chapter 7 because income was below the state median. The case would adjudicated as a Chapter 7 with assets. The house would be foreclosed and creditors would split the equity when it was sold.

    Wrong.

    If they were over the median AND wage earners. Meaning income wasn’t derived from the ownership of a business, they could keep their homes and live the lifestyle of the poor for 5 years with any excess going to the credit card companies.
    It’ s a well known fact the the majority of Chapter 13s fail and are converted into Chapter 7s. If someone loses a job or a medical emergency arises – hell anything can happen in five years.

    So, as they give up their homes to save the cards, what happens? Eventually they will be in bankruptcy courts anyway. Some will find it advantageous to take jobs that pay less than the median so they can file for a no asset, Chapter 7, wiping out the credit card debt and hope that within a few years they can get their income back up.

    In my opinion, the other shoes hasn’t fallen. Once a foreclosure is on people’s credit records, most banks will raise interest rates on their cards. They will have to pay higher rents as rent is rising as available units fell off the market when the housing boom was going. So their problem is not really solved. The High rent will just replace the mortgage payments. They’ll get net,net,net leases which means they pay everything since it’s a seller’s market and they have lousy credit. Their monthly minimum payments will rise as the foreclosure creates a condition of universal default which all banks, ( except Citibank – if they keep their word) will raise interest rates as high as they can in a feeble attempt to recoup some losses from the mortgage debacle. Meaning someone could easily be facing massive increases in minimum payments

    So the only choice then will be to get rid of the credit card debt. Also keep in mind , many people will just walk away from the debt. Get a good voice mail system or disconnect their landlines and most credit card companies will write it off. If they do get sued and show they have no assets and not enough wages to garnish, nothing will be done or it will force them into bankruptcy.

    That means as credit card debt rises, the banks who fought tooth and nail for this “reform” will end up eating the credit card debt and the mortgages. Credit will tighten up as the banks won’t have money to loan which means the value of homes will continue to fall until ultimately the big and mighty banks will be purchased for a song by small competitors as their capital sinks below the level that the feds are forced to come in and put the bank into receivership.

    Karma on steroids.

  6. Jeff,

    Mark this day on your calendar–I completely agree with you.

    Americans–heck, all credit-using societies–need better financial education to teach them that credit isn’t something that means you get stuff for free. The bill always comes due.

    Mortgage lenders also need to convert from a bonus-based system to a salaried system to subvert the desire to push people into loans just to get commissions. Stricter oversight and transparency is a must. It may be too late to prevent the current financial doldrums, but hopefully we can learn from the mistakes of this cycle to prevent the next one.

  7. DBurn,

    What’s scary is that I can see this scenario playing out completely as you foretell it. Maybe that’ll be the wake-up call the financial industry needs to start playing fair with customers.

    Mark,

    No, he didn’t. Check the record and you’ll see that’s wrong. Obama has done some dumb things, but he’s always been on the right side of this issue.

  8. Martin:

    I will mark this day on my calendar.

    I’ll bet that we probably agree on more things in life than we disagree. Politics isn’t everything:)

    Jeff

  9. Jeff,

    I sincerely hope you’re better at picking stocks than making bets, because you lost that one. 🙂

  10. Martin,

    “Since one is easier to walk away from than the other, the credit card debt wins. . . In their overzealous effort to secure more profit for themselves through payments on credit card debt, the financial industry opened itself up to a much bigger problem. . .”

    I had no idea debtors were choosing to pay off credit cards rather than their houses because the latter isn’t quite as hard to get out from under. Never mind divorce — foreclosure is the new domestic tragedy.

    DBurn,

    “That means as credit card debt rises, the banks who fought tooth and nail for this ‘reform’ will end up eating the credit card debt and the mortgages.”

    Corporations are just as self-destructive as the rest of us.

    Finally, a note of thanks to all S&R commenters. You’ve really taken it up a notch in recent weeks. You’re among the most astute and articulate on the entire Web.

  11. Martin.

    I don’t make bets that I won’t win, and I never say “I’ll bet you”, unless I have at least a 20% edge in a one shot bet. I’d lower my edge to 1% if we were to have a series of bets over the course of time.

    If we could come up with a mutually acceptable way to determine who wins, it would probably have to be a huge questionaire. And it would have to cover the gamut of everything from the arts to the sciences to relationships, to morals; With politics representing just a small sampling, as politics isn’t everything.

    As for picking stocks and commodities, I’m usually right only about 50-56% of the time. However, my trading is good enough, day in and day out, that I make an excellent living. It’s more than enough, that Charlie Wrangel want’s to transfer some of my hard earned money to others in another of his cockeyed tax the rich schemes.

    Jeff