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.