July 2008

The Candidates on Credit Card Issues

Christina Latta Henry |  | 2008 Election, Credit, Current Events

This is the third in a series of weekly posts examining the positions of the major presidential candidates on bankruptcy, debt, and personal finance issues. The first two posts covered bankruptcy and foreclosure issues. This week, let’s take a look at another issue that’s at the front of a lot of consumers’ minds: credit cards.

Barack Obama (Issues Page)

Senator Obama has two major planks that address abusive credit card issuer practices. The first of these is a “Credit Card Bill of Rights,” which would ban unilateral changes, apply interest rate increases to future debt only, prohibit interest on fees, prohibit universal default (a controversial practice in which a lender can change the terms of your debt if you default with a different lender), and require prompt and fair crediting of payments.

Obama also proposes a five-star rating system that would give consumers an easy-to-understand metric of the risk involved in different credit cards. He charges credit card issuers with making their terms too difficult for the average consumer to understand, which makes it difficult or impossible to make an educated, rational decision. Credit card companies would be required to display this rating on all application and contract materials, “enabling consumers to quickly understand all of the major provisions of a credit card without having to rely exclusively on fine print in lengthy documents.”

In a January debate, Senator Hillary Clinton criticized Obama for voting against an amendment to the 2005 bankruptcy bill proposed by Sen. Mark Dayton (D-Minn.) that would have imposed a ceiling of 30 percent on interest rates for credit cards and other consumer debt. “I thought 30 percent potentially was too high of a ceiling,” Obama explained. The amendment failed, and there is still no federally-imposed ceiling on interest rates to this day. Obama did vote against the harshly punitive bankruptcy bill as a whole, as covered here two weeks ago.

Obama talked about credit card issues in his July 8 economic speech in Georgia, starting at about the 12 minute mark:

John McCain

Senator McCain has taken no position on credit card issues during the presidential campaign, and apparently does not intend to. Obama charges that McCain “sides with the credit card companies,” citing his opposition to a 1998 effort to require to require credit card companies to affirmatively determine that borrowers under 21 could handle any debts they might incur before issuing them cards, and to a 2005 bill to require issuers to inform borrowers on their monthly statement that making the minimum payment would increase the interest they’d have to pay and the time it would take to pay their debt off. McCain criticizes Obama for his vote on the Dayton amendment discussed above, but that criticism is more than a little bit disingenuous, because McCain also voted against the amendment.

Then again, considering the $1.37 million debt on the McCain campaign’s American Express card—a card that apparently carries a 17 percent annual percentage rate—maybe a McCain administration would bring some needed perspective to the issue of abusive credit card practices. And then there’s the personal credit card with a 25.99 percent APR…

Coming next week: The Candidates on Predatory Lending

Hot Potato

Christina Latta Henry |  | Credit, Current Events, Foreclosure, Predatory Lending

A few more highlights from the package of articles and features on the debt crisis from Sunday’s New York Times, which I first wrote about on Monday.

“Borrowers and Bankers: A Great Divide” is an analysis of the differences in how the federal government has responded to the financial woes of lenders and investors like Bear Stearns, Fannie Mae, and Freddie Mac (bailouts) vs. those of ordinary borrowers (you’re on your own), and explains some of the reasons behind the discrepancy.

“Work Out Problems with Lenders? Try to Find Them” talks about something I’ve written about in the past: mortgages are sliced and diced into securities and traded among big investors so much that people who want to work out payment terms with their lender are having difficulty even figuring out who they should be contacting. (I would be remiss if I did not point out that a good bankruptcy attorney can help you with this!)

In fact, as Sunday’s front-pager notes, it’s not just mortgage lenders who have been securitizing and trading consumer debt in recent years: credit card issuers have gotten into the act as well. The result has been the creation of a system in which lenders increasingly don’t even care if borrowers will ever be able to pay their debts in full. Securitization allows lenders to see an immediate return on investment (ROI) for issued debt instead of waiting years for the borrowers to pay it off, but it also means that they’re far less concerned with ensuring that borrowers can pay their debts off in full over the long run—as long as borrowers remain current until the lender unloads their promissory note onto someone else, the theory goes, all is well.

The lending industry has become a huge, nationwide game of Hot Potato, which worked well enough in good economic times, but as the economy has faltered we’ve started to see some of the huge problems that exist with a lot of these loans, and the so-called subprime mortgage crisis is looking more and more like it’s just the tip of the proverbial iceberg.

The Candidates on Mortgage and Foreclosure Issues

Christina Latta Henry |  | 2008 Election, Current Events, Foreclosure

This is the second in a series of weekly posts examining the positions of the major presidential candidates on bankruptcy, debt, and personal finance issues. Last week’s post, in cased you missed it, dealt with individual bankruptcy. This week, it’s time to look at where the candidates stand on mortgage and foreclosure issues.

Barack Obama on the Mortgage Crisis (Issues Page)

Sen. Obama’s mortgage plan focuses on increasing the transparency of the lending business and giving borrowers more options for relief from onerous loans.

Sen. Obama proposes to make it easier for borrowers to obtain and understand information about the mortgage products available to them, creating “a simplified, standardized borrower metric (similar to APR)” for home mortgages. A 10 percent universal mortgage credit would apply to homeowners who don’t itemize their deductions; Obama says this would equal an average of $500 a year for 10 million homeowners. Obama would also create a fund to help homeowners escape foreclosure through refinancing, funded in part by penalties on fraudulent lenders.

Obama was an early critic of mortgage fraud and abusive lending practices. With Sen. Richard Durbin (D-Ill.), he sponsored the Stopping Transactions which Operate to Promote Fraud, Risk, and Underdevelopment (STOP FRAUD) Act, which would criminalize mortgage fraud on the federal level and increase funding to federal and state law enforcement to fight it. The STOP FRAUD Act is currently in committee and has not become law. He also proposes allowing bankruptcy courts to modify the mortgage payment of an individual in bankruptcy; Obama calls the current bankruptcy law “outdated” and says that it shields the subprime mortgage industry from the consequences of its “dangerous and sometimes unscrupulous” business practices.

John McCain on the Mortgage Crisis (Issues Page)

Sen. McCain’s main mortgage-related plank calls for a “HOME Plan” that would help distressed homeowners trade in an unmanageable mortgage for a less expensive one with payments they can afford. McCain’s plan would have more restrictive terms than Obama’s: eligibility is limited to “[h]olders of a non-conventional mortgage taken after 2005 who live in their home (primary residence only); can prove creditworthiness at the time of the original loan; are either delinquent, in arrears on payments, facing a reset or otherwise demonstrate that they will be unable to continue to meet their mortgage obligations; and can meet the terms of a new 30-year fixed-rate mortgage on the existing home.” The part about proving creditworthiness is a bit troubling: What happens to people who were duped by predatory lenders into taking on mortgages they couldn’t afford? It’s not clear. McCain’s plan also involves lenders voluntarily agreeing to write down delinquent mortgages to the current market value of the home, which lenders have not historically shown a great willingness to do.

On the law & justice front, McCain has called for the Justice Department to form a Mortgage Abuse Task Force to investigate potential criminal wrongdoing in the mortgage industry and prosecute any offenders. The task force would also offer assistance to state attorneys general as they investigate and prosecute mortgage abuse cases on the local level.

For more on the candidates’ proposals and differences on mortgage-related issues, watch this video report from the Associated Press:

Coming next week: The Candidates on Credit Card Issues

Another Day Older and Deeper in Debt

Christina Latta Henry |  | Credit, Predatory Lending

[T]he lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.

It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.

A must-read article in Sunday’s New York Times evokes Merle Travis’ “Sixteen Tons” to shine a light on the practices that credit-card issuers, mortgage banks, and other issuers have used in recent years to more than triple  the amount of debt carried by the average household (in today’s dollars) over the past 25 years, even as the national household savings rate has dwindled to nothing. I deal with these issues every day in my practice, and yet it still takes me by surprise sometimes to realize how successful the lending industry has been at tilting the playing field in their favor, even at the cost of the economy as a whole.

Gretchen Morgenson’s front-page article is part of a package of stories and interactive features called “The Debt Trap,” about which I hope to write more later.

Obama Gets Serious About Bankruptcy

Christina Latta Henry |  | 2008 Election, Bankruptcy

Bankruptcy law professor Elizabeth Warren on that Barack Obama speech I wrote about earlier:

I can think of many reasons that bankruptcy is a terrible subject for someone running for president. It is very technical (hard to wedge into a sound bite). It is depressing (no one wants to think about going bankrupt). It will annoy big-money interests (financial services gave big money to pass the current bankruptcy laws).

Savvy handlers would advise against it. So why would Obama make bankruptcy relief a visible part of his platform?

…Obama has history. He voted against the bankruptcy bill. He voted in favor of the amendments that would have eased the effects of the amendments. But his real history is deeper. He was a community organizer who saw first-hand the effects of aggressive lending. He was a state legislator who felt the impact of federal pre-emption on his ability to protect the citizens he represented.

That makes sense. When Obama was in the Illinois state senate, he represented a district on the South Side of Chicago, a diverse region with a long working-class history. Individual bankruptcy is an alien concept to the economic elite who populate K Street and the corridors of Congress, but it’s a very real issue for the kinds of people Obama has represented throughout his political career. It’s been a while since we’ve had a figure on the national scene who was as well equipped to address debt and bankruptcy issues as Obama is.

The Candidates on Bankruptcy Issues

Christina Latta Henry |  | 2008 Election, Bankruptcy, Current Events

Something I’ve wanted to do for a while has been to put together a series of posts examining where the 2008 presidential candidates stand on bankruptcy, debt, and personal finance issues. The candidates have starkly differing views on a number of fundamental economic issues, and weighing these differences is going to be a top priority for voters this fall. Without further ado, therefore, here’s where the candidates stand on the very important issue of individual bankruptcy:

Barack Obama on Bankruptcy (Issues Page)

Sen. Obama has made bankruptcy issues a talking point in his campaign. Here he is speaking in Powder Springs, Georgia last week about his proposals to make bankruptcy law fairer and to fast-track the bankruptcy process for military families, among other reforms:

This speech echoes a number of familiar themes for Obama, who has been prominent on bankruptcy and lending issues since he arrived in the Senate in 2005. He voted against the Orwellian “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” a horrible piece of legislation that has made it harder for millions of Americans to seek bankruptcy protection, and he accuses Washington—and John McCain in particular—of standing up for the interests of big banks and credit card companies instead of for the American people. He is harshly critical of the loophole in the current bankruptcy law that allow bankruptcy courts to modify the loan for a borrower’s second home, but not their primary home.

Obama proposes to reform the bankruptcy laws to make it easier for individuals to seek debt relief when they file for bankruptcy protection due to medical expenses. He also wants to raise the homestead exemption and enact other reforms that would make it easier for seniors to keep their homes.

John McCain on Bankruptcy

Sen. McCain’s record on bankruptcy issues is not good. He voted for the 2005 bankruptcy bill, calling it “an important step toward a fair and balanced approach to restoring personal responsibility to our federal banking system.” As the bill was being debated, Senate Democrats introduced a number of amendments in an effort to reduce the punitive impact it would have on working families. McCain voted no on almost all the amendments, even ones that would have extended some protections to individuals whose financial problems were due to medical problems or identity theft.

McCain’s economic issues page say nothing about bankruptcy. He does mention the subject on a page devoted to veterans’ issues, touting his support of an amendment by Sen. Jeff Sessions (R-Ala.) that would have protected veterans from being denied bankruptcy claims if they incurred their debts while on active duty—an amendment Obama voted against. However, what McCain doesn’t mention is that this amendment was a watered-down response to an earlier amendment offered by Sen. Richard Durbin (D-Ill.), which Sessions criticized as “overly broad.”. McCain voted against the Durbin amendment; Obama voted for it.

Coming next week: The Candidates on Mortgage and Foreclosure Issues

Credit Card Fees Everywhere

Christina Latta Henry |  | Credit

Even honest and conscientious people can all too easily find themselves ensnared in the web of penalties, fees, and rate games that credit card issuers have created. Bankoholic.com helps cut through the clutter with 5 Credit Card Fees You Probably Didn’t Know About.

Tip: whenever you receive a credit card solicitation, look for the “Schumer Box,” a prominent table that gives you important information such as the APR, finance charges, and payment terms. It won’t protect you from all the fees, but it’ll help you weed out the worst cards.

New Restrictions On Mortgage Lenders

Christina Latta Henry |  | Current Events, Predatory Lending

File this one under “things you wouldn’t think you’d have to tell someone”: The Federal Reserve moved today to outlaw a number of shady practices among mortgage lenders. My personal favorite: “a restriction on the use of the word ‘fixed’ to describe the terms of a loan whose rate will change over time.” Other welcome new restrictions:

— Prohibit lenders from loaning to borrowers who cannot repay the loan from income and assets other than a home’s value.

— Require lenders to verify a borrower’s income and assets.

— Ban prepayment penalties for the first four years of any adjustable-rate subprime mortgage; other subprime mortgages could have no prepayment penalties for two years.

[…]

— Prohibit advertising in which different loans are compared unless all payments and rates are also disclosed.

— Prohibit foreign-language mortgage ads in which required disclosures are presented in English.

— Prohibit a lender from encouraging or coercing an appraiser to misrepresent a home’s assessed value. [!]

— Require lenders to credit borrowers’ payments on the day of receipt.

There are many more new regs that I can’t quote without running afoul of the fair-use standard, so go and read the whole thing.

Fannie, Freddie, and Indy

Christina Latta Henry |  | Current Events

The failure of IndyMac Bank wasn’t too difficult to foresee; IndyMac was always one of the biggest movers behind the no-doc/subprime/Alt-A mortgage craze earlier in the decade, so its insolvency was probably inevitable. The troubles of Fannie Mae and Freddie Mac come as more of a surprise, as those institutions are prevented by law from doing subprime lending. (The definition of “subprime,” in fact, amounts to “loans that Fannie and Freddie aren’t allowed to touch.”) So why are they in trouble? New York Times columnist Paul Krugman answers the question:

Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.

There are other reasons, Krugman explains, having mainly to do with inadequate capitalization on the part of Fannie and Freddie. Still, it’s clearer than ever before that “subprime crisis” is a misnomer, and that our current woes affect a lot more mortgages than initially thought.

N.B.: For a good primer on what Fannie Mae and Freddie Mac are and what they’re supposed to do, go read the whole column.