Unintended effects.

[randomness]

Various banks spent lots of time and money in the last decade lobbying Congress to get the bankruptcy laws changed so it would be more difficult to wipe out credit card debt.

Now, the same banks are finding that debtors are deciding to pay off their credit cards instead of paying their mortgages. Foreclosures are now at a record, and the banks are getting stuck with the foreclosed houses in a sagging housing market.

From http://www.bloomberg.com/apps/news?pid=20601109&sid=a0EKOfVyqCD4:

The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''

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.

People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said.

``What we conclude is that people are saying, `Honey, let the house go,''' but keep the cards, Fairbank said Nov. 5 at a conference in New York sponsored by Lehman Brothers Holdings Inc.

The new bankruptcy code makes it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. It shifted people who get paychecks higher than the median income for their area to Chapter 13, giving them up to five years to pay off non-housing creditors.

``We have people walking away from homes because they can't afford them even post bankruptcy,'' said Sommer, a Philadelphia- based bankruptcy attorney. ``Their mortgage rates are resetting at levels that are completely unaffordable, and there's nothing the bankruptcy process can do for them as it now stands.''

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The old law, the Bankruptcy Reform Act of 1978 that was signed by President Jimmy Carter, had loosened requirements for debt forgiveness.

Financial companies began a coordinated lobbying campaign for bankruptcy reform in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.

Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave Bush his second term in office. Two-thirds of the donations were given to Republicans who supported the bankruptcy changes, according to the Center for Responsive Politics.

The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard Inc., and Morgan Stanley.

Oops.

Comments

[marginaleye.livejournal.com]

The mandatory credit counseling provision of the new bankruptcy laws has also been a huge bonanza for the "debt management" business, which is full of very phony "nonprofit" organizations and sleaze-bags.

[karakara98.livejournal.com]

Thanks for posting this. It's interesting, especially in light of this: http://money.cnn.com/2007/10/29/magazines/fortune/consumer_debt.fortune/index.htm?postversion=2007103013. The whole financial system is becoming amazingly complex and depersonalized.

[r-ness.livejournal.com]

Thanks for that link!

I wonder if perhaps the bankruptcy laws in the UK differ from US ones in their incentives. I remember that when I was unemployed right out of school I converted a chunk of lower-rate student loan debt--which was harder to get forgiveness for--into higher-rate credit card debt, on the theory that I would have an easier time renegotiating the credit card debt. As it turned out, I was able to pay it all off, but it meant that I never had to default (or even miss a payment) on anything, even if I did pay more interest for a while.

Something like that may be going on with UK homeowners. Also, my understanding is that most UK mortgages are adjustable-rate, so it may be a problem with homeowners being cash-strapped because rates have risen.

[gravitrue.livejournal.com]

If the banks that lobbied through the changes have more assets in plastic than mortgages, they might come out ahead at the cost of the mortgage holding investors. Visa Inc certainly doesn't need to care if the mortgage default rate goes up; long-term it might even be good for them, as people use more plastic for credit instead of home equity they no longer have.

[r-ness.livejournal.com]

Unless Visa has any exposure to the mortgage market, they don't need to care at all. On the other hand, it does seem like a lot of the banks really stampeded into the mortgage market chasing yields, so to me it looks like they successfully outsmarted themselves.

bwahahaha

[maggiebex.livejournal.com]

I have nothing pithy to say. Just "Oops!", indeed. Bad credit card companies, bad mortgage companies, bad!

I will say this - I thank God and my lawyer every day for my mortgage. I met with the president of the little family-owned bank personally, he gave me a killer rate, ad they have never, in the history of the bank, resold a mortgage. I am feeling very comfortable and fortunate, but it makes me want to not move for the next 30 years....