Colin
http://www.pineapplewatch.com

I like to look at what people don’t say. The statement that “Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards” means little in isolation.

Some people don’t have a balance on their cards. Having a mortgage – even one that’s resetting and that you can no longer afford – is not necessarily equivalent to being a financial profligate. Not all sub-prime mortgages were to the archetypal leaf-blower: a huge proportion were made to speculators who might well be expected to keep the rest of their lives in order, given that – from what I understand of the matter – US mortgages are generally non-recourse to the borrower.

Many of the sub-prime mortgagees will have very low limits on their cards – the low limit having been set for the same reason that their mortgage is called “sub-prime”. It’s a lot easier to make a $100 payment to keep your credit card (with, say, a $2000 balance) current than it is to pay $1600 to keep your mortgage current.

And, with respect to the 70% … what was the figure before the law? What is the current figure for those who are not delinquent, then and now?

I’m not saying Mr. Fairbank is wrong; nor do I mean to imply that he has an agenda influencing his choice of words and statistics – but there’s a lot of evidence and argument missing here.

I am sure as well that Mr. Dubitsky did in fact say what he was quoted as saying; but I am not sure what else he said that might be pertinent. His remarks as quoted do not amount to an argument.

For all that being “Head of Asset Backed Research for Credit Suisse” is a very nice title, I’m not about to take his unsupported word for anything, let alone a matter of public policy.

However, viewed in isolation, his remarks seem plain enough: effectively, mortgage debt used to be senior to credit card debt, now it’s parri passu. From the perspective of an investor who has some exposure to mortgages and none to credit cards, I’m willing to entertain the hypothesis that the change in law is regrettable.

But I want to check all the data – or, at least, have its full analysis explained to me! The Law of Unintended Consequences is merely a special case of The Law of Sloppy Analysis.

These gentlemen’s opinions may well have been filtered through a journalist’s lens. While Bloomberg is an excellent source of news, I have noticed that their stories on such issues tend to be even more reflective of the individual journalist’s views than most of the media sources I use. I don’t think they have yet perfectly established a cult of editorial indifference to policy.

And, in any event, the question of greatest good has not yet been addressed. The reviled lobbyists were, presumably, hired in an effort to improve total recovery for the industry. If somebody has, say $20,000 credit card debt and an $80,000 mortgage on a $100,000 house then foreclosure will give greater recovery than old-style bankruptcy – even if the house sells for only $90,000.

Any change in total recovery is not addressed by the article. It would be extremely difficult to estimate the effects of the change in law since the only period examined is, shall we say, rather unusual in terms of housing prices; but I’ll bet a nickel the major financial institutions have very well paid teams of statisticians working on the question. We hear nothing from them.

The lowering mortgage balance bit may be to make Chapter 13 consistent with Chapter 11. Under Chapter 11, if you lease a building and its market value has declined, the mortgage principal amount will be reduced (not sure re how done, just the general concept).

The interest rate reduction is another matter entirely….

don’t like this idea. sounds like a bailout move.

Agreed. As I said above, the reason I have never been sympathetic with the banks on the bankruptcy law is simple. If you are seeing more bankruptcies than you like among your cardholders, you need to improve your credit policies. But instead, they got a “get out of jail free” card from Congress.

The industry screwed itself up with no fee cards. When they charged annual fees, customers who paid in full every month were attractive. But they wanted to expand their market, so the industry started offering no fee cards. That meant that they had a greater incentive to find customers who couldn’t pay their balance off and would pay interest.

Capital One is a credit card issuer, It isn’t exactly in their interest to say people are sacrificing their homes to avoid bankruptcy. I would assume the CEOs comments are based on what he sees in his customers’ behavior, and he specifically said they have consumers three months behind on their mortgages, which in most states means they are in default and subject to foreclosure, yet are current on their credit cards (Cap One is also known in the industry to be highly analytical). Similarly, the head of asset backed research for Credit Suisse, also quoted in the article, is an analyst, not a consumer advocate, and is of the view that the new bankruptcy law has led to more foreclosures.

This development seems pretty obvious now that it is happening. Under the old law, if you got badly behind on your credit cards and saw no way out, you’d file for bankruptcy. The court would take whatever assets you had that could be applied to the debt, but in most states, homes were protected at least to a degree, some completely.

By contrast, the new law is pretty punitive. You can’t use Chapter 7 if you income is above the average in your state. And the home is more subject to being seized in the new law under Chapter 7.

Even though homeowners can theoretically avail themselves of Chapter 13 and keep their home, the court cannot change the terms of the mortgage. Thus if a homeowner is already on the verge of going under and faces a reset, the court can do nothing about it.

In addition, even if the homeowner is not facing a reset, if he files under Chapter 13, the court sets a repayment plan for his debt. That is based on assumptions on what it takes for him to live on and the rest goes to debt service. The bankruptcy attorneys say the assumptions in the new law are unworkable for many people, and often don’t reflect real local costs. For example, a family of 4 in New York city is allotted only $200 a month for food.

Oh, and you aren’t permitted to refile for bankruptcy if you fail to meet the terms set by the court. So it seems pretty plausible that people are choosing not to file for bankruptcy if they can avoid it. After all, that was the intent of the law.