HOME MORTGAGE HIJINKS
Jon Christian Ryter
The home mortgage default and foreclosure figures are in for February. The Bush Administration was not anxious to release them. The figures don't look good. The home mortgage crisis has become contagious. It's spreading from the subprime home market into the prime loan market. Approximately 2.3% of the holders of prime rate mortgages were at least 60 days late. That number is up 1.4% from a year ago. It is the highest level of delinquencies from prime rate borrowers in a decade. Prime rate mortgages are given only to the "A" list of credit worthiness.
First American's CLLP (Core-Logic-Loan-Performance) tracking system noted that the number of prime rate delinquencies is relatively small. Dean Baker of the Center for Economic and Policy Research agreed but feels, since February, the number of delinquencies from borrowers who previously had stellar credit, has risen substantially because all of the economic news since the first of the year has been negative. Unemployment is up. State welfare, which has declined steadily for the past decade is spiking upwards with 27 States reporting increases in applicants to the federal government's Temporary Assistance to Needy Families program. Since the program was started in 1994 to wean generational welfare recipients off the dole, 3.9 million US families (mostly adults with physical or mental handicaps that bar them from meaningful employment, or grandparents too old to find work who are raising grandchildren because the parents are out of the picture) have been on the program. Today, that number is expanding as the most likely destinations for tourists, like Florida, California and Nevada, are feeling the impact of the downsizing of the tourism industry.
Florida and Nevada both experienced 7 straight months of declining employment which not only impacts those employed in that industry, but residually, it impacts every business that is affected by the tourist dollars that feed the entire economy of the tourism States. And that, of course, is everyone. The loss of revenue dominoes from industry to industry, business to business, and reduces a whole range of incomes statewide. The States hardest hit by the slowdown in the economy are experiencing the greatest number of new mortgage delinquencies and foreclosures not only in the subprime sector of the mortgage industry, but in the prime rate sector as well.
Compounding the dilemma of the delinquent prime rate mortgage holders is that when the homeowners' mortgages move into the danger zone and their credit scores are reduced, it triggers increases across the board in a wide spectrum of the home owner's ordinary fixed monthly obligations. When the consumers' credit score drops, credit card companies have the right to increase their interest rates based on an assumed increased risk to the lender. Sadly, in the fine print on many credit card agreements (the stuff you don't bother to read when you eagerly sign on the dotted line because you want the plastic) the credit card company or bank has the right, in addition to charging late fees, to change your fixed interest rate to a variable rate if your payments become tardy.
As local bank-issued credit cards began to replace cash as the preferred medium of exchange, the banks and credit card companies used interest rate hikes to cover bad debt losses and used punitive late charges to penalize the late-paying malefactor. Initially, the late charges were percentage of the balance owed—the larger the account balance, the larger the late fee. To protect the consumers within their jurisdictions, about half of the States enacted usury laws that placed ceilings on the late charges and interest rates that could be charged to consumers.
While late fees are still based on the account balance, they are now flat fees. Cardholders with a balance of less than $100 generally pay a late fee of $15. Customers with a balance of between $100 and $1,000 can expect a late charge of $25 and those will balances over $1,000 will pay a late fee of $35. Since the average credit card balance in the United States exceeds $8,000, most late-payers are dunned $35 for the late payment. But, even worse, their interest rates will skyrocket to the maximum allowed by State law—or higher. Sometimes, to achieve the maximum, the credit card company or bank will revoke the fixed rate and charge the cardholder a variable interest rate which converts the standard credit card into a high risk credit card.
In 1978 Marquette National Bank of Minneapolis filed a lawsuit against Omaha Bank and, in Minneapolis, its subsidiary, First Omaha Service Corporation for violating Minnesota usury laws. Marquette sued to end the right of First Omaha to offer BankAmericard™ services. Marquette argued before the US Supreme Court in Marquette National Bank v First of Omaha Service Corporation, 439 US 299 that First Omaha was charging Minnesota cardholders Nebraska interest rates which were higher than those allowed by Minnesota law. The Supreme Court ruled that based on the National Bank Act of 1864 (12 USC § 85) national banks could charge whatever interest rates were allowed by their home state even if those rates exceeded the interest rate ceilings in States with lower rate ceilings.
Since about half of the States have no interest rate ceilings, most national banks simply re-incorporated in one of them. That is precisely what Bank of America, and every other credit card company in the United States has done since, according to the Supreme Court, the laws in the lenders' home State determines the rates they can charge in States with lower limits. Citibank, one of the largest credit card issuers in the country moved their credit card business to South Dakota in 1981. A year later the four largest credit card companies in Maryland moved their credit card business to Delaware. Look where your credit card statements come from, and you will see your New York or New Jersey credit card provider is billing you from Delaware, Rhode Island, Georgia, Illinois, Nebraska, South Dakota or Utah. Most of those States cap interest rates around 24% although subprime rates go as high as 27%. (By law, Arkansas has kept a lid on interest rates for over 100 years. Under Arkansas law, credit card providers may charge no more than 5% over the federal discount rate, which makes Arkansas credit cards the best value for consumers in the nation.) If you are looking for a new credit card, check out the banks in Little Rock before you look elsewhere.
Under the Financial Services Modernization Act of 1999 (Public Law 106-112), also known as the Gramm-Leach-Bliley Act, banks may once again own securities firms and insurance companies—assets that were denied them under the Glass-Stegall Act of 1934 because the financial services industry itself was responsible for the Crash of 1929. Lobbyists for the banking industry pushed hard to get the Gramm-Leach-Bliley Act enacted into law. The bankers wanted to enjoy the immense profits from the financial services industry. Unlike the 1930s when there were no financial-responsibility laws that forced car owners to purchase casualty insurance, today drivers are required by law to carry insurance.
Because banks once again own insurance companies, how you pay your insurance premiums now impacts your credit score. And that, in part, determines the rate of interest you pay on your credit cards. So, if you have a propensity to switch insurance carriers quite often, you will pay a higher rate of interest on your credit cards. And, you will suddenly discover you are a "subprime risk" for insurance, and you will pay a higher rate for coverage even if you have never had an accident or a speeding ticket. For that matter, if you drag your heels paying your gas, electric, water and phone bills, you will also be penalized when you apply for credit since that, too, will lower your credit score. With the banks controlling your credit score, anything negative about how you pay anything to anyone impacts your credit worthiness. As your credit score drops, the payments on all of your existing credit cards will increase, further impacting your personal cash flow and, ultimately, how and when you pay your monthly obligations.
Brad Dakake, a consumer advocate for the Massachusetts Public Interest Research Group told the media that "...fees are way out of control. They're not being done to penalize customers who miss payments," he said. "They're being done to maximize profits [for the lender]."
America is in crisis. It is a crisis created not by the unscrupulous mortgage brokers who sold the American dream to consumers who desperately wanted it but for whom the dream would become a nightmare. It is a crisis created by politicians in Washington who enacted the laws the bankers wanted to expand credit for the sole purpose of making the economy look robust when it was not. The politicians provided the bankers with a safety net to trap most the consumers who greedily bit off more debt than their paychecks could absorb, and were forced to flee the debt they could no longer manage—debt that fiscally-prudent lenders should never have extended. As the jobs drain continued at full throttle, the jobs created by the housing boom and the "plastic spending" were the smoke screens that concealed the true nature of the economy.
The safety net the politicians created was The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The bankers financed homes for the subprime market with toxic adjustable rate mortgages that were virtual time bombs waiting to explode. Then, the bankers and credit card companies loaded the same high risk consumers with credit cards they also couldn't afford—but not until Congress enacted The Bankruptcy Abuse Presentation and Consumer Protection Act of 2005 to provide the banks and credit card companies with a safety net that would force the consumers into repayment plans rather than liquidation if they owned their home since the bankruptcy laws were changed to exclude tax debts and any secured loans from bankruptcy. The only "escapable debt" became unsecure loans (i.e., credit cards). To protect the lenders of credit, Congress has created a myriad of laws that will allow the credit industry to recoup their bad debt losses by tightening "due dates," and assessing penalties if payments are not received on that date. Three federal agencies are currently working to reverse both the "immediate delinquent status" and the punitive "day-late" penalty fees that are currently assessed. The Federal Reserve is currently considering placing a time constraint on late fees by ruling a payment must be 21 or more days late before late fees could be assessed, and credit card companies will not be allowed to charge fees for cardholders exceeding their credit limits when hotels and/or car rental companies put "holds" on estimated card usage— particularly when the actual charges do not exceed the card's credit limits.
Banks and credit card lenders treat consumers as human capital—their personal chattel. When the economy sours and employers begin downsizing to protect their profit margins, consumers who can no longer juggle their debt feel it first. The areas of the country hit the hardest, and first, were those areas whose economies were artificially bolstered by quick fix jobs—the industrial States which had experienced the most job losses under the Clinton's 1994 NAFTA job export program.
But to understand the catalyst that brought us to this point, we have to look at the whole picture because there is more to it than just the collapse of the housing market. The economic collapse we are now experiencing began with the housing bust, but was intensified by the economic agenda of the Democrats who regained control of Congress in January, 2007. America began to get the "change" promised by Senators Barack Obama and Hillary Clinton with the first pieces of Democratic-churned legislation that was all-but guaranteed to reverse the economy in America because government is never the creator of jobs, it is the primary jobs eliminator. The Far Right sitting out the election of 2006 to teach George Bush a lesson has taught us all a lesson. Control of a democratic nation is a fragile thing. When conservatives sit out an election, and surrender their government to the far left, bad things—some of them irreversible—happen to all of us.
As the prime rate began edging up under the Democrat's austerity programs that has reversed two decades of economic growth by taxing both small business and the sweat equity of the middle class to provide new benefits for the poor. Since the Election of 2006, the Democratically-controlled House and Senate have eliminated the prosperity of the Reagan-Bush years and returned us to the horrors of the Nixon-Carter years. When Democrats assumed the reins of government in January, 2007, gasoline was $2.19 a gallon. Today it is $3.79 per gallon with pundits predicting it will break $4.00 per gallon by Memorial Day. Unemployment was at 4.5% when the Democrats took control of the helm of State. Today it is at 5%. The Far Left's declaring war on wealth was a stealth attack on the whole economy. Wall Street responded to the liberal agenda of Harry Reid and Nancy Pelosi—$2.3 trillion in stock equity vanished. Consumer confidence plummeted, buying slowed and the bottom fell out of the good luck bucket.
Hopefully, the Fed's cutting interest rates will plug the foreclosure dike by keeping toxic ARMs from birthing a new wave of foreclosures. The real tragedy of the housing boom is that unscrupulous builders, realtors and county tax appraisers are all guilty of perpetuating the myth that homes somehow became worth two to three times their actual value over a 5 year period rather than over the decades usually needed to increase the value of the traditional family home. Banks closed their eyes and approved toxic loans for eager home buyers they had to know would not be able to afford the payments once their toxic ARMs adjusted upward when the vacation from high interest rates ended. But, since HUD was backing the loans, they felt there were no losers—except the taxpayers who would be forced to foot the bill when the joyride ended.