Mortgage Meltdown

Actions often have unintended consequences.

The Federal Reserve Bank of New York just issued a report that examined the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This Act had some interesting consequences as reported on by Dan Margolies of the Kansas City Star.

In a nutshell, prior to the Act in 2005, someone facing severe financial problems could declare bankruptcy, wipe out their consumer debt (credit cards, etc) and then use the cash to get caught up on their home. The goal of the Act was to force "better off" borrowers to pay off all the debts and not escape through filing Chapter 7. Now they are forced to file Chapter 13 which means that they are much more likely to lose their home.

Bankruptcies did go down at first but I think this was probably due to the rise right prior to the Acts implementation of people wanting to beat the deadline for filing under the old law.

Currently this Act is contributing to the large rise in foreclosures. And it is not having an effect on the "high-income deadbeats", it is impacting the average income American most of all. These are the people who are most likely to be so far in over their heads that they can not pay their debts and their house value has fallen so that they have negative equity in their homes.

I don't like debt (especially consumer debt) in the first place and I firmly believe that we should pay our debts whether they are put aside due to bankruptcy or not. But this is a good example of a government imposed solution that caused more problems than it cured. Granted it is not the only reason the country is in the economic mess that it is in right now but it is contributing to the slow recovery in housing markets.

But now a proposal is gaining steam in financial and political circles to let bankruptcy courts alter the terms of a mortgage to keep people in their homes.

I wonder what problems this new proposal will cause if it is enacted?

As the article points out: "it is one of the Ten Commandments that those shalt not alter the terms of a mortgage."

Rather than try and fix the bad Act with a band aid, maybe the new law should just be scrapped and the old bankruptcy laws put back in place.

Of course, when has Congress ever gone for less regulation?

I strongly doubt the cure will work as cleanly as those who want this new revision expect.

Conflict

Today on the front page of the local paper (the Kansas City Star) there was an article about the the conflict that consumers are facing in the current economy.

Basically it comes down to save versus spend: The tendency in times of trouble and uncertainty is to not spend on anything other than necessities while the cure for a down economy is for consumers to spend more. Consumers spending less means less demand for stuff which means fewer jobs. Spending, not saving, is what drives the economy today.

It is a fascinating look at the dilemma facing consumers today. Do I want to help the economy out of the doldrums or do I want to do what I think should be done to prepare for an uncertain future?

The article points out that consumers since the turn of the decade have saved an average of one cent for every dollar spent and are now pulling back on discretionary spending.

For me it comes down to what is prudent and right to do for me? Loralie and I don't have any consumer debt. The Dave Ramsey class really drove that idea home. In fact, we hate debt and are very comfortable not having any.

We've been moving this way for a long time but it is only in the past yhear that we have been able to reach this goal.

It has been a long time since we bought a car using a loan. And our next car will probably be a used one that we buy for cash.

But we will spend when we have the need and we have the cash. For example, we just bought a new bed since we didn't have place for guests to sleep (furniture went out the door to stock kids apartments and houses). But we did our research to get a good deal and we picked it up at the warehouse rather than pay extra for delivery.

When the question: "What's in your wallet?" can be answered: "Cash!" there is a sense of power and security that I can handle the emergency that will happen. I don't have to worry that if the car breaks down I won't have the money to pay for repairs.

And when I have an emergency fund, I know that I can weather a job loss without losing the house.

I guess that what it comes down to is that I am not going to change my behavior just because someone tells me it is good for the country, economy, environment, etc. I am going to change my behavior because I am convinced that it is the right thing for me and my family to do in our situation.

So I'll stick with a budget and with saving and with buying stuff with cash not credit. And maybe it is time for others to do the same...