As income and credit continue to diminish, most people are now painfully aware of the fact that they have taken on too much debt over the years when the good times were rolling. As long as easy credit, refinance options, home equity extraction were the order of the day, people could finance their life style by essentially spending money that belonged to someone else--money banks created at their whim when they "made" a loan. Like a shark that must always swim to get the oxygen it needs as water flows over its gills, the American consumer just kept on swimming in credit, until this economic crunch made them realize they were now simply drowning in debt.
Millions of homeowners are now "underwater," owing more on their homes than they can be sold for in this market. Their home has lost all its equity and is now a massive debt obligation. Thousands are walking away each month from situations that become unmanageable, making the difficult decision to cut their losses on the property and restructure their lives at a more sustainable level as renters. By the same token, millions of former "consumers" are now deeply mired in revolving credit card debt. For years they received ten or more credit card offers per week, and every time they shopped at Macy's, JC Penney or any other store, they were offered discounts if they bought on the store charge card. Nothing down and low easy payments was the mantra of retail sales for decades. Now all this access to fast credit has become unsustainable debt for individuals and families all across the U.S.
Barklays offered up some typically stupid mainstream media "good news" today, as Bloomberg reported: "The wave of "option" adjustable-rate mortgages recasting to higher payments, projected by some economists to represent a looming source of foreclosures that will hurt housing markets over the next few years, will be smaller than "feared" because many borrowers will default before their bills change." This is the sort of nonsense we get from the media, that also reported new home sales "surging" 11% in June when they actually dropped over 23% from June 2008. (They got their "surge" by comparing June's seasonally higher sales rate to the previous month of May. This is the duplicity, willful ignorance and outright deception that continues in the main stream media. Good news! We don't have to worry about defaulting Option ARMs, because they have already defaulted! They figured this out by discoverign that 40% of the people holding such loans are already in arrears. No good news there at all.
Like homeowners who take the hard step of walking away, consumers are doing the same with their credit card debt. Bank America reported an astounding 11.73% default rate, increasing from just 8.62% 90 days ago. When defaults surge 36% in just three months, the banks have a real problem. The customers they branded with FICO scores, and saddled with revolving debt through endless credit offers, balance transfer checks, teaser interest rate traps, rate hikes, fees and penalties, are now bucking in the pen and throwing off the stirrups and saddles. They are simply refusing to pay, and since the credit card debt is unsecured, there is little banks can do about it. Some play tough at first, hiking interest rates to 30% or more to punish customers who get behind, others offer to negotiate down the debt.
I said long ago that the reflexive punishments banks initiate to keep people in line would become a problem of their own design, like everything else in this crisis that was entirely created by the banks. When you hike interests rates to 29.99%, you effectively prevent a debtor from ever attacking the the loan balance, and lock them into endless revolving debt payments. Some people will look and realize they have credit card debt that exceeds their average annual income! In a system that allows this as a "best business practice" by the banks, the consumer's only sane option is to simply walk away. As the deflationary depression continues to grind forward, a person's greatest enemy is unsustainable debt. Yes, defaulting is frowned upon by "the system." Debtors who choose this option will sour their credit rating, but to my mind this is simple good riddance. Credit is debt, nothing more. The advantages of living debt free by far outweigh the fact that credit will be very difficult to obtain after default. But it will force consumers to live within their means--always a good thing--and restructure their lives to sustainable levels, something we must do as a nation if we are to ever recover from this ongoing debt crisis.
The great delevering of consumer and household debt is just getting started. Reuters quoted financial analyst Paul Miller as saying: "Growth in charge-offs and nonperforming assets still scares the daylights out of me." It should. Had the banks structured fair mortgage deals and offered fair interest rates in the first place, they might not be facing such a severe charge off, foreclosure, and default rates now. How about an adjustable rate mortgage that is keyed to the current market value of a house, where the payment gets lower as the house value declines instead of resetting to a higher level after an initial grace period? Such an idea would never enter a banker's mind, and this is why the default rates will continue to rise as more and more people "just say no," and walk away from their unsustainable debt to start over. All things must pass, whether the banks want it that way or not.
"Renunciation is not getting rid of the things of this world, but accepting that they pass away." -Aitken Roshi
Millions of homeowners are now "underwater," owing more on their homes than they can be sold for in this market. Their home has lost all its equity and is now a massive debt obligation. Thousands are walking away each month from situations that become unmanageable, making the difficult decision to cut their losses on the property and restructure their lives at a more sustainable level as renters. By the same token, millions of former "consumers" are now deeply mired in revolving credit card debt. For years they received ten or more credit card offers per week, and every time they shopped at Macy's, JC Penney or any other store, they were offered discounts if they bought on the store charge card. Nothing down and low easy payments was the mantra of retail sales for decades. Now all this access to fast credit has become unsustainable debt for individuals and families all across the U.S.
Barklays offered up some typically stupid mainstream media "good news" today, as Bloomberg reported: "The wave of "option" adjustable-rate mortgages recasting to higher payments, projected by some economists to represent a looming source of foreclosures that will hurt housing markets over the next few years, will be smaller than "feared" because many borrowers will default before their bills change." This is the sort of nonsense we get from the media, that also reported new home sales "surging" 11% in June when they actually dropped over 23% from June 2008. (They got their "surge" by comparing June's seasonally higher sales rate to the previous month of May. This is the duplicity, willful ignorance and outright deception that continues in the main stream media. Good news! We don't have to worry about defaulting Option ARMs, because they have already defaulted! They figured this out by discoverign that 40% of the people holding such loans are already in arrears. No good news there at all.
Like homeowners who take the hard step of walking away, consumers are doing the same with their credit card debt. Bank America reported an astounding 11.73% default rate, increasing from just 8.62% 90 days ago. When defaults surge 36% in just three months, the banks have a real problem. The customers they branded with FICO scores, and saddled with revolving debt through endless credit offers, balance transfer checks, teaser interest rate traps, rate hikes, fees and penalties, are now bucking in the pen and throwing off the stirrups and saddles. They are simply refusing to pay, and since the credit card debt is unsecured, there is little banks can do about it. Some play tough at first, hiking interest rates to 30% or more to punish customers who get behind, others offer to negotiate down the debt.
I said long ago that the reflexive punishments banks initiate to keep people in line would become a problem of their own design, like everything else in this crisis that was entirely created by the banks. When you hike interests rates to 29.99%, you effectively prevent a debtor from ever attacking the the loan balance, and lock them into endless revolving debt payments. Some people will look and realize they have credit card debt that exceeds their average annual income! In a system that allows this as a "best business practice" by the banks, the consumer's only sane option is to simply walk away. As the deflationary depression continues to grind forward, a person's greatest enemy is unsustainable debt. Yes, defaulting is frowned upon by "the system." Debtors who choose this option will sour their credit rating, but to my mind this is simple good riddance. Credit is debt, nothing more. The advantages of living debt free by far outweigh the fact that credit will be very difficult to obtain after default. But it will force consumers to live within their means--always a good thing--and restructure their lives to sustainable levels, something we must do as a nation if we are to ever recover from this ongoing debt crisis.
The great delevering of consumer and household debt is just getting started. Reuters quoted financial analyst Paul Miller as saying: "Growth in charge-offs and nonperforming assets still scares the daylights out of me." It should. Had the banks structured fair mortgage deals and offered fair interest rates in the first place, they might not be facing such a severe charge off, foreclosure, and default rates now. How about an adjustable rate mortgage that is keyed to the current market value of a house, where the payment gets lower as the house value declines instead of resetting to a higher level after an initial grace period? Such an idea would never enter a banker's mind, and this is why the default rates will continue to rise as more and more people "just say no," and walk away from their unsustainable debt to start over. All things must pass, whether the banks want it that way or not.
"Renunciation is not getting rid of the things of this world, but accepting that they pass away." -Aitken Roshi
