Posted by Todd Zywicki:
The Bankruptcy Mortgage Modification Spillover Effect:
http://volokh.com/archives/archive_2009_02_22-2009_02_28.shtml#1235421393
In my[1] Wall Street Journal column criticizing the bankruptcy
mortgage modification proposal I argued that one of the major
unintended consequences of the proposal would be a predictable
spillover effect of dragging other consumer credit into the vortex of
the mortgage mess, exacerbating losses in the credit card industry.
Sure enough, just a few days later, the[2] Wall Street Journal
reported (may be subscriber-only, if so [3]this link has some excerpts
from the article) that the credit card industry is expecting massive
unexpected losses if the proposal goes through:
Issuers of plastic will be looking at even larger losses on
credit-card loans if a proposed change in bankruptcy legislation,
backed by the Obama administration, goes through.
Bigger losses would raise borrowing costs for these companies,
translating into higher rates for consumers, making it tougher for
Americans to tap what has been one of the easiest places to get
credit.
"Anytime there's a change in bankruptcy law that accelerates
bankruptcy filings, it severely affects credit-card losses," said
Scott Valentin, an analyst at FBR Capital Markets. "And right now
card companies aren't in a healthy financial condition to absorb
these losses."
The White House is calling for a controversial provision to allow
bankruptcy judges to rework the terms of mortgages in court. The
change in legislation would allow Chapter 13 bankruptcy judges to
lower interest rates, extend the loan maturity and change the
principal amount owed on the mortgage to reflect the home's market
value.
As a result, "more homeowners struggling with mortgages will file
for bankruptcy," said Neil Crane, an attorney at the Law Offices of
Neil Crane, a consumer bankruptcy specialist with offices in
Connecticut.
A rise in bankruptcies will increase charge-offs, or, credit-card
loans deemed uncollectible for plastic issuers such as Citigroup
Inc. (C), JP Morgan Chase & Co. (JPM), American Express Co. (AXP),
Bank of America (BAC), Capital One Financial (COF) and Discover
Financial Services (DFS). This is because accounting rules dictate
that these companies write-off credit-card payments owed to them
within 60 days of being notified of a borrower's bankruptcy filing.
Bankruptcies historically have accounted for roughly 30%-50% of
credit-card charge-offs, according to a JP Morgan report last
month. Under the proposed legislation, particularly vulnerable to
bankruptcy filings are homeowners with underwater loans, that is,
where borrowers' mortgage debt exceeds the value of their homes.
This is because the new rule would allow a judge to decrease the
loan balance to reflect a home's current market value.
References
1. http://online.wsj.com/article/SB123449016984380499.html
2. http://online.wsj.com/article/BT-CO-20090219-716776.html?mod=
3. http://www.tickerforum.org/cgi-ticker/akcs-www?post=84165&ord=1022030
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