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Tuesday, October 30, 2007 12:50 AM

Problems Delayed Are Not Problems Solved

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Reuters is reporting Stressed US borrowers use plastic to delay default.

In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 -- higher than they planned on, especially with her husband's furniture sales job largely commission-based and business not good due to the U.S. housing slowdown.

But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has "maxed out" all her credit cards, spending to the limit on basic needs. "Now all I'm doing is making the minimum monthly payments."

"When credit conditions dry up, marginal borrowers turn to plastic," said Merrill Lynch North American Economist David Rosenberg. "We're seeing signs of that already."

In an October 5 research note, Rosenberg called rising credit- card delinquency rates as the "next skeleton in the closet."

"Our biggest concern right now is that there are lot of people who will face a choice between bankruptcy or foreclosure," he said. "Either way, it's going to suck."


Nancy Barba -- a financial counselor at a local community group, the Resurrection Project -- helped Johari Reeves negotiate her latest attempt at a repayment schedule for her mortgage.

"The credit cards will be a problem later," Barba said. "But right now, the main concern is the house."
How much bad advice is being given by credit counselors to keep them in their homes? If Barba is any guide, perhaps a ton of it. Postponing problems is not a solution, it merely makes them worse. And certainly maxing out credit cards to pay the mortgage is not clear thinking.

In this case, the problem is the house. Reeves cannot afford it. With maxed out credit cards, a small reduction in a loan rate is not going to help much either given Barba's admission that "credit cards will be a problem later".

Reeves ought to be talking to a bankruptcy lawyer. Instead, Barba is doing everything possible to keep the albatross around Reeves' neck.

Barba says "Right now, the main concern is the house." In actuality, the main concern should be how to get rid of the house, not how to keep it. The house has to go. It can go now or it can go later after more money is wasted making minimum payments on credit cards.

Life would be so much simpler if Reeves started all over renting an apartment she and her husband can comfortably afford, while saving money for a rainy day (or a house they can afford sometime down the road). Instead they are paying usurious credit card rates and sinking further behind on a house that is likely declining in value.

Everyone is doing their part to make people debt slaves forever. Even financial counselors are in on the act.

Mike Shedlock / Mish

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