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Sunday, July 26, 2009 2:00 PM

Preemptive Defaults

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Many consumers, trapped in a whirlpool of debt, interest payments, and fees spiraling out of control, finally see the light of preemptive defaults and elect to walk away.

Please consider the New York Times article When Debtors Decide to Default.

Those on the front lines of the debt industry say there is a small but increasingly noticeable group of strapped consumers who are deciding they will simply stop paying. After loading up on debt eagerly provided by the card companies during the boom times, these people now find themselves trapped in an endless cycle where they are charged interest on interest and fees upon fees while the lenders get government bailouts.

They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. They could continue to pay for a while longer but instead are walking away. “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com.

“They’ve done the math on their account and they’re very angry,” said Corey Calabrese, a Fordham Law student who is an administrator of the school’s walk-in clinic for debtors at Manhattan Civil Court. Public sentiment is on their side, she added: “For the first time, Americans are no longer blaming the borrower but are looking at the credit card companies.”

According to a Quinnipiac University poll in February, 62 percent of those polled blamed lenders “who loaned the money to people who may not be able to pay it back.” Only a quarter blamed homeowners.

Like many who default, Ms. Birks first asked her credit card company to lower her 19 percent interest rate. No dice, Bank of America responded. After she tried to get the bank’s attention by skipping a payment, it immediately raised her rate to 25 percent. As Ms. Birks’ debt swelled, so did a sense of injustice mingled with helplessness.

Ms. Birks asked Bank of America about a settlement this spring. Since her account was up to date, she was told she didn’t qualify. She stopped paying, the bank started calling.

When Bank of America finally got her on the phone, it agreed for the first time to drastically reduce her interest rate. She did not take the deal, but considered it progress.
Banks Send Message - "Don't Pay"

By refusing to negotiate before defaults, banks are sending a strong message "Don't Pay" your bills. And now that Ms. Birks, who owes $28,830, decided to stop paying cold turkey, Bank of America wants to talk turkey.

More than likely it is now too late. Instead of negotiating an interest rate reduction, Ms. Birks probably wants a balance adjustment as well. And this is what Bank of America and all the banks deserve. It's no wonder its default rate is up to a whopping 13.8%.

Debt Slave Act of 2005 Comes Back To Haunt Banks

The Debt Slave act of 2005, officially known as the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" has come back to bite banks big time.

Banks asked for and got their dream list of everything they wanted in that bill, including a "means test" making it very hard for consumers to walk away from debt, at least in theory.

Of course theory is one thing and practice is another as Ms. Birks and those like her clearly show. Also note that with unemployment at 9.5% and rising, many can now easily pass even the most stringent of "means tests".

Plenty of Blame to Go Around

Of course consumers are partially to blame for this mess, but the preponderance of the blame must be placed squarely on the shoulders of banks and lending institutions who made horrendously bad lending decisions.

Banks allowed consumers to rack up enormous amounts of debt in relation to their salaries. If that's not the banks' fault, whose fault is it? Now is payback time.

Bernanke has thrown $trillions at banks and now those very banks are back throwing "happy days are here again" parties while handing out big bonuses and raises. Is it any wonder consumers are fed up?

Clearly the banks have learned nothing, nor did Bernanke.

Mortgage Preemptive Defaults On The Rise

“I’m astonished that people would walk away from their homes,” Bank of America chief executive Kenneth Lewis said in late 2007.

Last week I received an email update from Jon Maddux, CEO, of You Walk Away
Hello Mish,

I hope all is well. I thought you might want an update. About 90% people who sign up for our service now days, are "A" paper good credit borrowers who can afford their mortgages, but they just don't think it makes sense to keep paying. The rest either already got a loan modification and didn't get a principal reduction or just really can't afford to own any longer. I wish you the best!

Kind regards,

Jon Maddux
Welcome to the real world Mr. Lewis.

Mike "Mish" Shedlock
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