The NYT reported yesterday on my pet peeve about America: Debt.
I'm 60, and a lifetime of saving and being careful with money accounts for the following. I do not intend any of this a boast -- rather it is a warning. Too many people I see around me cannot pay for what they seemingly own. That situation, nationally, has a big part to play in the economic crisis that is developing like a tropical storm turning into a hurricane. It threatens to sweep us all away.
I have a horror of debt -- I never carry a balance on a credit card. I have a mortgage on my primary residence the annual payment for which is about 5% of my wife and my gross annual salary -- not including investment income. There is no mortgage on my 2nd home. I also have one auto loan that costs all of $200 a month and no payments on the other 2 cars. We do not buy things we cannot pay for out of the checking account in any given month. So I don't have a lot of the toys people seem to think necessary like huge flat screen TVs -- I don't watch TV very much at all, so I don't care.
We run a monthly surplus and we save it. When the stock market went down by 19% year to date recently, at that time I was only down 8% due to once more being careful and paying attention to risk.
I've taught my daughter carefully about living within her means -- but I've every confidence that she heard me and her position doing accounting work for a consulting firm has only sharpened her skills in handling bills properly.
But read yesterday's NYT article and see why I started this discussion. This pattern has got to change.
Given a Shovel, Digging Deeper Into Debt
The collection agencies call at least 20 times a day. For a little quiet, Diane McLeod stashes her phone in the dishwasher.
But right up until she hit the wall financially, Ms. McLeod was a dream customer for lenders. She juggled not one but two mortgages, both with interest rates that rose over time, and a car loan and high-cost credit card debt. Separated and living with her 20-year-old son, she worked two jobs so she could afford her small, two-bedroom ranch house in suburban Philadelphia, the Kia she drove to work, and the handbags and knickknacks she liked.
Then last year, back-to-back medical emergencies helped push her over the edge. She could no longer afford either her home payments or her credit card bills. Then she lost her job. Now her home is in foreclosure and her credit profile in ruins.
Ms. McLeod, who is 47, readily admits her money problems are largely of her own making. But as surely as it takes two to tango, she had partners in her financial demise. In recent years, those partners, including the financial giants Citigroup, Capital One and GE Capital, were collecting interest payments totaling more than 40 percent of her pretax income and thousands more in fees.
Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.
While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.
It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.
To reduce the risk of a domino effect, the Bush administration fashioned an emergency rescue plan last week to shore up Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies, if necessary.
To be sure, the increased availability of credit has contributed mightily to the American economy and has allowed consumers to make big-ticket purchases like homes, cars and college educations.
But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.
Lenders have found new ways to squeeze more profit from borrowers. Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 — a difference that adds billions of dollars in interest charges annually to credit card bills.
Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.
Mortgage lenders similarly added or raised fees associated with borrowing to buy a home — like $75 e-mail charges, $100 document preparation costs and $70 courier fees — bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These “junk fees” have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.
“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.
Lenders have been eager to expand their reach. They have honed sophisticated marketing tactics, gathering personal financial data to tailor their pitches. They have spent hundreds of millions of dollars on advertising campaigns that make debt sound desirable and risk-free. The ads are aimed at people who urgently need loans to pay for health care and other necessities.
It is not just financial conglomerates that are profiting on consumer debt loads. Some manufacturers and retailers can generate more income from internal financing arms that lend to their customers than from their primary businesses.
Tallying what the lenders have made off Ms. McLeod over the years is revealing. In 2007, when she earned $48,000 before taxes, she was charged more than $20,000 in interest on her various loans.
Originally posted by ScriabinThe article is a bit odd.
The NYT reported yesterday on my pet peeve about America: Debt.
I'm 60, and a lifetime of saving and being careful with money accounts for the following. I do not intend any of this a boast -- rather it is a warning. Too many people I see around me cannot pay for what they seemingly own. That situation, nationally, has a big part to play in the economic ...[text shortened]... $48,000 before taxes, she was charged more than $20,000 in interest on her various loans.
How could she be a dream customer if she had two mortgages and was already working two jobs to be able to repay them?
Also, what the lenders have made off Ms. Mcleod cannot be simply calculated by seeing how much in debt she was. If she's defaulting and the lenders are now calling in collection agencies, then the lenders aren't in a very good position themselves.
However, I do agree that most mortgage contracts are too complex for the average person to really understand what is going on and which fees they will be liable for and in which case.
I would be in favour of some regulation on household loans, possibly working towards some degree of standardization of contracts on mortgages that would simplify things for households. Particularly regarding the fees the article mentions.
Originally posted by PalynkaLook at the average debt carried by those who fail to pay off their credit cards every month.
The article is a bit odd.
How could she be a dream customer if she had two mortgages and was already working two jobs to be able to repay them?
Also, what the lenders have made off Ms. Mcleod cannot be simply calculated by seeing how much in debt she was. If she's defaulting and the lenders are now calling in collection agencies, then the lenders aren' ...[text shortened]... at would simplify things for households. Particularly regarding the fees the article mentions.
This is the result from all these cheap Chinese-made consumer goods.
I bought a DVD player this weekend for $30 -- just so my daughter and her significant other could have one for the 2nd TV in the vacation house freeing up the main room for reading.
How can such a device cost so little? I bought an HP all-in-one printer, fax and scanner that is amazingly good in quality for $80. Now, if I refrain from printing photos and conserve ink, I'm not paying what they apparently thought I'd spend over time.
Even cars seem cheaper than they ought to be - except for the ones that are festooned with gadgets one doesn't need or is arbitrarily designated a "premium" model for which added profit is simply added to the price. It doesn't matter that there is little significant functional difference between the engines in certain model Toyotas and their equivalent Lexus model, the price difference is enormous due to the "status" factor.
Women pay simply ridiculous prices for "designer" goods that simply don't justify their cost other than by the emotions and social pressures of fashion.
I may be out of step, out of touch with the mainstream -- but I'm out of debt, too. I can pay off everything I owe by writing a check right now. But I need something to deduct.
Originally posted by Palynka"How could she be a dream customer if she had two mortgages and was already working two jobs to be able to repay them?"
The article is a bit odd.
How could she be a dream customer if she had two mortgages and was already working two jobs to be able to repay them?
Also, what the lenders have made off Ms. Mcleod cannot be simply calculated by seeing how much in debt she was. If she's defaulting and the lenders are now calling in collection agencies, then the lenders aren' ...[text shortened]... at would simplify things for households. Particularly regarding the fees the article mentions.
Could it be that the average bank doesn't care about her credit knowing that they will sell it to Freddie or Fannie and stick it to the tax payers if they fail? Just asking.
GRANNY.
Originally posted by smw6869That's going to change, and fast. My spouse works for the inner office of the leadership of one of the federal banking regulators. She knows they haven't been regulating effectively during this Administration -- it is almost as bad as the run up to 1929. But there will be a correction now and risk management standards will be established for those who aren't subject to regulation now and they will be enforced quite a bit more effectively, at least for awhile.
"How could she be a dream customer if she had two mortgages and was already working two jobs to be able to repay them?"
Could it be that the average bank doesn't care about her credit knowing that they will sell it to Freddie or Fannie and stick it to the tax payers if they fail? Just asking.
GRANNY.
Better buy that cheap flat screen soon -- it won't be so cheap much longer.
Originally posted by smw6869She's still not a dream customer. Someone like her would be on the subprime, so her mortgages couldn't be sold directly to FM².
"How could she be a dream customer if she had two mortgages and was already working two jobs to be able to repay them?"
Could it be that the average bank doesn't care about her credit knowing that they will sell it to Freddie or Fannie and stick it to the tax payers if they fail? Just asking.
GRANNY.
Sure, there was money to be made out of the MBS and CDO mess but the bank still wouldn't make as much money as someone on the prime market. The problem with the system was when demand for MBS and CDO largely exceeded the ability of the prime market to accomodate it. This is when the subprime market started to slide by trying to supply enough MBS and CDOs via excess lending.
This is the moment where US regulation failed, in my opinion. The banks had little incentive to adequately control the ability of customers to repay and the law didn't require them to do it properly.
Originally posted by AThousandYoungIn a related matter, my uncle and I go round and round about why fewer people are having children (except foreign nationals from Mexico and Latin America). I say it's because people are strapped paying higher and higher taxes to the government; he says it's because once couples get out of college, they buy a brand new BMW and a McMansion. I'm willing to concede that his argument has merit because here in Dallas, the number of foreclosures in Frisco and Plano (affluent suburbs) have been increasing. My mom feels sorry for these people. I don't since they're all living better than me and their wives don't work and their second car is a Lexus. Basically, these people bought a lifestyle and didn't save a dime for a rainy day. Well, guess what? It's raining.
Not honoring them.
Originally posted by der schwarze RitterEveryone's living better than you.
In a related matter, my uncle and I go round and round about why fewer people are having children (except foreign nationals from Mexico and Latin America). I say it's because people are strapped paying higher and higher taxes to the government; he says it's because once couples get out of college, they buy a brand new BMW and a McMansion. I'm wil ...[text shortened]... ught a lifestyle and didn't save a dime for a rainy day. Well, guess what? It's raining.
Now I know why you're so anti-everything-without-the-stars-and-stripes. You're from Dallas. Did you vote for "good ol' gov'nur Bush?"
Welcome to the world of RHP.
Originally posted by scherzoI don't know why you presume that everyone is living better than me -- that's just bizarre. I guess if you're a poor college student and a member of the Palestinian Martyrs Brigade auxiliary, you must think that life is always going to be like it is today? The good news is it doesn't have to be. If you apply yourself, and don't get distracted with foolish causes, you can get a job, work hard, and one day live the good life too.
Everyone's living better than you.
Now I know why you're so anti-everything-without-the-stars-and-stripes. You're from Dallas. Did you vote for "good ol' gov'nur Bush?"
Welcome to the world of RHP.