CHESSNOID

There was a great post on credit card defaults in the NY Times.  I think there are many like us who believe there is some type of injustice the way these credit card companies are charging what they charge, and then turning around asking for a handout from the government at the taxpayer’s expense.  It sounds like the perfect corporate scam.

NYTimes: Credit Card Debtors “Embracing the Darkness of Default”

Ruthless defaulters today face different perils. Delinquency destroys credit scores, can prompt a lawsuit and guarantees a very large number of hostile calls from collection agencies.

Still, all that can seem the better alternative. 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.

Bank of America has its hands full, with a June default rate of 13.8 percent, up from 12.5 percent in May. The other major credit card companies are in a similar fix. Estimates of the total industry losses are over $100 billion for the current recession.

Collectors are noticing a shift not only in ability but in willingness to pay. “With all the bailouts the government is giving everyone, no one has any personal accountability about their own debts,” said Roger Knauf, who runs a trade group of debt-buying firms.

Many of today’s debtors were maxed out long before the recession. Much of this debt was of course in the form of junky mortgages on wildly overpriced houses, and it was here that people first began to rebel.

Countrywide Financial, the country’s biggest and most aggressive lender, surveyed its customers about why they were defaulting in the summer of 2007. One of the leading reasons was “low regard for property ownership.” In other words, people concluded that owning these houses was a bad deal.

That people would intentionally default on loans they never should have gotten in the first place took lenders by surprise. “I’m astonished that people would walk away from their homes,” Bank of America chief executive Kenneth Lewis said in late 2007.

Nineteen months later, walking away from mortgages is widespread if impossible to quantify, and no cause for embarrassment. Rather the opposite: it shows savviness. “I’ll walk away before I take a loss,” a Dallas financier recently boasted to Barron’s magazine about his efforts to sell his $6 million vacation estate.

There are many reasons why people stop paying bills, but I think when the government committed the moral hazard of bailing out banks and other financial institutions with tax payer money, people’s attitudes changed. I think rightfully so.  Forget about contracts and responsibility if the companies bailed out do not have to play on the same field just because they have friends in the government or lobbyists who know how to game the system.

Could you imagine if a creditors entire portfolio of credit card holders all just decided to default in retaliation for the actions against them?  The bank or credit card company would be bankrupt literally in a month.

“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.”

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.

The example they used here reminds me of people who need or want a mortgage modification. Banks simply say you don’t qualify if you are not behind. The logic is if you are current then you can afford to pay. Is that really fair to the person paying on time to have a person in default rewarded by giving them a principal and/or interest rate reduction?  You miss a payment for whatever reason and get transferred into the collections department and all of a sudden you have multiple options that become available to you.