Important legislation stalled in Senate, but at least one Senator is broadening scope to include credit-card reform

March 24th, 2009 by Mike Hinshaw

Amid the nationwide screaming about the AIG bonuses, U.S. Senators have decided to let a good idea simmer on the back burner. As discussed here, the House recently passed a bill that would allow bankruptcy judges to modify terms of loans on primary residences.

It’s a crucial piece of legislation, long overdue.

As reported March 23 at washingtonindependent.com: “Without government help, 2.4 million homeowners will lose their homes to foreclosure this year, according to the Center for Responsible Lending (CRL), an advocacy group.

“Every 13 seconds another family receives notice a lender’s foreclosing on their home. That means  6,600 additional foreclosures start every day at a time foreclosure rates already are four times normal levels. A week ago, the number of families forced into foreclosure since January 1 surpassed 500,000.”

Every 13 seconds… Sure, we’re often reminded that most folks have been able to keep their payments current (at what levels of sacrifice, though, no one seems to be investigating), and maybe many homeowners who got into trouble were trying to flip houses, or maybe they refinanced and went on a cruise.

Still… every 13 seconds.

And as the Independent’s post mentions, “CRL projects that 73 million families will each lose $6,000 in home value in 2009 just for living in the proximity of foreclosed homes.”

Seventy-three million multiplied by 6,000? That’s a larger sum than most homeowner calculators will display–and that sum doesn’t even address the foreclosed homes themselves.

“Meanwhile,” the Independent’s post continues, “housing legislation that would cut into these numbers remains stalled in the Senate over a provision, unpopular among the banks, that would allow bankruptcy judges to modify the terms of primary mortgages to help homeowners keep their homes. Credit Suisse has estimated that the bankruptcy provision alone would prevent 20 percent of all foreclosures — keeping more than 1.6 million families in their homes between now and 2013.

“Claiming time restraints, Senate leaders don’t plan to take up the housing bill until after their two-week-long Easter recess, which doesn’t end until April 20. Yet Congress had plenty of time to fritter the last week grappling with efforts to clawback $165 million in bonuses to AIG — hardly a tiny sum, but it’s a rounding error relative to the cumulative wealth being lost by the country’s homeowners while the housing bill idles.”

And, even though CNBC has been able to locate the worst domestic areas for foreclosure rates (see slideshow here ), increases in bankruptcy filings continue abroad.  The UPI is reporting Canadian bankruptcies on the rise, not only for individuals but also for corporations. And the middle class is even getting hit in Australia, where a small business site, “The Age,” cites a survey showing a staggering increase in the number of mortgage lenders listed as creditors: “In what could foreshadow the crush of record high home prices on cash-strapped households, the report showed a 700% jump in the amount of mortgage providers listed by bankrupts as creditors over the two years to 2007. Bankrupts blaming their home mortgage grew to 16% in 2007 from 2% in 2005.”

Back in the USA, some attention is being shifted to the bankruptcy code itself, with some suggesting that the much heralded reform act of 2005 actually needs reforming itself. In a long, thorough article posted March 23 at USA Today’s site,  Christine Dugas writes, “Congress wrangled for eight years before passing a reform act aimed at curbing abuse and ending an alarming rise in bankruptcy filings. With the economy in tatters and personal fortunes often in even worse shape these days, the bankruptcy law is beginning to undergo scrutiny again.”

Dugas contends that Congress will continue to focus on the immediate need to help with foreclosures (in other words, the legislation that the Senators are sitting on until after the big Easter-egg hunt). “But once that’s settled,” Dugas says, “attention will turn to the 2005 bankruptcy reform.”

“There is continuing concern about the bankruptcy-reform bill and what its effects have been,” says Sen. Sheldon Whitehouse, D-R.I., who leads the Senate Judiciary subcommittee that oversees bankruptcy law. “We are looking at a number of things that we can do to address the problems.”

Whitehouse was scheduled today to “hold a hearing that will discuss legislation he has introduced that would allow families burdened by exorbitant credit card rates and fees to more simply discharge their debt under bankruptcy. He is considering several other proposals.”

Bolstered with much good data, balanced quotes and comprehensive background explanations, Dugas’ piece also explains the credit card industry’s reasons for lobbying so hard for changes in the bankruptcy law. Beneath the sub-heading “Credit card fees pile on profits,” Dugas explains:

“Credit card fees and interest rates were at the center of the reform debate. During a multiyear, multimillion-dollar lobbying effort by credit card companies to change the law, Americans were told that they had to pay higher credit card fees because bankruptcy filings had caused the industry to lose about $40 billion a year. ‘Congress should do as much as possible to reduce the $400 hidden tax on every American family due to the increasing number of bankruptcies that are filed in this country,’ said then-Rep. Steve Chabot, R-Ohio, during a House subcommittee meeting in 1997 at the outset of the eight-year battle for reform.

“Since the reform passed, the credit card industry’s profits have grown. It earned $19.9 billion from penalty fees in 2008, up from $14.8 billion in 2005, according to R.K. Hammer, a consulting firm. The industry’s pretax profit climbed to about $39 billion in 2008 from $30.6 billion in 2005, according to CardTrak, a credit card research firm.

“But there has been no rollback on credit card fees, says Robert McKinley, founder of CardTrak.com. Punitive rates are just as aggressive as they were before, even though the prime rate has dropped dramatically. In 2005, the punitive rate was 30.99% as the prime rate was up to 7.00%, McKinley says. Last year, the punitive credit card rate was 30.88%, but the prime rate was only 4.00%, which he calls an unprecedented rate spread.

“In addition, credit card payment grace periods have continued to fall since the bankruptcy reform, according to a report by Michael Simkovic, a former Olin Fellow at Harvard Law School. ‘The data is unambiguous: 2005 Bankruptcy Reform benefited credit card companies and hurt their customers,’ says the report, released in July.”

Dugas explains that before the 2005 act was passed, “a family overwhelmed with home mortgage and credit card debt most often filed for Chapter 7, which would allow them to have all unsecured debts, including credit card bills, discharged. That might have freed the family to pay the mortgage and keep their home.

“But a major goal of the reform was to force such families to rely on Chapter 13 bankruptcy instead, which requires them to repay debts in full, or in part, over several years.”

But that has not been the case, as mentioned here. As Dugas points out, “Last year, Chapter 7 filings — accounting for 76% of personal filings — continued to outpace Chapter 13 filings. Chapter 7 filings made up 80% of the total filings in 2005; 72% in 2004.”

Meanwhile, some more 13-second periods have passed, and more folks have received forclosure notices.

Yet, our Senators are waiting on the Easter Bunny.