The housing industry is finally just starting to get a bit of life, thanks to mortgage rates that are at the lowest levels in nearly 50 years. Combined with falling house prices, home affordability is the best level in years. Wise homebuyers will take out a fixed rate mortgage, NOT a variable one, however long the term might be, and budget to pay that fixed amount every month.
But what the banks – or should I say, the Government, because without the bailout money, the mortgage fiasco would only still be getting worse – giveth with one hand, the banks are taking away with the other, when it comes to the interest rates and fees they are charging their banking and credit card customers.
After years of encouraging their customers to borrow beyond their means by extending credit beyond any reasonable ability to pay back, the banks are adding insult to injury by jacking up the interest rates seemingly ad nauseam. To date, the Government has been entirely too passive in its response to this gauging of the consumer. By putting in some regulation that does not take affect until July 2010, the Government has in essence been winking at the banks, and tacitly encouraging them to charge whatever the market will bear until that day of reckoning 15 months from now.
The banks speak out of both sides on their mouth on the subject. In front of Congress, they agree that the credit card problem is serious and growing and that defaults will be significant. Very frankly, if the interest rates were not so onerous, there wouldn’t be such a default rate. Housing crisis redux!!!!
Remember? It was when the mortgage rates started shooting up through the roof, that the defaults starting soaring. Well the same thing will be happening again, but because it doesn’t leave the customer on the street with no place to sleep, it doesn’t get the same national attention. Rates need to be lowered, not raised, in order to solve the credit card debt problem.
The banks say they need to be able to charge a wide array of rates in order to manage their risks. Where were they two and three and four years ago, when consumers were getting into debt way beyond their ability to pay? They were gladly extending credit, not managing their risks. Proper risk management would have limited the amount of credit they granted back then. It is disingenuous on the part of the banks to fall back on the risk management argument.
Much as I deplore Government intervention in the economy, there are times when the Government does indeed need to take a hand in matters that affect the best interests of its people. This is such a time. Without some recourse, consumers will be burdened with costs that will significantly deter the recovery of our economy. To date, Congress has rolled over in favor of the banks. Now is the time for Congressman Frank and Senator Dodd to stand up to the banks and to protect their constituents, all U.S. consumers.
Ironically, this is a uniquely American crisis – except for the fact that all the bundled up credit card debt has probably been sold to countries around the world.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.