Good Debt, Bad Debt

Credit problems exploded after too many people with questionable credit, shaky jobs and NO downpayments were given mortgages. The extension of nearly unlimited credit to everyone came on top of historically low interest rates.

Low interest rates and low or no downpayments are the two most compelling variables in the equation for calculating the price of a house. The combination of falling rates and easy credit led to housing prices that marched uphill until the lending terms were squeezed to their mathematical limits. Possibly beyond, since some people were actually given cash for downpayments.

When terms could get no better and every borrower had borrowed, there was only one possible set of circumstances ahead for the real estate market -- a slowdown in sales and a decline in prices. Despite the fact that mortgages were collateralized by houses, both lost value and the defaults and foreclosures began.

However, it appears the foreclosed homes will sell for at least 50% of the mortgaged amounts.

Unfortunately, that's not the case with goods purchased with credit cards. Nevertheless, Obama wants to keep the credit-card industry floating along by using the same strategy used to keep the mortgage business flying: Once again -- Low Rates and Easy Credit.

Obama wants Credit Card Companies to give Americans more capital at lower rates. That's his idea of a solution to problems caused by wild spending at higher rates. More money and lower rates. Yeah, that'll do it. It seems he unaware that a bad policy gets even worse when it is expanded.

We're in for it with this guy.

Credit-Card Fees

Obama also prodded Congress to pass restrictions on credit- card issuers, saying consumers need “strong and reliable” protection from unfair practices and hidden fees.

“It’s time for reform that’s built on transparency, accountability, and mutual responsibility, values fundamental to the new foundation we seek to build for our economy,” the president said.
Obama called on Congress to pass a credit-card bill he can sign into law by May 25 that would clamp down on what he says are sudden rate increases, unfair penalties and hidden fees. He wants the measure to protect consumers, strengthen monitoring and impose penalties for credit-card company violations.

The U.S. House of Representatives passed the credit-card bill last month after adding a provision requiring banks to apply consumers’ payments to balances with the highest interest rates first. The bill also imposes limits on card interest rates and fees.

The Senate is debating its version today. It also would require credit-card companies to give 45 days’ notice before increasing an interest rate. It would prohibit retroactive rate increases on existing balances unless a consumer was 60 days late with a payment.

‘Complicit’ in Debt

The president said Americans have been hooked on their credit cards and share some of the blame for the current system.

“We have been complicit in these problems,” he said. “We have to change how we operate. These practices have only grown worse in the midst of this recession.”

The House and Senate will have to iron out any differences and vote again on a final, compromise version before sending it to Obama for his signature.

The American Bankers Association, which represents card issuers, has warned lawmakers and the Obama administration against taking punitive action or setting requirements that are too stringent. Doing so, the lobby group says, would limit consumer credit and worsen a credit crunch.

Obama said that restrictions “shouldn’t diminish consumers’ access to credit.”

Uncollectible credit-card debt rose to 8.82 percent in February, the most in the 20 years that Moody’s Investors Service Inc. has kept records. Lawmakers have said they’re under increasing pressure from constituents to respond to rising interest rates and abrupt changes to consumers’ accounts.