Credit card defaults are soaring. And banks after having fought credit card reform for years are now in panic mode over losses.

Newsday.Com asks Is Credit Card Relief Coming?

Banks, which are losing billions because many card holders aren’t paying anything, seek OK to forgive up to 40% of strapped consumers’ debts. Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

The new pilot program, which the banks hope will become permanent, could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower’s financial situation, up to a maximum of 40 percent.

“There’s obviously a financial benefit to the financial institutions to step up to the plate right now,” said Susan Keating, president and chief executive of the National Foundation for Credit Counseling. “We absolutely support the proposal.”

In an increasingly tough economic climate, banks and other mortgage lenders already have been agreeing to modify loans of distressed homeowners to help them avoid foreclosure. Now, banks making credit card loans have reached a point where they can lose less by forgiving part of the debt than seeing the consumer walk away entirely.

Americans are lumbering under about $900 billion in credit card debt, according to the latest available Federal Reserve figures.

The new proposal pitched to federal regulators by the Financial Services Roundtable, which represents more than 100 big banks and other financial companies, and the Consumer Federation of America, would allow lenders to reduce by as much as 40 percent the amount of credit card debt owed by deeply indebted consumers in a pilot program.

Be Careful For What You Wish

In 2005 banks got everything they asked for and then some in the inappropriately named Bankruptcy Reform Act of 2005. A better name would have been the Debt Slave Act of 2005. The bill stops short of imprisonment for failure to repay debts, but provisions of the bill seem eerily reminiscent of the Tennessee Ernie Ford song “Sixteen Tons“.

Credit Card Relief Or Sucker Trap?

Banks are not being generous here. They are attempting to squeeze the last drop of juice from a shriveled up orange. Another reason behind this new found generosity is fear of how Congress might rewrite that bankruptcy law after Obama is elected.

Banks need to learn a lesson about extending massive amounts of credit to undeserving customers. Yes, this is a two way street but banks are the enablers here. It sickens me to see people trapped in debt at 28% annual interest, with massive overlimit fees, and other gotchas like two cycle billing. Please see Read the Fine Print On Credit Cards for more details on the ripoff of two cycle billing and balance transfer offers at Discover Card and other places.

Payback Time For Bank Greed

It’s now payback time for this bank greed. For anyone not paying bills, the question is why pay 60% instead of walking away? More importantly, the sooner bankruptcies and defaults are out of the way, the sooner the economy can recover. In the meantime, attempts to prop up home prices and squeeze the last dime out of consumers will do nothing but prolong the recession. That is why all these measures by Paulson and Bernanke are counterproductive.

I can see how this offer might help a few people. But I also think it will hurt more than it helps. People may squander the last of what they have and still end up in bankruptcy court.

My advice for anyone in serious financial trouble is to consult a bankruptcy attorney as opposed to a credit counseling service. Many in the latter group are nothing but shills for banks and credit card companies, just as groups offering “free down payments” on houses were nothing but shills for the homebuilders.

Credit Tightens

Bloomberg is reporting Sears, Home Depot May Lose 8% of Holiday Sales on Credit Limits.

Home Depot Inc., Sears Holdings Corp. and other retailers may lose as much as 8 percent of their holiday sales this year because lenders and stores are clamping down on financing.

Almost a quarter of shoppers say banks cut the spending limits on their credit cards, according to a survey by America’s Research Group, which also provided the sales-loss estimate. More people are being rejected for new cards, hurting sales for bigger purchases. Demand is being pinched just as retailers prepare to enter the holiday selling season, which accounts for as much as 35 percent of their annual revenue.

“Banks just don’t have the money,” said David Bassuk, a New York-based managing director at consulting firm AlixPartners LLP. The tightening credit is putting retailers “at big risk to lose those sales or lose those customers,” he said. “There is a big concern there with the holiday spending.”

America’s Research Group Chairman Britt Beemer predicts holiday sales will decrease at least 4 percent, the first decline since he started forecasting in 1979, as consumers grapple with sinking home and stock values. His projections have been correct in 16 of the past 17 years.

Retailers that offer zero- or low-interest financing –which is often backed by banks — may also rein in the credit they extend to shoppers to avoid being left with bad loans when customers can’t pay them back.

If financing is “offered, it’s going to be to a much smaller segment of the population,” said Red Gillen, a senior analyst at Boston consulting firm Celent LLC. “It’s great to attract customers with these financing deals, but you don’t want to be holding delinquencies.”

Misplaced Concern

David Bassuk of AlixPartners LLP said “The tightening credit is putting retailers at big risk to lose those sales or lose those customers. There is a big concern there with the holiday spending.”

The big concern ought to be that consumers keep spending recklessly and card companies keep extending credit. If either happens it will simply add to the defaults down the road.

Calculated Risk has an interesting report on defaults in Citigroup: $1.4 Billion in Losses from Credit Card Securitizations. Inquiring minds will want to take a look.

Mike “Mish” Shedlock
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