When will we hit the tipping point?

28 Jul

Being in the legal field, I get to pick up a lot of anecdotal information. One of the things bothering me lately involves consumer credit. I was in court this morning, and of four lawyers who had matters scheduled on this one judge’s calendar, three of us were there on foreclosures and other collection cases. And one guy had probably 20 collection files set for hearing that morning.

In conversations with local judges, I’ve learned that a huge percentage of their cases are collections and mortgage foreclosures. And they are issuing more and more and more default judgments–people are not even disputing the debts, trying to avoid the entry of a judgment against them. Many of the homes in foreclosure are low-income homes, but a surprising number are worth a few hundred thousand dollars.

One judge worries that if the trend continues, the whole thing is going to tip over and fall on us. And that image got me thinking.

In the 1990s, as interest rates dropped to ridiculously low rates, refinancing mortgages became a huge business. People refinanced their mortgages a couple times a year as rates fell. And adjustable rate mortgages were pushed hard by the lenders, and people figured that interest rates would never rise again the way they did in the late 1970s and in the 1980s.

Wrong.

Interest rates are creeping back up. ARMs are going higher, too, with no limit in sight. Loan payments are thus increasing as well, and people’s budgets are getting squeezed. They were barely scraping by before, and now they are in the hole each month.

How long until the mortgage payment is the one bill that has to “wait” to get paid? And then the death spiral begins.

We see it all the time–late charges, interest, etc. gets tacked on. A $1,000 mortgage payment becomes a $1,090 payment (at least). Of course, the next month the payment is $2,090, and if it’s late, it’s $2,180. Next month, $3,270. At this point there are usually noises of a foreclosure, where additional attorney’s fees, court costs, and title search fees get tacked on. There’s a few thousand bucks more to get the mortgage brought current.

This is happening more and more these days. More homes are going into foreclosure, and people are moving out. Where are they going? They’re living off of credit cards, most likely. And then those bills aren’t being paid.  And collection suits get filed.

I fear we may be headed for some disaster here. What are the banks going to do when people can’t afford to borrow money any longer, when they are still saddled with debts that are no longer dischargeable in bankruptcy?

I suppose this is something for the economists to worry about. But when even people like me, who don’t understand much about economics, can see that trouble is coming, then the problem could be much larger than we want to even think about.

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