Montana Viewpoint

May 30, 2005

I worry about being in debt. Actually, I worry about other people being in debt. I try to run a pretty tight ship on what I borrow, but the trend, as an old fellow I knew used to say, is “hooray for today and the hell with tomorrow.”

I grew up in a time when there were few, if any credit cards, and if you wanted to borrow money you’d better have a good reason, not to mention the ability to pay it back. Pretty much everything I learned about borrowing money I learned from my Pop, who had an unceasing fear of not being able to pay his debts off. Taking out a business loan just months before the stock market crash of 1929 put a keen edge on that fear. (Yes, he managed to pay it back.)

But it was that very fear that allowed him to never over-reach his financial ability. He was very conservative about what he borrowed, and as a Director of our small town bank, conservative about what he loaned.

Foremost in his mind was to determine that the borrower would be able to pay the loan off. Although he was concerned about the soundness of the loan for the bank’s sake, that wasn’t his major issue. Pop was more interested in the welfare of the people borrowing the money—he wanted them to succeed.

Then, major loans were for home purchases or for business. Now, they are increasingly just for fun, and the major proponent of this shift in borrowing is not coming from the consumer, but from the credit card and loan industry.

What causes my recent spate of hand wringing is a story in the Washington Post about the prevalence of interest only mortgages, which now account for some 23% of new mortgages. Because housing costs are escalating at breakneck speed across the nation, many people can no longer afford “traditional” mortgage payments on a new home. A variable rate loan with interest only payments for the first few years allows for more affordable payments, but a lot more risk for both lender and borrower.

The assumption is that the paper equity in the home will increase so fast that soon the borrower will be able to sell it and corner some real money, even though they have no actual earned equity in the property. Well, it is a pretty slick trick, but what happens when the housing market goes gunny bags? There sits the borrower essentially renting their own home or the lender looking at foreclosure. Yes, foreclosures are on the rise, too.

This isn’t the only instance I see of dangerous lending practices—not dangerous for the lender, just the borrower. Credit card debt is a major factor in the financial dilemmas that cause people to file for Chapter 7 bankruptcy protection. You may remember that amidst a great concern that credit card companies were losing money hand over fist because of cardholder bankruptcies, a new, stiffer bankruptcy law was passed by Congress.

So who are now the most courted customers whose business is solicited by the credit card companies? People who are just coming out of bankruptcy! Who’s the fool here? Not the credit card guys; as one writer points out, what better person to loan money to than someone who has just had all their debt erased? There’s also another, more sinister aspect. Under the new law recently signed by President Bush, a person must pay off any debt incurred for eight years after filing for Chapter 7 bankruptcy.

There’s a real plum; a credit card customer with no debt and a legal obligation to pay new debt off. You’d almost think the law was written by the credit card companies.

You’re going to have to make up your own mind about the ethics of these kinds of business practices. Me, I’m hopelessly lost in the business ethics of a long gone time and carry my prejudices forward with me. It seems people no longer have much idea of the consequences of careless debt, and it seems like the lending industry isn’t too worried about that lack of knowledge. In fact, I think they rather profit by it.

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620