My 2 Cents on the Credit Crisis

Every one seems to have an answer to the “credit crisis” we are facing today. Some folks want to tighten up credit policy. Some want to make lenders more accountable, some want the federal government to intercede and establish stringent rules and regulations to prevent this “subprime meltdown” from ever happening again.

That’s all fine and dandy, buy none of it goes to solving the problem first and foremost on most of the public’s mind these days…”What about me? What is going to happen to my_______________?” Just fill in the blank with whatever asset you might think of. After all, isn’t almost everything at risk these days?

My personal feeling is that we must be do something to protect the core investment that most consumers have made in their homes, vehicles, and their lives in general. Repossession or foreclosure, charge offs and relentless, unsuccessful collection attempts do nothing to preserve the integrity of the economy as we know it. Foreclosed homes sit vacant and fall into disrepair, and often sell at a significant and substantial loss for the creditor holding the loan on the property. Forced sales lower prices, and, in turn, lower the values of the surrounding properties. This in turn can cause additional foreclosures when property values decline to the point where it becomes pointless to continue to pay on a home no longer worth anywhere close to the mortgage balance.

Repossessed vehicles produce significant losses for lenders, when they are sold at auction to recover as much of the outstanding balance as possible. The remaining balance becomes an often uncollectible debt, as a consumer has little reason to pay off a debt on an vehicle they no longer have. The only ones who profit are the collection agencies who continually buy and resell these debts, often for pennies on the dollar.

My point is very simple. Instead of writing off a mortgage, auto loan or charge card as uncollectible, lenders might want to consider preserving the balance and foregoing the profit from the interest THEY PROBABLY WON’T EVER COLLECT WHEN THE DEBT GOES BAD! Why not consider restructuring the loan to make it affordable to the debtor to continue to pay. If there is going to be a significant loss when the debt goes sour, why not restructure the debt to the amount that may be recoverable and keep the collateral producing some income or interest or profit, instead of producing the inevitable loss.

Now, I’m not saying that all debts should be reworked, but maybe, in those cases where a debtor has an ability to make payments, why not restructure a loan to make it affordable? In cases where there is no chance of repayment, well, that’s another story. But why not work to preserve principle, and forgo profit where profiut is clearly unachievable? After all, if the likelihood of repayment never really existed in the first place, was the profit anything more than a phantom, a wisp in the wind that never really had a chance to materialize? To me, the idea of preserving the principle amount of the collateral works in everybody’s best interest.

Mr. President, Mr. Bernanke, members of Congress, lenders, creditors, and bankers alike - we all want to believe there is a solution out there somewhere that doesn’t mean financial doom for all of us. Let’s find a way to preserve the things we have all worked so hard for – our homes, our cars, our and our children’s futures – instead of just writing them off!

That’s my 2 cents…