WASHINGTON (FinalCall.com) – While world attention was focused on recent highly visible stock market fluctuations, even more serious economic meltdowns might be facing consumers and investors alike.
The credit card industry was denounced on Capitol Hill recently for confusing and usurious lending practices, while the credit-blemished mortgage market may also be in trouble because of a practice known as “sub-prime” loans, usually granted to the riskiest borrowers.
Executives of three major banks were questioned about their credit card practices in a hearing of the Senate Homeland Security and Governmental Affairs’ investigative subcommittee Mar. 5. An Ohio man whose $3,200 credit card debt mushroomed to $10,700 with interest and fees was actually offered an apology from his credit card company.
Representatives of Citigroup Inc. and Chase Bank USA said their companies were eliminating some practices–including the one that hit Wesley Wannemacher of Lima, Ohio, with over-limit fees on his Chase card account 47 times. The interest charges and fees on Mr. Wannemacher’s account more than tripled his debt despite his having made payments averaging $1,000 a year over six years, noted Sen. Carl Levin, D-Mich., the subcommittee’s chairman.
Sen. Norman Coleman Jr. of Minnesota, the panel’s senior Republican, said of high interest rates on credit cards, “hefty fees and crippling penalties impede more and more hardworking families from pursuing their American dream.”
Meanwhile, in the area of home mortgages, some analysts caution that laid-back underwriting guidelines–such as no verification of a borrower’s incomes or assets, low or no down payments and high-balance mortgages that were made to families who already were over their heads in debt–finally are coming back to haunt the economy.
The sub-prime lending world is a huge $1.3 trillion market. High delinquencies or failure to make a mortgage payment when it is due reportedly hit 12.6 percent in the latest quarter, and that’s up from 11.7 percent. Adjustable-rate sub-prime loans exceeded 13 percent among those borrowers. That instability is also influencing major stock markets, according to recent reports.
Wall Street seesawed through its own erratic session Mar. 5, trying to stabilize, but ultimately finishing near its lows of the day amid worries about mortgage defaults, a strengthening Japanese yen and tumbling stock markets abroad.
Financial markets remained jittery about losses from sub-prime loans, or loans to customers with poor credit ratings. HSBC Holdings PLC, Europe’s largest bank, said its 2006 earnings rose 5 percent, but that it suffered $10.6 billion in losses on bad loans from its U.S. sub-prime mortgage operations.
But Blacks need to focus on financial literacy and thrift according to Maudine Cooper, President of the Washington Urban League. “We ought not to be just focusing on the stock market. That’s too narrow a focus. What we need to be focusing on is financial literacy initiative, and what that really means,” Ms. Cooper told The Final Call.
“What you need to do is do some comparison shopping. If you’re trying to get a major loan–like, for a house–that is the biggest purchase you’ll ever make in life for most people. And so therefore, you need to make sure you get the best deal. It’s a complicated process; our people get the raw end of the stick so many times because we’re so used to being turned down that when somebody says ‘yes’ to whatever they say yes to, we’re so glad, we take it.”
All of the problems consumers face in the marketplace are worsened by the impossible-to-understand language of credit card and other loan disclosures provided to consumers.
“We ought to be cautious about living, period,” said Ms. Cooper. “If you’re in a crisis situation, you need to sit down and figure out another way. It’s very difficult, for example, to borrow your way out of debt. All you’re doing is creating more debt. So we need to be very, very careful about borrowing money to get out of debt,” she said. People need to thoughtfully look at life and not just resolve: “Oh, I’m in trouble; I’m in debt. Let me go borrow some money.”