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Credit is a double-edged sword: lenders are willing to extend generous amounts of it to almost anyone with a decent record, but they are intransigent when it comes to accommodating delinquent borrowers with repayment plans. In years past, creditors have found it less expensive and easier to charge off delinquent debts rather than collaborate with borrowers on a repayment plan. They tended to prefer this approach because they can get a tax break on the write-off of the bad debt and then quickly move on to the lucrative business of extending more credit to other customers. Recently, though, the attitudes of lenders have changed dramatically in light of sky-high default rates, the slowing economy, and the credit crisis. Increasingly, lenders are willing to either forgive some debts or at least work with delinquent borrowers to create a mutually advantageous repayment plan.
Why the About-Face?
The shift in lenders’ attitudes is not surprising in the current challenging financial climate. Here are just a few of the reasons that might be motivating lenders to find new ways to keep borrowers paying on their debts:
- One year ago, credit card companies charged off 3.85% of the total amount owed as bad debt. As of the second quarter of 2008, the charge-off rate had spiked to 5.47%.
- Consumer bankruptcy filings for October 2008 were 40% higher than the same month last year
- Over 2.2 million homeowners are more than 60 days behind on their mortgage payments, and one in six homeowners owes more on his or her home than it is worth
- As home prices plummet, each foreclosure now translates into a loss of 44% of the original loan, compared to just 29% one year ago
Mortgage Lenders See the Light
The biggest mortgage-related new program was unveiled on Nov. 11, 2008 by Fannie Mae and Freddie Mac, the government entities that guarantee 31 million American mortgages. Under the new program, the agencies will begin paying the mortgage companies that maintain the home loans $800 for each loan the companies modify. Modifications might come in the form of relaxed interest rates, extended loan terms, or interest-free deferments of some of the loan principal. Citigroup also announced that it would stop foreclosures on the homes of borrowers who have a good chance of being able to make reduced mortgage payments.
The Exceptions: Auto & Student Loans
Not all creditors have seen the light. In fact, the issuers of auto and student loans have actually made it more difficult to escape these kinds of debt. However, there is some hope:
- Some borrowers may be able to get portions of their student loans forgiven through military service, volunteer work, or teaching in low-income areas. Likewise, a law passed in 2007 erases federal student loan debt for borrowers who work in certain occupations and have made ten years of on-time payments.
- Auto loan issuers have ratcheted up their efforts to educate borrowers about their alternatives if they get behind on their car payments. These efforts are much needed—over 500,000 borrowers are at least 30 days overdue on an auto loan currently.
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