The Grid
By Mitch Berg
Joe Doakes from Como Park writes:
I know a guy who invested in real estate in the late 90’s and early 00’s, bought his last parcel in 2004 before any of the troubles began. Talked to him last night for a bit. Interesting story.
Like many honest, hardworking people, he’s been moderately successful in his career and had a 800+ credit score, but has been struggling to make payments on the real estate investment properties and can’t refinance or sell because of declining values. He finally admitted defeat last year and filed for bankruptcy, letting all the properties go. He owed no credit card debt, no consumer debt, only mortgages on the real estate; but the big lenders weren’t content to take the property back, they also wanted judgments to garnish his wages and levy his accounts. Bankruptcy was his only out.
He was astonished to learn that after filing for bankruptcy, all his other creditors cut him off, too. Credit cards that were fully paid up to date with a perfect payment history were canceled on the grounds that continuing to accept his payments was too risky. His bank – to whom he owed no money but instead had money in the bank – canceled his ATM card. He can’t even renew his cell phone contract! He didn’t intend to “go Galt” and drop off the grid – he’s been thrown off the grid by mindless computer programs that consider only the Fair Isaac score and not his personal history of prompt payments.
I think Fair Isaac and the three big credit-scoring agencies have been one of the biggest obstacles to the economy in recent years, and it’s only going to get worse, as millions of Americans, with their credit scores hammered by the abrupt deflation of their homes and Fair-Isaac’s absurd algorithm, become tray to the credit industry.
So now he cashes his paychecks and pays cash or buys pre-paid VISA cards at Walgreens. I wonder how many other people are in the same boat?
To what extent is mindlessly computer-controlled credit inhibit the entrepreneurial activity necessary for an economic recovery?
Perhaps lending needs less federal regulation and more one-on-one human contact?
Joe Doakes
Como Park
I think if I were President, I just might reform the credit reporting industry.
Maybe using the Air Force.
January 20th, 2012 at 12:26 pm
“…all his other creditors cut him off, too. Credit cards that were fully paid up to date with a perfect payment history were canceled. ”
That’s because there were cross-default provisions in all those credt agreements. They basically state that an instance of default on one line of credit / loan regardless of who holds the papers is an instance of default on the present loan. If you have a credit card or a mortgage, you are 99% likely to be subject to that as well.
//lawgeek
January 20th, 2012 at 2:03 pm
I think if I were President, I just might reform the credit reporting industry.
Maybe using the Air Force.
I’d agree, but for probably different reasons than you.
I believe we are awash in too much credit these days and that it’s far too easy to get. We offer kids who are 18 and unwise in the ways of the world the ability to mortgage their future in the hopes of maybe getting a job with a degree. We offer adults the ability to go way in over their heads and default on businesses that aren’t sound (as in this case), etc.
Fair Isaac radically opened up credit and allowed lenders cover for over extending credit because loan officers could now say that it was someone else’s fault that the loan they arranged defaulted. That cover blew the limit off the amount of credit available to the general public and I have to say that I don’t think the general public has handled the situation well.
January 20th, 2012 at 10:22 pm
Low interest rates encurage spending and borrowing now, and not saving. Interest rates really should be about 4 percent higher. Painful in the short run, but would be better for society in the long run. Makes people save and put off those purchases, instead of borrowing and spending the money now.
January 23rd, 2012 at 10:28 am
That’s because there were cross-default provisions in all those credt agreements. They basically state that an instance of default on one line of credit / loan regardless of who holds the papers is an instance of default on the present loan. If you have a credit card or a mortgage, you are 99% likely to be subject to that as well.
I was wondering about that because I remember being told in my finance classes in the 1990s that after someone have filed bankruptcy is usually the safest time for a lender to extend them credit because they can’t file against for 7/10 years. I remember hearing stories about people who received credit card applications right after they filed bankruptcy but when I went to work in the mortgage industry after graduation, I found that more reputable lenders aren’t as eager to extend credit to someone right after they filed bankruptcy because the borrower is considered riskier. The behaviors and circumstances that lead to the bankruptcy often remain even after the debt is discharged.