Members of the Obama administration are understandably dismayed by the soaring number of consumer bankruptcy filings hitting the United States. According to the latest numbers from the American Bankruptcy Institute, consumer filings are scheduled to hit their highest level this year since 2005. Such filings, of course, are devastating for consumers; depending on the type of bankruptcy protection for which consumers file, this negative mark stays on their credit reports for seven to 10 years. During this time, consumers will struggle to borrow money or qualify for even the highest-interest-rate credit cards. But bankruptcy filings are bad for the country, too. When too many consumers are standing before bankruptcy judges, there are too few willing to spend big bucks on flat-screen TVs and new cars. And the country’s economy depends on this discretionary spending.
Many critics point to the country’s mortgage lenders and bankers as one of the big reasons for the increasing number of consumers seeking bankruptcy protection. Ever since the Great Recession’s height, mortgage lenders have enacted far stricter lending requirements. This hurts homeowners who want to refinance their existing mortgage loans into loans that come with lower interest rates. Because lenders are being so strict – boosting their debt-to-income, credit score, and equity requirements – far too many struggling homeowners aren’t able to qualify for refinances. They then can’t nab today’s historically low interest rates, something that would dramatically reduce their monthly mortgage payments. By reducing these payments, these homeowners might have been able to afford their bills and avoid filing for bankruptcy protection.
Government Programs Failing
The federal government in 2009 introduced its Home Affordable Refinance Program, better known as HARP, to deal with this problem. HARP provides mortgage lenders financial incentives if they’ll refinance the home loans of homeowners who don’t have the traditional 20 percent equity in their homes. Unfortunately, HARP has turned out to be a massive failure. Not nearly enough lenders are approving HARP refinances, and far too many homeowners are falling even deeper into debt because they can’t lower their monthly mortgage payments.
What Next?
Some economists have argued that the economy won’t really improve until the banks and lenders finally loosen their requirements. No one is saying that banks have to go back to the days of lending anyone with a pulse hundreds of thousands of dollars, but there does need to be a happy medium. Until banks start passing out loan money more freely, and until they approve more homeowner refinances, we can all expect the country’s depressing bankruptcy numbers to continue to rise.