Declaring Financial Independence

Every holiday, various organizations try to catch the attention of consumers by finding clever ways to link the special occasion to a product or service they are offering.

For example, Consumer Credit Counseling Service in Atlanta is encouraging people to declare their independence from credit card debt. Make this Fourth of July week the start of your lifetime of economic freedom, says the nonprofit organization, which offers debt-management programs and budget and bankruptcy counseling.

"Using credit cards for purchases can put you at risk, especially if you aren't disciplined," said Suzanne Boas, president of the service's office in Atlanta. "It may feel like you aren't really spending money and, before you even realize it, you have amassed a large debt that is difficult and very costly to repay."

This creative effort is better, at least, than someone hawking cars or TVs. The group's call is useful considering the latest bankruptcy statistics. The number of consumer bankruptcies filed during the first three months of 2007 jumped to 187,361, a 66 percent increase compared with the first quarter of 2006 and a 9 percent increase compared with the fourth quarter of 2006, according to the Administrative Office of the U.S. Courts. In all of 2006, 112,685 new cases were filed.

"New cases are being filed at much higher rates than a year ago, as more households feel the stress of high debt burdens, a trend that is likely to continue," said the American Bankruptcy Institute's executive director, Samuel J. Gerdano.

This sad news comes at the same time that the five federal regulatory agencies that oversee banks, savings institutions and credit unions (and related subsidiaries) issued a joint statement directed at certain lenders. The organizations implored the lenders to be more forthcoming about the eventual sting borrowers may feel after signing up for teaser interest rates on subprime mortgage loans. The regulators are particularly concerned about adjustable-rate mortgage products that are contributing to the rise in bankruptcy filings.

"Information provided to consumers should clearly explain the risk of payment shock," the regulators said in the statement.

The loans in question enabled people to make low initial payments based on a small introductory rate. Those teaser rates are expiring, and many borrowers are finding they can't handle the larger mortgage payments, leading to increases in mortgage defaults and foreclosures.

About $467 billion of mortgage loans will reset for the first time in 2007, and another $383 billion will reset in 2008, according to Moody's Economy.com. Together, the $850 billion is equivalent to about 9 percent of the mortgage debt that was outstanding in 2006, says Celia Chen, director of housing economics for Moody's Economy.com.

The crux of the regulatory clarification to lenders is this: An institution's analysis of a borrower's ability to repay one of these loans should include an evaluation of the borrower's ability to repay the debt after the introductory rate expires.

"D'oh!" as Homer Simpson says.

Here's an example, according to the regulators, of what they want lenders to do. Let's say a borrower is interested in a loan with an initial fixed rate of 7 percent. After the introductory rate expires, the loan would reset to the six-month London interbank offered rate plus a margin of 6 percent. If that Libor rate equals 5.5 percent, lenders should qualify the borrower at 11.5 percent (5.5 plus 6 percent).