Credit Card Debt: Banks’ Mortgage Woes May Offer Consumers Help
January 26, 2009
American Debt Control
Consumers with out of control credit card debt may actually be helped by the mortgage loan crisis. As banks struggle to collect mortgage payments from over-extended homeowners, some are willing to negotiate credit card balances.
If you’re having trouble keeping up with mortgage payments, and you have high credit card debt with the same financial institution, you probably feel overwhelmed, perhaps desperate. But the same sour economy that is the source of your pain is sticking it to the banks in a way that could actually help reduce your debt.
Collateral
Sound good? Hang on, this requires some explanation. It has to do with a term called cross-collateralization. Anyone who has borrowed money to buy a house or car knows the term “collateral.” In the financial world, collateral is security pledged against a loan. Simply put, the lender really owns your house or car until you pay it off.
If you doubt that, watch what happens if you stop making payments. Even if your have nearly paid the account in full, you lose your collateral – your home or car – if you don’t make all the payments.
Banks require collateral for most loans, whether or not the asset pledged is related to the reason for the loan, as it is with a house or car loan. For example, if you need money to start a business, the lending bank may ask you to offer your home, car or some of your investments as collateral. That way, the bank won’t be the loser if you default. You will.
Cross-Collateralization
Sometimes banks will allow the borrower to offer the same collateral for more than one loan. If you have a house worth $250,000 and owe $100,000 on your mortgage, the bank will accept the $150,000 of equity as security for another loan. This is called cross-collateralization.
Banks routinely use cross-collateralization of loans to reduce risk. You can bet when the risk is less for the bank, it’s greater for the borrower. But there is a new twist on this that actually can benefit consumers who have big credit card debts they cannot pay.
It is commonplace for consumers to have credit card accounts with the same institutions that hold or service their mortgages. As the number of mortgages in default has grown over the past year, some banks – including some of the nation’s largest – have decided receiving mortgage payments is more important to them than receiving credit card payments from the same borrowers. Why would that be?
Why Banks Are Hurting
The real estate boom of the past decade was so profitable for so long for so many people, some thought it would go on indefinitely. Banks accepted more risk from less qualified buyers. Bankers figured, understandably so at the time, that if a borrower might be a little shaky, the bank could repossess the house and sell it for a profit.
Then the bubble burst in 2008. Home values plummeted so much that many borrowers owed more money on their homes than the homes were worth. It does no good to foreclose on a home, then turn around and sell it for a loss, if it can be sold at all. What’s a banker to do? Better to keep the homeowner making those payments and maintain a steady revenue stream for the bank.
Borrowers have similar dilemmas: many have variable-rate mortgages that cause their monthly payments to increase as mortgage interest rates go up. To make matters worse, many also have thousands of dollars of credit card debt on cards issued by the same institutions.
Bank’s Pain, Your Gain
If your situation is anything like that, take heart. You may have more leverage than you realize. The more important it becomes for banks to keep you making your mortgage payments, the more likely they are to strike a deal on your credit card debt.
The situation for the bank is like that of a man whose foot is stuck in a railroad track with a train speeding toward him. If he stays between the rails the train will obliterate him; if he stretches as far as he can to get mostly off the track, he may lose a leg. Your credit card debt is the banker’s leg: Better for the bank to take a smaller loss on the credit card balance than to take the big hit on the mortgage.
Get Professional Help
It can be daunting trying to negotiate your way out of such a situation. If you don’t go about it right you may dig a deeper hole for yourself. The best course of action is to consult professionals who do this kind of work every day.
Debt settlement companies can help you develop a solid plan to get out of debt and enjoy life again. These companies don’t all work the same, however. To find a reputable one that adheres to accepted industry standards, look for companies that are members of The Association of Settlement Companies, TASC. With your personal commitment to the task and professional help, you can get out of debt.
About the Author
Zack Anderson is president of American Debt Control, LLC, a full-service debt settlement company helping financially distressed people become debt-free and regain control of their lives in 12-36 months. Call American Debt Control at 1-877-770-1080, or visit http://www.americandebtcontrol.com.
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