Summary
This article is important because it emphasizes an urgent need for Americans to have a diverse stock of wealth. While making payments on a mortgage, which in a number of cases were beyond the consumers' budgets, consumers failed to accumulate any savings. A pool of wealth outside of the equity in the home may have helped offset mortgage defaults and bankruptcy filings. The article also provides evidence supporting government consideration of designing and implementing policies that providing greater incentives to save and invest.
Analysis
I expect an increasing direct impact on consumer financial services companies. With the expected increase in mortgage defaults due to ARM resets over the next 6 to 8 months, unsecured creditors will face greater losses.
For example, in the case of a consumer filing for Chapter 7 where the consumer is trying to prevent foreclosure by discharging unsecured debt while keeping his home, unsecured creditors will be hardpressed to recover any of the debt especially where the consumer has negative equity in the home.
In most cases, consumers want to reestablish credit via a credit card account. The irony is that while the consumer wants to get rid of this debt through bankruptcy, the consumer still wants to get back in the market for this type of credit. Credit card companies may want to pursue a policy where they offer forgiveness of some portion of the interest or delaying collection on the debt for some period in return for some reaffirmation of the debt. This may be less costly than going through the bankruptcy process or closing accounts while incurring marketing costs to attract new customers.
