As a bankruptcy attorney, I meet with many distressed homeowners behind in mortgage payments, but what is baffling to me is how many of my friends and acquaintances who are not in financial trouble (yet) believe that the current foreclosure crisis is not their problem.
I always hear statements like, "The banks were stupid to lend money under such risky conditions, and the borrowers were stupid to take money they knew they couldn’t repay. I think they should both pay for their stupidity, and leave the taxpayer out of it!"
I can understand the sentiment behind statements such as these, as ordinary middle class American’s are fuming from the current one-sided government bailout of the lenders.
As a bankruptcy attorney, I am also against a taxpayer bailout because I understand that the pending bankruptcy reform legislation does a lot to ease the foreclosure crisis without dipping into everyone’s pockets.
Bankruptcy reform, which has been stalled by Congress’ knowledge that President Bush will veto this and any bill the banks tell him to, would force the borrower and lender to come to the table to renegotiate the terms of the loan. No taxpayer bailout necessary!
However, all Americans should understand that this crisis IS everyone’s problem, and we are ALL being affected in very real and direct ways. In yet another example of how this crisis affects everyone, BusinessWeek reports, "Lenders are dropping out of the federally backed student loan business in droves, fleeing an environment squeezed of cash because of the credit crunch."
Forty-six (46) lenders have stopped making federally guaranteed student loans, including Washington Mutual Inc., Sovereign Bancorp Inc., College Loan Corp., CIT Group Inc., NorthStar Education Finance Inc., HSBC Bank USA and Zions Bancorp.
Additionally, the Wall Street Journal reports that Sallie Mae will no longer offer federal consolidation loans. This means that college graduates will no longer have the option to convert their adjustable rate loans to fixed rate loans.
The move is particularly alarming considering the default rate on student loans should be far lower than other types of debt. Because student loan obligations are non-dischargable in bankruptcy, most financially strapped citizens continue paying them long after they have stopped paying other types of debt.
The logical result of this move by lenders will be a higher cost of education for college students who had no hand in the subprime lending debacle. These young people will be starting their careers with fewer opportunities in a strapped economy but with even more debt than their predecessors.
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