Bankruptcy filings could decline next year for the first time since 1992, a research report concludes, thanks to low interest rates and new mortgage products that enable consumers to consolidate debts.
SMR Research of Budd Lake, N.J., and Columbia University have issued reports concluding that home equity loans and high-loan-to-value mortgages are letting overstrapped consumers lower their monthly payments and sidestep bankruptcy.
These reports contradict studies claiming that high-loan-to-value lending contributes to bankruptcies.
SMR goes so far as to predict that bankruptcies will level off this year at 1.33 million and decline to between 1.15 million and 1.28 million in 1999.
Previous research-notably by Visa International-has concluded that filings would continue to rise, perhaps at a slower rate.
Lower interest rates are encouraging homeowners to refinance their home loans, thereby lowering monthly payments, said Stuart Feldstein, presidentof SMR. Homeowners are also taking out extra cash when they refinance, he said, and using it to pay down credit card debts.
More lenders are now offering first and second mortgages for near to or even above a home's value, and touting the products as a way to consolidate credit card debt. Home equity lending volume has steadily increased in the past five years, to about $268 billion in 1997, observers estimate.
The high-loan-to-value segment has grown even faster-more than $6.3 billion of such loans were securitized in 1997, according to PaineWebber Inc., versus just $1.3 billion in 1996.
A Columbia Business School report issued in early July predicted that more use of high-LTV loans would prevent some some consumers from filing for bankruptcy.
"If you convert from a nonsecured credit card loan to a mortgage product, you are less likely to file," said author Charles Calomiris. Home- related debt cannot be charged off in most states, and this gives a consumer little incentive to file, he said.
But high-LTV lending will have an effect only on "abusive or strategic" filings, he added, where borrowers are using bankruptcy expressly to get out of debt. Legitimate bankruptcies are going to continue to rise, he said, because of certain demographic trends.
The reports generally support lenders' views.
"Here is an industry that primarily allows people to refinance high-rate credit card debt and amortize it over time," said Scott Reading, president of Amresco Residential Credit Corp. "You have to wonder what level bankruptcies would be at today if you could not do that."
Most high-LTV lenders are loath to draw any correlation between the loans and bankruptcy, however.
"The loan itself is for a creditworthy customer," said Scott Stafford, head of a new high-LTV program at National Commerce Bancorp., Memphis. "If used properly, it can certainly help someone," he said, but consumers with debt-to-income ratios over 38% are not eligible for a National Commerce high-LTV loan.
Not everyone is sold on transferring credit card debt to a home equity loan. "I don't see the point of taking unsecured debt and securing it to your home," said Greg Herman, a credit counselor who specializies in helping near-bankruptcy consumers consolidate their bills. Mr. Herman negotiates with card issuers to get lower interest rates and eliminate late-payment charges.
Mr. Herman said he recommends high-LTV loans only in extreme cases, when they provide lower monthly payments than he can arrange from other creditors. "It's a severe financial product," he said.
Some observers warn that the current popularity of high-LTV loans will lead to more bankruptcies.
"Just as often as these loans save someone from bankruptcy, they will cause people to file," said Greg Klein, staff attorney with the National Consumer Law Center, Boston. High-LTV companies can use the threat of foreclosure to force a borrower to pay, but bankruptcy allows borrowers to hold on to their homes, he said."The imminence of foreclosure will cause force someone to file."
Foreclosure rates generally peak five to seven years after a loan is made, Mr. Klein said. He said it will be another three years before foreclosure rates peak for high-LTV loans.
Predicting a dip in bankruptcies because of the growth of home equity loans "might be ambitious," Mr. Reading said. "At best, they minimize the growth-without this, industry personal bankruptcy would be significantly higher."
Future bankruptcy trends also may hinge on the state of the economy and reform legislation-both unpredictable.
The bankruptcy reform bill that would tighten requirements on consumers, originally due to be reviewed in late July, will not be voted on until after the Senate reconvenes in September.
Visa International, meanwhile, concluded in mid-July that bankruptcies will increase steadily in coming years, to 69% above current record levels by 2001.
"Interest rates have already been down for a year and a half," said Kenneth R. Crone, Visa's senior vice president for issuer risk. If bankruptcies were going to decline, "that trend should have happened sooner" than 1999.