Rules are changing, and we could feel the pain soon
Jerry Epperson -- Furniture Today, July 4, 2005
Just when you thought selling furniture couldn't be any more fun, your government steps in to change the rules and make business even more challenging.
I tend to be positive, especially on the longer-term outlook for our industry, but I am very concerned about our prospects for the remainder of 2005.
First, and most obvious, The Bankruptcy Abuse Protection Act of 2005 is expected to become effective in late autumn. While it's designed to protect creditors from some obvious abuses, between now and then you'll see many attorneys ignore the opportunity to chase the next ambulance so they can push marginal consumers into bankruptcy while the old, more lenient rules apply. We expect a surge in filings this summer.
Second, according to Kiplinger and others, federal regulators are forcing some mortgage lenders to raise standards. In 2004, for example, more than 25% of new home loans were interest-only mortgages, up from less than 3% in 2001.
The concern, of course, is that lenders have gone too far in lowering standards for mortgages and home equity loans, and this could lead to severe levels of defaults if housing values fall or if consumers have other credit problems. We don't expect new regulations, but stricter compliance with existing rules.
Finally, and perhaps most worrisome, the Office of the Comptroller of the Currency (you call him "comp") is requiring credit card companies to raise minimum monthly payments. Overall household debt stands at $10 trillion, and with the current 2% minimum repayment of principal and a 16% interest rate, a consumer would need more than 40 years to pay off a credit card balance paying the minimum every month!
The new requirement of a 4% minimum monthly payment is being phased in over the coming months, and will throw a major monkey wrench into many consumers' take-home pay. Today, one in six households is making the minimum payment on credit cards, according to CardWeb.com.
If a household's credit card debt totals $15,000 at a 16% rate, existing rules require a minimum payment of $500, $300 towards principal and $200 in interest. But with the new regulations, the minimum would balloon to $800, $600 plus $200. For a stretched consumer, that can be a huge problem, making them less willing (and less qualified) to take on additional debt, especially for big-ticket, often-deferrable merchandise.
And on top of all this, interest rates are rising, making all debt more expensive.
We are confident these factors can and will be absorbed over time. But, as an industry, we need to consider their implications and prepare now.
