Sunday, July 16, 2006

Piling on the Debt

From the Press of Atlantic City:

Credit-card debt engulfs America as spending outweighs income

In “Hamlet,” Shakespeare's Lord Polonius said, “Neither a borrower nor a lender be.” Today's consumer philosophy is closer to the 1980s bumper sticker: “He who dies with the most toys wins.” Polonius would be laughed out of the home electronics superstore.
But some homeowners can't escape credit-card debt be-cause they have turned it into mortgage debt. They took out home equity loans to pay off creditors. That's happened a lot. Nearly one-third of equity loans in 2004 went to pay off debt, according to the Federal Reserve.

Shifting credit debt to mortgage payments usually lowers the interest rate. It allows interest to be deducted on income tax returns. Still, draining equity out of a family's main asset may be a sign of credit problems. It's especially troubling if a family runs up its credit cards again.

Clayman and other attorneys say there are fewer bankruptcies when housing prices are high and interest rates are low. Higher equity helps manage debt.

Unfortunately, the lawyers look at mortgage and interest trends, and predict that more families' finances are living on borrowed time.
Some buyers could not afford a big down payment in the roaring housing market of recent years. The mortgage industry created no-equity loans. The buyer keeps payments low by paying only interest until he sells the house at a profit. Some buyers took loans with “negative equity.” They borrowed more than the house was worth.

Lenders also provided adjustable-rate mortgages, which start with a low interest rate that changes according to market trends. Seventeen percent of adjustable mortgages sold in 2004 and 2005 offered a starter rate of 2 percent or less.

Two problems have developed. Housing prices have started declining. And the Federal Reserve keeps raising interest rates to fight inflation.

Higher interest rates will affect millions of adjustable-rate mortgages. Rates are expected to increase on a quarter of all outstanding U.S. mortgages either this year or next, according to

Many recent buyers' adjustable mortgage payments could double.

Christopher Cagan, research director for First American Real Estate Solutions, studied the possible impact of rising interest rates. An increase from 1 percent to a 6 percent market rate could rocket a monthly payment from $965 to $1,800.

Even if it took a few years for rates to rise that high, Cagan said, many people would lose their homes. If a homeowner holds no equity and his house has lost value, he would make nothing if he sold it.


Anonymous Anonymous said...

"ARMs are a ticking time bomb," said Brad Geisen, president and chief executive of property tracker "Through 2006 and 2007, I'm pretty sure we'll see a high volume of foreclosures."

7/16/2006 09:49:00 AM  
Anonymous Anonymous said...

Hang in there it is payback time.

7/16/2006 09:53:00 AM  
Anonymous Anonymous said...

Its about personal responsibility. The consumer mentality is more entrenched in this area than other parts of the country.

Consumer debt is because of reckless spending - plain & simple. Most of the debt is stupid anyway - such as spending thousands on overpriced trashy clubs, bad overhyped restaurants blessed by Zagat & the NY Times where you can't get in unless you are dressed in thousand dollar outfits, & of course thousands on designer clothing made in the third world.

People judge others by what they drive & what they are wearing. If you aren't wearing expensive clothes & driving a $50,000 car, people either ignore you or act Hostile, rude, aggressive & confrontational.

7/16/2006 10:14:00 AM  
Anonymous Anonymous said...

Something to think about before charging another pair of $300 Jeans, $250 shirt from Bloomingdales, or spending $350 on Dinner at Pastis in the meatpacking district.

Of course, most just ask Mom & Dad to bail them out..

And no house prices aren't going to continue to rise by 25% a year, and your studio condo isn't going to sell for $499,000 in Jersey City (with its $6,000 in annual real estate taxes & $400 monthly HOA fees).

7/16/2006 10:17:00 AM  
Anonymous Anonymous said...

Madam Esmeralda is staring into her crystal ball... seeing many, many frightened sellers sitting at closings with cash advances on their credit cards to cover their losses.

Those same credit cards they paid off last year with HELOCs.

7/16/2006 10:23:00 AM  
Anonymous gary said...

Send lawyers, guns and money...

7/16/2006 11:53:00 AM  

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