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.
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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.
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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 Economy.com.

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.