Posted on 10/29/2007 10:00:06 AM PDT by zek157
This may be Johari Reeves' last chance to catch up on her mortgage payments. The credit cards, she'll worry about later.
"We fell behind (with the mortgage) and twice we agreed to new repayment schedules that didn't work out," said the 31-year-old, a compliance officer at a small bank on Chicago's blue-collar South Side. "It's been a lot of stress. But this time, if all goes well, we should be able catch up."
In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 -- higher than they planned on, especially with her husband's furniture sales job largely commission-based and business not good due to the U.S. housing slowdown.
An attempt this spring at refinancing with another lender fell through, leaving them behind on payments and struggling.
But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has "maxed out" all her credit cards, spending to the limit on basic needs. "Now all I'm doing is making the minimum monthly payments."
According to nonprofit groups providing debt counseling to home owners, more Americans like Reeves risk being swept up by the next wave of home owners to default on their mortgages.
The reason? A second debt mountain on top of the first.
Rising mortgage payments and tighter lending standards for refinancing amid the subprime credit crisis have dried up once-easy access to home equity loans for many middle-income borrowers -- so desperate borrowers are using credit cards to cover basics while trying to keep up with home payments.
"When credit conditions dry up, marginal borrowers turn to plastic," said Merrill Lynch North American Economist David Rosenberg. "We're seeing signs of that already."
In an October 5 research note, Rosenberg called rising credit- card delinquency rates as the "next skeleton in the closet."
It is one scary skeleton -- and a specter of bankruptcy.
The problem with using credit cards -- with their high interest rates -- to stave off default brought on by "reset" adjustable mortgage interest is that it merely postpones an inevitable crisis, said Gregary Brown, social policy director at Metropolitan Family Services in Chicago.
"Our biggest concern right now is that there are lot of people who will face a choice between bankruptcy or foreclosure," he said. "Either way, it's going to suck."
HOLDING OFF THE TIDE?
Nancy Barba -- a financial counselor at a local community group, the Resurrection Project -- helped Johari Reeves negotiate her latest attempt at a repayment schedule for her mortgage.
"The credit cards will be a problem later," Barba said. "But right now, the main concern is the house."
Barba and other counselors said people from a broad range of income levels were facing similar problems with their credit cards, especially those with adjustable rate mortgages.
"We're not just talking to people with subprime loans but also people who bought homes almost out of their range struggling with a higher mortgage rate," said Cate Williams at Money Management International, a nonprofit group.
"They're now using plastic to pay for basics like gas and food and are running into trouble," she said.
U.S. Federal Reserve data for August showed revolving consumer credit, mainly credit and charge cards, rose $6.14 billion, or 8.1 percent, to $915.47 billion -- the highest monthly increase seen since the second quarter of 2006.
More worrying, said Merrill Lynch's Rosenberg, were Fed data for credit-card delinquency, which hit a three-year high in the second quarter of this year.
The next worry? The U.S. holiday retail spending season is rapidly approaching and, according to Rosenberg and others, this could push many home owners over the edge.
"People are stretched thin even before the holidays," said Geoff Smith, project director at Woodstock Institute, a Chicago community development group. "If they spend a lot, about three months after Christmas when the bills and mortgages are past due, we could see a rise in delinquency and foreclosures."
Although the 2005 U.S. Bankruptcy Abuse Prevention and Consumer Protection Act made it more difficult to file for bankruptcy, John Talmage of nonprofit group Social Compact predicts: "We should see a spike in bankruptcy applications."
But here’s my question:
If they bought the house with zero down, they aren’t in trouble because they depleted their savings. So the problem lies in the size of the house payment. What would their rent have been each month if they weren’t buying? Wouldn’t the rent be pretty close to the amount of the house payment for a similar size house?
What am I missing here? Wouldn’t they have been in this same trouble anyhow?
Help me understand this, please.
Yeah I caught that too. Looks like they NEVER paid it right from the start.
And what? GOP candidates are supposed to propose bailouts for them or what?
When used intelligently some cards actually can save you money and build credit. If you see yourself paying interest on accumulated monthly debt your using it improperly and should get rid of it immediately.
I make 100% commission too...does that mean I shouldn’t buy a home? Fact is I make about twice what I could on a salaried position with similar requirements...and that’s in a SLOW market.
Fact is while that’s a part of their problem, it’s much greater than that. I’d be interested to see if:
A-they even verified income
B-what has he made historically at this job
C-what his wife makes
I didn’t say that. Though I do predict GOP candidates fold like lawn furniture come election season.
Brilliant! I bet the next ingenious step is payday/car title lending.
Um...you don’t expect them to pay utilities, gasoline, or food??
$125 a week is $500/mo. I don’t know where you live, but utilities alone might come damn close to that...add another $200 to put gas in the car...another $150 to insure the cars...and they haven’t eaten yet.
The number of first-payment defaults or “early payment defaults” (ie, within the first six payments) in the last 12 months has taken the mortgage lending industry completely by surprise. They had no clue that they were truly dealing with a different type of borrower here.
The pattern to pay off unsecured debt first, mortgage second, also took the mortgage industry by surprise.
The statistical patterns that are emerging from the sub-prime borrowers in the last 2.5 years are so contrary to long-established patterns of mortgage borrower behavior that it is the reason why I’m saying that the sub-prime debt market will never come back in the form we’ve seen it in the past. The debt market learned a very hard lesson here: when you lend money to people with really poor credit history, you find out that there’s a *reason* why these people have a really poor credit history.
These people fundamentally do not understand money.
Well that I can’t dispute.
Subprime and less-than-prime lending has been around a while and did OK. The problem arose when lenders took on the “let’s give ‘em a mile since we gave ‘em an inch” mentality.
At first, subprime was meant for people who USED to have bad credit...but have done rather well the last 2 years or so...and proven they’ve changed their ways. Or, at the very least, people with problems that could reasonably be corrected and with a low enough loan-to-value ratio that they were still protected if the client did default.
Then they loosened up more, and more, and more...
It’s way to easy to spend money you don’t have.
Amen, I have a credit card that I use primarily for purchasing gas, and for the rare occasions where I need to purchase something and I don’t have a check or an ATM nearby. If you do get a card, make sure that you use it, but like PAR35 said, only make purchases you plan to pay off each month. I have never once payed the ‘minimum’, I treat the card like a debit card, anything I purchase on it comes out of the checking account at the end of the month. If used ‘correctly’, they can be very good for your credit score, but too many people don’t, such as these individuals. They may save their house, emphasize may, but they will still be saddled with huge credit debts that will constantly accrue interest, and will probably be in worse shape in a couple years than they are now.
Another reason for debacles like this (aside from this family’s financial mismanagement) is the whole notion that everyone should own their own home. Many people who are in trouble today would have been far better off if they had rented. Home ownership is a siren song for some people.
Very stupid.
However...people in this situation often reach this point where you say “screw it...I’m so far beyond unable to fix the problem now I might as well enjoy myself before I crash and burn.”
I’m not saying that makes it “OK” by any means...but it’s not quite the straight-up irresponsibility it seems to be at that point. People reach a point of hopelessness.
Big mistake. People who demonstrate an ability to save for a downpayment have shown they have some financial discipline. Used to be you had to put at least 10-20% down and have a decent credit history to get a mortgage. Today's clueless buyer takes out a jumbo mortgage with no money down then maxes out their plastic furnishing the place.
We always pay off our cards and both of our cards give us money back, as well. Well, one is in the form of gift ceertificates to a grocery strore, but it’s the store where we shop most. We usually end up with 5 or 6 free weekly trips per year.
We DID make the payments and zeroed out the balance EVERY month, even if we didn’t eat that month.
After a few years we had established credit and were able to get much lower rates on our car loan because we had proved that we would repay our loans.
We still pay the credit cards off first every month.
So, you should get a card, and please consider a plan similar to what we did to get started. Don’t use one of those ‘establish credit credit cards’ you see on TV. They’re a trick, but a normal Credit Union will usually give you one with a genuine Visa or Mastercard (I’d guess Discover is OK too). Just pay it off every month, period.
Exactly, if you can’t afford to make a down payment, you have no business buying a house.
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