Stressed borrowers use plastic to delay default

Al Rueters ^ | Sun Oct 28, 1:59 | Nick Carey

[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."

[MrB]

Oh, silly me, at first I thought you were suggesting that a Dem help these people out with his OWN money...

That never happens.

[NVDave]

Right — and one of the ways they loosened up was to go waaaaay down into the basement of FICO scores.

Offhand (mind you, I’m not a lender), but from the statistical reports I’m seeing in banking analysis of the sub-prime market, once you start fishing for borrowers below about the 610 to 625 range of FICO scores, the mindset and behavior of the borrowers changes. It goes from people who have had trouble, or even might be a bit late (consistently) on payments, or flip their debt between too many credit cards, etc — down into the “serious deadbeat” range of behavior. It has been interesting to see the banking industry’s reaction — the seriously-low FICO score borrower isn’t just someone with a few more late payments, or over their head in debt - they have a serious disconnect in their head about how to handle money.

There ought to be a way of flagging a borrower who pays off unsecured debt (ie, credit cards) first, and the mortgage last in the credit scores. These people should never be given a mortgage. That sort of fundamental change in banking assumptions wasn’t well reflected in a FICO score that was “only” 25 points lower than someone else. That’s what the banking analysts are whinging about.

Then, as you point out, these idiot bankers started piling on the high LTV’s, no confirmation of any income at all, etc, etc... and you get what we have today.

This whole situation seems on most days to be a collision where two groups of grifters met up and tried to con each other.

[angkor]

$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.

You're absolutely right.

I said the $125 /$500 was for food and incidentals. Read it again.

As for the rest, sell the cars, take public transport, and save insurance, gas, payments (you say $350, OK that's fine, and then add back $120 for two monthly bus passes).

My utilities are about $75/mo + phone about $25.

So for all your fuming we'll give them another $250 per month so let's say $350 before taxes = $4,200 annually.

Bottom line, they each need to get jobs paying $26,100 annually, not $24,000.

You're not going to get much further with this. Right now they seem to be at or below poverty line.

[RockinRight]

My recommendation is that the people that can do well with zero-down loans are the ones that don’t need it.

In other words...they have money tied up in investments, but would rather leave it leveraged instead of putting it down and no longer having the benefit of earning interest on it.

But the fact they HAVE the money takes care of the financial discipline aspect you mention.

[RockinRight]

If you have less cash, it must (should) be balanced by the other factors, income, credit, etc...being better than the baseline for that same type of loan at a higher down payment.

That’s an oversimplification in reality but the sensible solution.

[RockinRight]

I am in the mortgage industry and would have to say your analysis is GENERALLY correct.

Now does that mean I’ve never seen a 580 credit score on someone that was for all the other information I had a responsible person? I have seen it but it’s the exception. Things can happen (divorce, medical emergency, long period of unemployment) that someone can take some time to recover FICO-wise from. As you probably know, if your credit was bad enough at one time, even two years of perfect ontime payments aren’t always enough to bring you out of the sub-600 cellar. But in the old days (which is really just pre-2003) you had to have damn good compensating factors for everything else...income, assets, etc...

And...to be fair...once in a while you find a real deadbeat with a 700 FICO who has just been lucky so far. Again, the exception.

[ex-Texan]

Foreclosures in Bay Area and Statewide Hit Record Highs in 3rd Quarter

Statewide, 24,209 homes were taken back by lenders in the third quarter, also the highest level recorded. That was up 604.8 percent from last year's third quarter, when 3,435 California homes were lost to foreclosure, and a 38.7 percent increase from the preceding April-to-June quarter of this year.

"We're deep into uncharted territory because we've never been in this boat where the housing market is weakening so much in the absence of a recession," LePage said. "We've never had this widespread use of very risky unconventional loans."

Subprime Catastrophe Was Foretold in 2004

Excerpt:

"Increased subprime lending has been associated with higher levels of delinquency, foreclosure and, in some cases, abusive lending practices." So declared Edward M. Gramlich, a Federal Reserve official.

These days a lot of people are saying things like that about subprime loans -- mortgages issued to buyers who don't meet the normal financial criteria for a home loan. But here's the thing: Mr. Gramlich said those words in May 2004.

And it wasn't his first warning. In his last book, Mr. Gramlich, who recently died of cancer, revealed that he tried to get Alan Greenspan to increase oversight of subprime lending as early as 2000, but got nowhere. * * *

A new report from Congress's Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That's two million American families facing the humiliation and financial pain of losing their homes. * * *

In a paper presented just before his death, Mr. Gramlich wrote that "the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision." What he didn't mention was that this was the way the laissez-faire ideologues ruling Washington -- a group that very much included Mr. Greenspan -- wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.

Unfortunately, assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices. * * *

In fact, both borrowers and investors got scammed.

I've written before about the way investors in securities backed by subprime loans were assured that they were buying AAA assets, only to suddenly find that what they really owned were junk bonds. This shock has produced a crisis of confidence in financial markets, which poses a serious threat to the economy

I have been posting warnings here since 2003, myself. Hardly anybody listened. Others attacked me maliciously. Over 2,300 hacking attacks were launched from corporate web sites. Criminal conduct from corporate criminals. So what else is new? Nada por nada.

Oh, well. Nothing to see here. Greenspan was responsible for creating at least three huge bubbles. Dot.com. Housing. The Credit bubble. Add to that the Bubble Economy. Now were are dealing with a dollar crisis created by the Federal Reserve System. Watch the middle class get shafted as the dollar implodes.

Open borders. 30 million illegal aliens are here already. Nobody gives a shi'ite. Bubble economy. Bernanke wants to lower interest rates yet again. Why? To benefit his cronies on Wall Street, mortgage lenders and credit card companies. Yet, no benefits will flow to middle class Americans. We all get the shaft. Need I say more?

[texaslil]

“I keep balking at the idea...”

Keep balking. If one has to charge something, it’s because one can’t afford it otherwise. For all those who brag that they pay off credit cards each month I need only point out that a number of studies indicate it usually encourages spending from fifteen to eighteen percent more.

There’s something wrong with a society that thinks of debt as the norm. I was raised to think of debt as a shameful lack of character. It’s served me well-—don’t owe anyone. only way to garner capitol is to limit consumption. Don’t have to pay it back or ask a soul if I can spend it.

[RockinRight]

No, you’re probably right...I was just saying that your figures seemed a bit low depending on what part of the country.

And not all areas have access to transit options that can allow someone to forego the automobile. My wife and I, for example, each work 25 miles from home and in opposite directions. And in both cases the pay cuts that would result from a job change don’t justify changing jobs.

Of course we’re not this couple above either!!!!

[zek157]

I use a card for almost every purchase. It’s not the using a card that is bad. I also pay it off every month.

In the last 3-4 years I have paid about 15 cents in interest on one card my daughter used for Itunes. I didn’t know she bought ~$10.00 in tunes until the next month.

[RockinRight]

If that way works for you, great.

Others feel that well-managed debt (that is the KEY) can make you wealthier than otherwise - and it can. It’s not for everyone though and someone who thinks as you do would probably either not believe that it’s true or decide that morally, debt-free is better, regardless of potential benefits of using debt WISELY.

That’s what freedom’s all about!

Nobody here is advocating running up to the limit in debt though.

[steve86]

I use a card for almost every purchase. It’s not the using a card that is bad. I also pay it off every month.

Congratulations! Life is good, I guess. Now pull off that same trick after you and your wife get sick and can't work like we did.

[zek157]

A new report from Congress’s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That’s two million American families facing the humiliation and financial pain of losing their homes.

1.6-1.8M of these humiliated/pained families should not have been provided a mortgage IMHO.

I feel for any family that is losing their home due to illness or job loss. That can happen to anyone.

[numberonepal]

There’s something wrong with a society that thinks of debt as the norm.

Darn tootin'. One does not need a credit card. One might be required to have some plastic in today's world, but that should be in the form of a Debit Card. Cash is still king, it just takes on new forms.

[RockinRight]

One point about debit cards:

When it comes to a dispute, fraud, or theft...you have much more protection on a credit card than a debit card.

Just an FYI.

[Nervous Tick]

>> Open borders. 30 million illegal aliens are here already. Nobody gives a shi’ite. Bubble economy. Bernanke wants to lower interest rates yet again. Why? To benefit his cronies on Wall Street, mortgage lenders and credit card companies. Yet, no benefits will flow to middle class Americans. We all get the shaft.

Hey, thanks for the uplifting ray ‘o hope!

>> Need I say more?

Well, I’d appreciate your advice... should I put the muzzle in my mouth, or would a temple shot be better?

:-) :-) :-) :-) :-) :-) :-) :-) :-) :-)

[businessprofessor]

Markets are self correcting. You just do not like the correction. Stopping the correction is the mistake. We have had many boom/bust cycles in this country. Corrections were painful in many cases but the country moved on.

Regulation is not the solution. While some regulation may be appropriate, regulation will not fix the problem. The actions of buyers and sellers will correct the foolish behavior. Credit rules have already been substantially tightened. Loan holders are looking much more carefully at the quality of the loans.

[lOKKI]

I use a card for almost every purchase. It is not the using a card that is bad. I also pay it off every month.

Congratulations! Life is good, I guess. Now pull off that same trick after you and your wife get sick and can't work like we did.

You've taken the wrong message from this. You can't use the card in lieu of cash; only as a form of cash. Paying Interest on credit cards is the sin - not using the card itself.

Yes, that takes more discipline than paying cash, but once you've had a few months where you've have to scrape to pay off the card without paying any interest, you learn that discipline pretty fast.

[RockinRight]

ex-Texan likes misery. The mouth would be the best place for the muzzle.

;-)

[RockinRight]

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.

Any kind of card is OK as long as it reports to the three major credit bureaus.