More People Are Stumbling On The Treadmill Of Debt

By Nancy K. Crevier

Go to foreclosure.com, and you will find nearly 70 instances of preforeclosure, foreclosure, and bankruptcy in Newtown and Sandy Hook. At Realtytrac.com, an online real estate marketplace, more than 500 local homes are listed as being in preforeclosure, bank owned (the final step in foreclosure), or as resales, meaning that the lender has taken ownership of the property.

What Jay Patrick, a local real estate title examiner for more than 35 years, has noticed over the past two years is the increase in the number of  lis pendens that show up on title searches. A lis pendens is a notice of suit, said Mr Patrick, and might indicate that there is overextension of spending in Newtown.

The Federal Reserve notes that foreclosures are up 20 percent over the last year in Connecticut, said Mr Patrick, and there is no reason to believe that Newtown numbers are not in keeping with that trend.

“Starting in about 1995 to 96, lenders were practically giving out mortgages. People were buying up these megamansions, but you ask the builders about it, and they will tell you that some of those big houses had hardly a stick of real furniture in them. Home prices were up, but now the prices have leveled off and people are finding themselves in debt,” said Mr Patrick. As residents overspent on housing and accumulated credit card debt, many found themselves unable to carry the burden of excessive bills; bankruptcy and foreclosure are often the result, he said.

In the minutes of the March 8 Consumer Advisory Council (CAC) posted on the Federal Reserve website federalreserve.gov, Stella Adams, a committee member, stated, “We are facing foreclosure crisis in this country and we really need to try to get a handle on the cause of it.”

Ms Adams also noted that there were 1.2 million families at risk for foreclosure from 2006 and that “as many as 2 million will face foreclosure in the upcoming year because of various activities… in the marketplace.” A significant number of those foreclosures are in the subprime market, Ms Adams said.

A subprime mortgage is one granted to a person with a substandard credit report. Subprime borrowers may have missed payments on a debt or have been late with payments. A higher interest rate is charged to make up for the possibility that this borrower could default on the loan. Subprime mortgages often allow people to get into more house than a traditional mortgage would permit.

Many people in Newtown, in Connecticut, and across the country were willing in recent years to gamble by taking on subprime mortgages, counting on increasing equity in their homes and increased earning capabilities to keep them ahead of the higher loan cost. Lenders also gambled that the economy would remain strong, enabling buyers who would not have qualified for standard mortgages to purchase homes and be able to make monthly payments that had the potential to increase from year to year. The dice did not roll favorably, however, for many who put their homes at stake.

Joe Falk, who spoke on behalf of the mortgage broker community at the CAC meeting, pointed out that part of the subprime problem could be due to a lack of understanding on the part of borrowers as to what subprime variable rate mortgages entail. He noted that in some instances no final payment sheet was provided, including minimum and maximum payment, prepayment penalty options, or whether escrow for taxes and insurance was included in the loan payment. Refinance issues, consumers using the rapid appreciation of their homes to pay their daily bills, and fraudulent acts by some of the loan originators were also responsible, stated Mr Falk, for some instances of foreclosure.

Interest rates that change without affecting the amount of the monthly payment can push borrowers into a negative amortization situation, in which those payments do not cover even the interest due, and the loan ends up higher than the amount initially borrowed. As payments fall behind, foreclosure and/or bankruptcy are often not far behind.

At Consumer Credit Counseling Service (CCCS), a member of the National Foundation for Credit Counseling, the Connecticut director of education Diane Mull said that more people are coming in for counseling these past two years. “We’re seeing many for bankruptcy counseling, but some of that is because counseling is required now before filing and again before a bankruptcy can be discharged,” she explained. What worries Ms Mull is seeing people who are caught in the vise grip of housing, education, and health costs. “Costs are so high now for education,” said Ms Mull. “More children have to pay their own way for schooling, even with parents helping, and that means taking out huge loans. A lot of young people are in debt because of student loan debt. Entry level income has not kept up with what was a given even a few years ago, so these young people find themselves deep in debt.”

What she sees happening as young people try to make their way in the world is an unmanageable amount of credit card debt. “They become what we call ‘revolvers.’ They never pay off more than the minimum payment each month. They keep debt out there and they never catch up,” Ms Mull said.

Credit card abuse accounts for 35 percent of the clients CCCS sees. The most common cause of debt, though, accounting for 37 percent of those seeking financial counseling, is because of job loss, Ms Mull said. Unexpected medical costs, family issues, and a lack of budgeting add to those reasons and can result in bankruptcy.

It is not just people who have overspent on housing or credit cards that CCCS is counseling these days. “We are seeing more senior citizens than ever. They are finding themselves challenged. Their savings don’t go as far as they used to go, pensions are not like they used to be, and people are living longer with higher medical costs.” All of this is pushing the elderly over the brink, said Ms Mull.

Credit can be used wisely, but Ms Mull said there are signals that indicate when spending is getting out of hand. “If you see that debt is increasing over time is a big sign. Another red flag would be if you start to argue with a spouse over money. If you are at or near the credit card limit or if you are denied credit, if you are using savings or credit for daily expenses, and of course, if you receive telephone calls from a collector, those are trouble signs,” Ms Mull said.

Counseling can help people get back on the financial track again. Sometimes, debt consolidation is an option. “People need to understand that with debt consolidation they still have to be able to pay off that debt in five years. We try to get the credit card holder to bring their debt current and find a way for them to afford the monthly payments, often by getting concessions from the creditors,” she said.

CCCS then receives the monthly payments amount from the client and disperses it to creditors. “It is sometimes the only way to resolve a credit problem,” she said.

Adding onto an existing mortgage is another way to access funds to pay off debt, but the down side, said Ms Mull is that it takes away equity from the home.

If a debt problem is recognized, it is important for people to resolve it as soon as possible, said Ms Mull. Local CCCS advisors can be reached at 866-515-2227.

Negative Savings

Bill Donaldson, a certified financial planner and partner with Vista Companies in Newtown, says that not only is debt a problem nationally, it is a problem in Newtown. Nationally, said Mr Donaldson, for the first time since the Depression, the savings rate in 2005 was negative, meaning that people are spending more than they are earning. “It’s a little misleading,” he said, “because earnings don’t include pretax savings plans, but it is still a sign that people are not saving what they should.”

National credit card debt has tripled since 1990, with the average card carrying a debt of $9,000 and an interest rate of 19 percent or more. “That’s a substantial amount,” he said.

The typical client at Vista is not in trouble, said Mr Donaldson, they are just looking to manage money that they do have. But where he sees people having money problems are those in divorce situations.

“People are going along, things are going well, and then it falls apart. When things are going well, as they have been in our economy, people will spend money. When there is a housing boom, people feel wealthier. The take out home equity loans and buy things on those home equity dollars, like vacations, cars, boats, paying for education.”

What people are not doing is saving, said Mr Donaldson, and especially in divorce situations, that can be a negative. “I see people in their 30s, 40s, and 50s going through divorce who basically have no savings. They might have assets, they might have a house, but they have nothing to fall back on and are deeply in debt. It’s hard to put a finger on why people aren’t saving.”

It may be that debt is more socially acceptable today than it was for the previous generation, he said. “When incomes go up, rates are low, and housing is strong, there is a sense of well-being and wealth. I think people don’t understand how much they will need in retirement. They just go day by day, and when the housing market weakens, or a job is lost, or a divorce happens, there are problems.”

Homeowners who took on subprime mortgages when they were feeling wealthy are in a bind when their income drops, housing prices level off, and debt has been accrued, said Mr Donaldson. “You don’t see lenders giving out those big, subprime mortgages today. I think what you will see is a return to the 15- and 30-year traditional mortgage. For a lot of people, the subprime mortgage did not work, and that is where I am seeing, in the divorce niche I advise, people saddled with mortgages they cannot afford now.”

A typical household should have savings equal to three to six months’ expenditures to fall back on, said Mr Donaldson, and retirees will need at least 70 to 80 percent of their current working years income to get by. That number could be greater, depending on how a person plans to spend their retirement. Travel, moving to a pricier region, or unexpected medical costs can quickly erode any savings.

There are really only two ways to reduce excessive debt, said Mr Donaldson, and it is his job to guide  people to do so. One way is to reduce spending. “You have to be realistic. Even little things can add up. You need to know, where is that cash going? Plan ahead to save for things, don’t just put it on a credit card. Statistics show that a person will spend 50 percent more if using credit than if they pay with cash. The other way to reduce debt is to increase income. That might mean taking on a second job.”

Debt consolidation should be a last resort, Mr Donaldson said. “Debt consolidation basically says to the creditor that you are giving up. It completely destroys your credit rating for at least seven years.”

If homeownership has become an albatross, homeowners may find relief in new terms handed down by the Federal Reserve Board last month. The Federal Reserve Board in mid-April urged lending institutions to work with homeowners struggling to make mortgage payments. Reasonable agreements would not incur regulatory penalties to lenders in these cases. The workout arrangements could include modifying loan terms, and/or moving borrowers from variable loans to fixed-rate loans in an attempt to avoid foreclosures.

Banks that provide assistance to those mortgage holders in trouble could be looked upon favorably by the Community Reinvestment Act (CRA), a 1977 regulation intended to encourage banks and lending institutions to help meet the needs of their home communities, especially low and moderate-income families.

No Connecticut lending institutions are presently listed as needing to improve or as substantial nonconformers in the Federal Deposit Insurance Corporation CRA Performance Ratings, so there may be no further appeal to Connecticut lenders to pursue CRA favor. However, one local bank at least is working to make sure that affordable mortgages are in reach of those who need them. In an effort to help low-income borrowers purchase a home, according to a Fairfield County Business Journal (fairfieldcbj.com) article dated April 30, Alexander Soule wrote that  Newtown Savings Bank has expanded its mortgage program to include FHA loans that offer lower down payments and lower interest rates.

Taking on a home mortgage that is realistic for a person’s present earning capacities is the prudent way to buy, and will go a long way toward avoiding someday having to go into foreclosure or bankruptcy, said Mr Donaldson. “Debt load is different for every person. What is way too much for one may be fine for another. It is essential to look at a budget and look at the cash flow. Cash flow is critical.”

Debt, said Mr Donaldson, does not need to be a burden when credit and finances are properly handled and planning is in place.