While the media and congress are busy pointing their fingers at the lackadaisical and allegedly unscrupulous business practices within the mortgage industry, they seem to be ignoring one of the more serious causes of the mortgage meltdown, credit card debt. Credit card debt has been a chronic problem over the past few decades and was incredibly out of control during the peak of the mortgage boom when property values rose skyward and homeowners gained thousands upon thousands of dollars in newly acquired home equity. The credit card companies were reaping tons of revenue, as they are now, and consumers were finding it more difficult to shoulder the burden of so much debt. Congress even sided with these multi-billion dollar companies in changing key bankruptcy legislation allowing them to pursue consumers who are filing for bankruptcy protection. Even Senator Joe Biden, the Vice Presidential choice of Democratic Presidential candidate Barack Obama, and others threw their support behind these corporate giants to the dismay of ordinary working folks just trying to make a living.
At the time, consumers used their credit cards to finance clothing, home improvements, emergencies, vacations, gas, and cash advances, among other things. Credit card companies even issued teaser interests rates for as low as 0% so consumers would not be the least hesitant to finance everything that suited their fancy as long as their payments were low and affordable. However after six months the teaser rates disappeared and cardholders were left with rates as high as 29% or more causing their payments to skyrocket way beyond their ability to pay them on time. The power of having credit is overwhelming for some. Unlike consumers who pay by cash, check, or with their debit cards, consumers who rely on credit cards will knowingly purchase items they can’t afford. This is because they do not have the discretionary funds in their savings accounts to accommodate such spending.
Small Businesses also Effected
Congress’s efforts, so far, have been focused around finance reforms and other restrictions pointed towards financial institutions. Although their intentions may seem honorable, this is putting a stranglehold on banks and other lending institutions that would, otherwise, approve qualified borrowers with good credit even though they may not be able to provide documented proof of their income because they are self-employed. Most self-employed small business owners will write off their business’s expenses during tax season to avoid paying the government whatever net income is left over from their net profits. After payroll taxes, worker’s compensation insurance, high fuel costs, inflation, a shrinking economy and other normal day-to-day business expenses, there’s seldom enough money left over to earn a living wage. The vast majority of small business owners are not a part of the 3% of the wealthiest Americans. Most of them are part of what was once considered middle class America, but not anymore.
What Congress fails to realize is that many small business owners rely on the equity of their homes to provide the much-needed capital necessary to make their businesses work. When business is good, these loans are paid off and the cycle starts all over again. Congress is not an expert regarding the many issues and problems within the mortgage industry. It must also welcome the input it receives from mortgage brokers in addition to the top paid banking executives who contribute to their political campaigns. When mortgage brokers took action to oppose some of the proposed financial reforms while still in committee, Senate Finance Committee members largely ignored what these brokers had to say and went forward with their own formula for changes within the industry.
Mortgage brokers, and the many loan officers who work for them, are in direct contact with homeowners and see firsthand the financial dilemma they are in. In a random survey taken at several prominent mortgage companies, loan officers reported that the number one reason homeowners requested refinancing was to pay off credit card debt. They reported that nine out of ten homeowners refinanced their properties when home values were at an all time high in order to consolidate their consumer debts, including credit card debt into their new loan. However, now that the market has changed for the worse, many are forced to abandon their homes and/or file for bankruptcy now that their properties worth less than the debt they now owe.
From 2002 to 2006 over 95% of homeowners refinanced their properties for the sole purpose of paying off their credit card debt with the equity from their homes. At that time interest rates for a home loan are much lower than what most credit card companies were charging. The benefit to homeowners was being able to pay out less per month compared to what they were paying with their mortgage payment and credit card payments combined. However, by combining these payments into a debt consolidation loan, the total combined debt that they once owed has increased because of loan related fees being added to their new home loan.
Consumers overburdened with excess debt have very few alternatives for getting out of debt unless they own a home or other liquid asset. But, for those who don’t own a home, or maybe do but have very little equity in their homes, there is no relief from rising debt unless they take extreme measures to modify their spending habits like trading in their SUV for a late model Toyota, or file for bankruptcy. The consequences for credit card abuse can dramatically change the living standards for many individuals.
Homeowners typically refinance their properties every 4-5 years on average. However, during the mortgage boom, homeowners were refinancing their properties more frequently, more like every 2 years due to the aggressive marketing tactics of the mortgage industry. Lenders offering low teaser rates during the first 2-3 years of the loan somehow believed borrowers would be able to refinance their properties again prior their rates being adjusted upward. For many homeowners, especially those who were seeking financial relief in the form of lower monthly payments, these variable interest rates seemed very attractive compared to what they were once paying. However, consolidating their credit card debt to their home loan was a recipe for disaster. This seemed to be the only answer to their financial suffering, but for some, it proved to be a financial nightmare. Little did they know that a new financial crisis was about to unfold that eventually would lead to the process of losing their home to foreclosure. As the mortgage lender implode list grew, so did the number of families left without a home.
