Lately, lenders are facing to deal with a grave foreclosure phenomenon that is sweeping the Nation with vigor. And, of course, everyone is weeping torrents over their financial ruin.
Yesterday, I spoke with a trustworthy mortgage broker whom I have established a dependable relationship over the years. She pointed out a very disturbing factor that everyone in the lending industry failed to consider while qualifying borrowers during the past buyers’ frenzy years.
Rewinding the DVD back a few years, during the hysterical home-buying delirium, lenders became very clever to accommodate borrowers by introducing exotic loan programs which raised the financing bar to ensure everyone would have a fair chance to qualify for a mortgage. And lenders succeeded while walking on the fence to suit borrowers.
Naturally, they have followed the proper formula (Loan to Value vs. Debt Ratio, etc.) and with some leeway, they managed to place customers in somewhat risqué loans.
Things are sailing along smoothly for a several months until mortgage payments start to come in late or skipped. This is becoming a pattern and the brain-surgeons of the lending world formed a think-tank consortium to find where lies the problem.
They concluded that the culprit is not the high mortgage payment, or not the high property tax, or not the exorbitant cost of insurance but it is the credit card debt. That is what was omitted in the equation.
By the time customers applied for their loans, their credit was adequate or perfectly clean. Therefore, lenders conformed based on what the customer’s condition was at the time of the loan application. Then, customers have the loan in hand and they make their payments on time but they can’t resist the temptation of enjoying an easy life filled with all the contemporary living necessities their new house and family require.
How does one indulge now without money? F...... charge it, of course!
The power of credit cards is sneaky. It is so easy to acquire not only one credit card but as many as one can apply for. So, here they are with 20 credit cards and a potential purchasing power of $50K +: Kids need braces, new clothes for each member of the family as needed, new TV for each bedroom, a full computer gear for each child with DSL service, bicycles, school books, un-necessary eating out every other night of the week, car repairs, ITM withdrawals for cash, kids special tuition, vacation, etc.
My mortgage broker friend told me that most of those people who are in financial deep s... now is because they have not managed their credit cards properly.
I think it makes perfect sense. I know friends who are almost here. They live way beyond their means seduced by spending temptations.
As professional Realtors® , we have a responsibility to disclose that element to our potential buyers.
John