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By Schneider, Howard | Mortgage Banking, March 2004 | Go to article overview

Card Games


Schneider, Howard, Mortgage Banking


CONSUMER DEBT LEVELS "ARE QUITE incredible," says Neill Fendly, a former president of the National Association of Mortgage Brokers (NAMB), who now is president of Mort gage Defense Inc., a consulting firm in Scottsdale, Arizona. Fendly finds that households commonly have 10 or more credit cards, and that a job lost during the 2001 recession--or even just a reduction in overtime pay--can mean consumers put $50,000 to $100,000 of living expenses on their plastic. Even if their incomes have since recovered, "minimum monthly payments are eating them up," Fendly adds.

Transforming high-rate credit card debt into low-rate, deductible mortgage payments has become steady business for many originators in recent years. After all, credit card rates can jump from 15 percent to more than 20 percent for folks who pay late.

Yet consumer debt (excluding home loans) still rose to more than $2 trillion last year, according to the Federal Reserve. Personal bankruptcies also set a record in 2003, as 1.6 million house-holds succumbed to financial hardship.

Fendly notes that although a loan provider can counsel consumers to retire their credit cards after consolidating debt, "a reasonable percentage do go back" to buying on credit. "It's hard not to," he explains, after a household has lowered its monthly expenses by $1,000--or more--and now has zero balances on all their charge cards. Fendly regularly finds "middle-to upper-middle-class" house-holds unable to resist the allure of easy credit. "I see it every day," he says.

Breathing room

Yet a study from the Federal Reserve Bank of New York reports that "the accelerated pace of home-equity withdrawal" due to recent refinancings "is not leading to a deterioration of household net worth." Debt service as a percentage of after-tax income has dropped over the last two years, according to the Fed economists.

Fendly notes that falling rates until recently meant consumers could refinance their first mortgage at least once a year, take cash out to pay off debts, and still lower their payments. Higher rates now have increased the use of home-equity lines of credit (HELOCs) to pull cash out of home equity. But since their rates fluctuate with the prime rate, HELOCs will charge more for outstanding balances once the Federal Reserve starts moving short-term rates up. Some consumers then could feel a pinch.

However, borrowers will be able to make their payments as long as they have jobs, asserts John Garosalo, president of Metropolitan Mortgage Bankers Inc., Silver Spring, Maryland. …

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