The Growing Debt Problem - Has It Gone Too Far?
The majority of financial professionals have known for some time, yet a few have been hesitant to read what it says. Many residents of the United States are getting deeper into debt. Part of this problem likely comes from the cost of owning a home. For a rising segment of homeowners, the financial burden of owning a home is forcing a difficult situation into an impossible one; creating a “foreclosure crisis” that will likely last many years more.
Earlier this year, current numbers released by the Government are showing an alarming growth in the rate of foreclosures. In some areas, of all homeowners who were extended sub-prime loans, the foreclosure rate is as high as 14-20% when 4-6% is considered “healthy”.
This information has been all over the news — the stock market has been in upheaval. Sub-prime lenders traditionally specialize in extending financing to borrowers with credit issues, unable to verify income, employment or other factors that make them a poor fit for conventional loans. In the past few months, many major players in the sub-prime market have sought additional investors or in some cases simply closed their doors and gone out of business. Just as their borrowers were unable to afford the escalating home ownership costs, many sub-prime financial companies found it impossible to absorb the rate of default we are now seeing.
The problem doesn’t stop with the sub-prime market. Even traditional lending institutions are increasing requirements and placing more scrutiny on the loan approval process. This makes us wonder: how did this issue ever happen in the first place?
A fair amount of the responsibility can be laid at the feet of the borrowers themselves. In this age of “bigger is better” many Americans see a large home as an indicator of success. This pushes many buyers into trying to own a bigger, more expensive home without enough thought to the financial burden of owning one. Often buyers push the levels of affordability and end up in a “house-poor” situation or worse.
Blame can also be attributed to some financial professionals. Who is better qualified to know how much debt a borrower can afford? The current debt-to-income ratios are either being ignored, or the types of loans that lenders are providing are poor choices. Loans like 28/2 and 27/3 loans with fixed teaser rates that adjust after 2 or 3 years with a balloon or margin are just a few of the loans that have presented problems for borrowers.
Of course the end result of this mess will be better qualified and better educated borrowers but did things really have to go so far? We've seen foreclosre problems hit most of the large regions we work including Plano real estate, Montgomery real estate and Yorkville real estate. Frankly, I sometimes think they did. Lately it seems like it takes a big shock to get some things back on track. In the mean time, if you are thinking of buying a home in the next few years, it’s important that you start speaking with your local REALTOR or loan officer and make sure your finances and credit scores are in order before you continue with applying for a loan.
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