It may have sounded like a good deal at the time. Even Alan Greenspan, chairman of the Federal Reserve, has recommended the consumers having a tough time paying the bills consider tapping their home equity.
With interest rates at the lowest levels seen in decades, many Americans refinanced their homes in order to lower interest payments while paying off some debt on credit cards. But now that interest rates are rising, consumers who took out adjustable rate mortgages (ARM) could find themselves in a pinch.
“People just need to be aware of what they have gotten into when they do this kind of thing,” says John Allison, commissioner of the Mississippi Department of Banking and Finance.
Allison said there is a downside to refinancing homes due to low interest rates. Some people were lured into consolidating their debt into their home mortgage. But then their spending habits — or unforeseen problems like losing a job, illness or a divorce — could put them back in the red each month.
“You need to have self control on spending,” Allison said. “People who maxed out credit cards thought refinancing their home was a way out. But for a large number of those same people, their credit cards are maxed out again. They thought they could handle these mortgage payments with an adjustable rate. Now variable rates are starting to inch up. A couple of bumps and that could really impact their income stream.”
Tough on retirees
The situation can be particularly difficult for retirees on fixed incomes. Nationwide an increasing number of people are entering their retirement years still owing on a mortgage.
“Retirees on fixed income thought they could pay the rates,” Allison said. “But unless they got a fixed rate, they could jeopardize their financial stability. If you have a variable or adjustable rate, when those rates pick up, obviously you are going to be paying more interest, which means higher payments. That eats into a fixed income. I have kind of wondered about retirees who have mortgaged out. I hope they were cognizant of what they were doing when they got into it.”
The U.S. has seen record levels of new home purchases in recent times, spurred by the low interest rates. At the same time, some people have been biting off more than they can chew. Foreclosures are up nationwide an estimated 44% since 2000.
The anecdotal evidence
Allison said while it isn’t a scientific survey, it does appear to him from reading the legal notices in newspapers that foreclosure notices are increasing.
“It appears foreclosures are on an up trend around the state, but I can’t hang my hat on any particular thing causing that,” Allison said. “There was a lot of movement into the mortgage area both in the number of brokers out there and the amount of activity because of the significant drop in mortgage rates in the past several years.”
John McGalliard, senior vice president and manager of Hancock Mortgage Corporation, a subsidiary of Hancock Bank in Gulfport, says that the bank is not experiencing any higher degree of delinquency/foreclosure problems. He said that although Hancock does not track specific data on the age of its mortgage customers, generally they do acknowledge that more customers in their later years appear to have mortgages.
“We also have repeated applications where customers are withdrawing equity in their homes to pay higher rate credit card debt,” he said. “Then, some customers tend to run up the credit card debt again, thus producing a net diminishing of their saved equity in their home. Hancock would recommend to customers that tap into their equity saving in their homes to retire higher interest rate debt, to exercise personal will power and good budgeting, and to not fall back into the previous trap of re-incurring higher interest rate debt. If such situations continue to re-occur time and again, ultimately all of an individual’s saved equity in their home will be eroded completely.”
Foreclosure notices must be filed with chancery clerks in Mississippi. But apparently there isn’t any county or statewide system for tracking trends in foreclosure.
Harrison County Chancery Clerk John McAdams said that while there may be more foreclosure notices than in the past, foreclosures are only a very small portion of the amount of home sales activity. The first six months of the year, 12,000 deeds of trust were recorded in the Gulfport area of Harrison County alone. Foreclosures have averaged 12 to 15 per month.
Harvard law professor Elizabeth Warren, author of “The Two-Income Trap: Why Middle-Class Mothers and Fathers are Going Broke,” says that telling people to borrow against their home equity to pay bills is “scary advice to give American families.”
“We as a country have mortgaged our future,” said Warren. “The number of people 65 and old who don’t own their home is growing.”
Warren said banks and other financial institutions make the most money by getting people into the largest mortgages they qualify for. Then, if something interrupts the family’s income stream, they can be only a month or two away from foreclosure and then perhaps bankruptcy.
Warren said another problem with home equity loans is that as interest rates go up, home values go down.
Uninsured medical debt a factor
Dr. William “Bill” G. Hardin II, assistant professor of real estate in the College of Business and Industry at Mississippi State University, said foreclosures and personal bankruptcy rates at record highs are surprising given the strength of the economy. But one study he has seen recently said one of the biggest issues with personal bankruptcy isn’t related to housing, but an uninsured medical debt.
Hardin said that by historic standards, past due mortgages and foreclosure rates are at the high end of the scale. Considering the fact the economy has been expanding at a rate of 4% per quarter, he would expect foreclosures to be down.
“What is surprising is statistics show we do have a high level of default and foreclosure given the strength of the economy,” Hardin said. “We aren’t in a recession. We had strong growth in GNP. It is just a mismatch. We have a relatively sound economy, but we do have high default rate.”
The upside of the picture is that it has never been easier to borrow money for a home.
“The question is, ‘Are you letting people borrow money who shouldn’t be borrowing money?” Hardin asks. “More access to credit gives people the opportunity to make mistakes. Generally as a population we are not as financially literate as we should be. That has to do with all types of financial lending.”
Joe McNeese, spokesperson for the Mississippi Mortgage Bankers Association (MMBA), said MMBA doesn’t track foreclosure statistics in the state. But his personal experience working as a mortgage banker for Trustmark National Bank, which services several billion dollars worth of mortgage loans in Mississippi and elsewhere in the Southeast, is that there is beginning to be a small increase in foreclosures. He said he has heard similar things from other mortgage lenders in the sate.
Looking at the upside
“There isn’t anything to cause concern at this point, but there are some slight issues there as far as foreclosure,” McNeese said. “A part of that is that in the past five years, the mortgage lending industry has really reached out through innovative programs to make loans to so many more people than we were able to do four or five years ago. A byproduct of that could be a slight increase in problem loans and foreclosures. But I think that is going to be more than offset by the benefits that are going to come from increased home ownership, not just here in Mississippi, but nationwide. That has been a good thing. Anytime you are stretching and reaching out to increase the number of people eligible to own a home, that is going to have a slight impact on some of your numbers.”
Chuck McIntosh, communications officer with BancorpSouth in Tupelo, said in comparing Mississippi mortgage loans of June 30, 2003, with June 30, 2004, there is a slight decrease in the number of foreclosures of 5%.
“However, there is an increase in the delinquent accounts of 20%,” McIntosh said. “I’m not sure this is an indication of the economy but more of an indication that people are prone to take on debt. We have seen two-plus years of mortgage rates reducing, people refinancing and consolidating debts to get a lower rate. They reduce their monthly obligations, have a little extra cash, then go out and buy a large ticket item and have more in monthly debt than before.”
McIntosh said the best way a customer can avoid delinquency or foreclosure is to have a set amount going to savings on a regular basis. This could cover the times when an emergency occurs.
“The mortgage payment is usually the largest monthly obligation a person has, so if they get behind it is very difficult to get current,” he said.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.