Good People in Bad Trouble

Like most of you, I've been reading about the wave of mortgage woes that's already beginning to crash down. 

We've already seen the initial devastating effect of bad loans made within the sub-prime mortgage market -- loans made to borrowers with poor credit or undocumented income.  Now, we're seeing a surprising increase in delinquent loan payments and defaults within the homeowner community with good credit.  The culprits are the Big Three: job loss, medical crisis and divorce.

The Big Three are no new surprise.  These have always been the leading financial symptoms leading to  foreclosure and bankruptcy.  And, not surprisingly, we're seeing them rear their ugly heads again.

Exotic loans -- usually adjustable rate mortgages (ARM) made with little or no money down, no proof of adequate income, or piggyback loans (to avoid mortgage insurance) -- were the only way many borrowers could see getting into the housing market as home prices soared over the past few years.  Now, the only thing soaring with these risky loans is the monthly payment.  Countrywide, the top U.S. mortgage lender, reported that borrowers divorcing or losing their jobs were the leading reasons for falling behind on payments, not resetting higher interest rates.

The rash of defaults is just beginning.  The trend will likely continue until the market is flushed, primarily due to areas of the country hit hard by job losses or pull-backs in speculative construction like Florida, Las Vegas and Phoenix.  It's already begun ... and won't end soon.

So now with fewer qualified first-time home buyers, even credit worthy existing homeowners are having trouble moving up because they're having a tougher time selling their homes.  The mess is already made, so what caused it?

We did.  The prospective homeowner and the over-eager lender.  Good people, bad decisions.  How do we fix it?

That's a little tougher, but doable.  The Solution: Patience, Discipline and The Gap. 

We'll need patience as consumers to not try to fix this overnight.  Some will weather the storm (save their homes) by making major spending reductions in other areas of their budget and increase income to create The Gap -- the difference between spendable income and expenses.  Others may need to sell (even at a loss), get their finances back on track and rent for a season or two.  Everyone will need discipline to chart and stay their course, because it will be a stormy one. 

Usually, the best choice is the most difficult one.  But, as the song says, "I will survive!".  You can only start from where you are right now.  Be encouraged!