Mar 082010

Consumers need to take personal action to protect themselves

The credit crunch is in full swing, and everyone is feeling the pressure. Workers and businesses are experiencing the impact because banks aren’t loaning money. Financial institutions aren’t even lending to each other, and you can feel the tension in the air.

The passage of the $700 billion bailout by Congress was supposed to ease fears on Wall Street, but we all watched the stock market tumble over the last week. Now, everyday Americans are wondering how this bailout will affect them, but only time will tell. In the meantime, consumers without great credit aren’t getting any loans.

The real question we should be asking ourselves is how this mess was started. We can all blame both the Republicans for deregulation and the Democrats for trying to give everyone a home. Since no one is solely to blame, we must look at the true cause – subprime mortgages.

From 2001 to 2006, subprime mortgages ran rampant through our country. Greedy banks and foolish borrowers started the economic roller coaster we are all on today. Instead of doing traditional underwriting, such as looking at job history and current debt, banks focused only on credit scores and used the lack of regulation in Washington to sign up uninformed consumers. These financial institutions gave away 105 percent mortgages to people who had no ability to repay the debt, and then sold these mortgages in bundles to Wall Street.

The construction industry fed on these easy mortgages, and the real estate market skyrocketed. Housing prices raced toward their peak. People were buying investment properties left and right because they were excited about the prospect of cashing out in the hot market. But that was the problem — many of these home loans were given to people with credit histories that wouldn’t have allowed them to get a loan 10 years ago.

Then the real estate market came to a halt, and it started to readjust. Here in Florida the real estate market has been hit hard during the past year. Sales have slowed and prices are falling. The lower prices have left many people owing their lenders more than their homes are worth, meaning the owners can’t refinance or sell their homes without paying the difference between their mortgage balances and what the homes are now worth.

Many of our clients are concerned about their own adjustable-rate mortgages and they are looking for answers. Unfortunately, we don’t know when or if we will feel any relief from the Washington bailout. Until then, I encourage you to instruct your clients to follow the basic tips below to help ease their own fears while also preparing for the worst.

1. Reduce unnecessary spending.
2. Have three to six months worth of income in a secure savings account.
3. Pay down credit card debt.
4. Make extra mortgage payments to pay down the principal.
5. Call lenders before a mortgage adjusts to see if they will help.

Douglas Muir, CEO

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