The Growing Debt Problem - Has It Gone Too Far?

The real estate world has known for some time, yet a few have been hesitant to read what it says. Many home owners are getting deeper into debt. Part of this problem likely comes from the cost of owning a house. For a rising segment of homeowners, the cost of home ownership is forcing a tough situation into a dangerous one; creating a “foreclosure crisis” that will likely last quite some time.

Earlier this year, current data released by the Department of Housing and Urban Development are showing an alarming increase in the rate of foreclosures. In some areas, of all property owners who were extended sub-prime financing, the foreclosure rate is as high as 14-20% when 4-6% is considered “healthy”.

The results have been all over the news — the stock market has been in upheaval. Sub-prime loan officers 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 traditional financing. In the past few months, many major players in the sub-prime market have sold off operations or in some cases simply closed their doors and gone out of business. Just as their borrowers were unable to afford the escalating expenses of homeownership, many sub-prime lenders found it impossible to absorb the rate of default we are now seeing.

The major issue doesn’t stop with the sub-prime market. Even traditional banks are increasing requirements and placing more scrutiny on the loan approval process. This makes us wonder: how did this mess ever begin in the first place?

A good deal of blame can be laid at the feet of the borrowers themselves. In this age of “bigger is better” many Americans see a big home as an indicator of success. This pushes many buyers into trying to buy a larger, 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 difficult situation or worse.

Blame can also be laid at the feet of some lenders. Who is better qualified to know how much debt a borrower can afford? The current debt-to-income ratios are either not working, or the types of loans that lenders are selling 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 ultimate result will be better qualified and better educated home owners but did things really have to go so far? We've seen foreclosre problems hit most of the large regions we work including Naperville real estate, Aurora real estate, St. Charles real estate, Montgomery real estate, Geneva real estate, Oswego real estate, Plano 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 purchasing real estate 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.

Eric Rogers is a full-time agent with Century 21 Pro-Team in Northern Illinois and a local professional for Stonebridge Subdivision and Oakhurst Aurora