09-22-2008, 08:01 AM
DaveS wrote:
To answer the question one has to at least place some theoretical guidelines into the picture. Let us assume a man has legitimately qualified for a $7,500 Credit Card and a mortgage payment $500.00 per month. He has $15,000 in equity in his house in his $150,000 house. Basically a 10% down payment.
Over time he borrows all of his CC credit line, i.e. Christmas presents, new tires, replace a water heater etc. He decides to move that $7,500 to his mortgage, The bank writes him a new mortgage based on a 5% equity - legal - and he perfectly qualifies for the new payment PROVIDED he does NOT begin to use his credit card again. The bank has actually HELPED him legally TRY to regain control.
But he decides the following Christmas to spend more than he should, goes on vacation, etc. and is back up to $5,000 and a payment he can not afford. He's back to square one - in debt for more than he can afford.
Ain't the banks fault. The bank can not control how much OTHER credit a borrower decides to use. The bank was not irresponsible, the borrower was.
And if you look at the outstanding balances of CC's - you will see that this is a very typical problem.
I think I can add more theoreticals:
Take this obviously fiscally irresponsible home owner and then offer him a refinance with an incredibly low interest rate (because it's a one-year ARM) and then take his wildly appreciated home value (now $250,000) and give him a home-equity line of credit of $100,000 and set him loose!
Within a year, he has financed his old credit card debt as well as two new SUVs, a three-week European vacation, 50" plasmas for every room including the newly re-done bathroom with Italian marble tile and jacuzzi tub. At the end of the year, he has the HELC maxxed out. Then the property values crash and his interest rate skyrockets and he can't pay the mortgage anymore and goes into foreclosure. He owes more than the house is worth, so selling it won't take him into the black.
Meanwhile, this is happening to lots of people because an aggressive mortgage broker who didn't give a rat's a$$ about their ability to repay (why should she, property values will keep going up & up & up &...) sold them mortgages that they really couldn't afford.
There. Your story was a bit old fashioned. One that many people have been going through for decades. Add the extra twists & turns and we see a pyramid scheme based on unrealistic interest rates & property values collapse.