There is a dark side to low rates, good housing values

Lots of borrowers now are struggling to meet payments


For many cash-strapped consumers, the dream of homeownership is turning into a nightmare. Even in an era of low mortgage rates and strong housing values, many borrowers are struggling to meet payments, buffeted by job losses, pay cuts or other unexpected troubles.

Complicating the picture is that lending standards have changed in the past few years, allowing more people to become homeowners. Many now find themselves shouldering a bigger obligation than they would have qualified for in the past.

"Net-net, the increase in homeownership is a positive long-term economic development," said Mark M. Zandi, chief economist at, a consulting firm. "But there is a dark side to this - which we are just beginning to see."

Personal finance experts say it's all too easy to get into a mortgage beyond your means.

"You can qualify for a lot more mortgage than you should have," said John Kvale, a financial planner at JK Financial in Dallas.

Experts say that in good times and bad, consumers make the mistake of taking on oversized home loans. While they are able to meet the payments in a stable economy, they start defaulting when things turn sour.

A recent study by Harvard University's Joint Center for Housing Studies found that about 1 in 7 American households devotes more than 50 percent of its income to housing.

With huge mortgage payments, "you are leaving yourself no room for error," Kvale said. "Everything has to be just perfect for you to make the payments easily."

Nationwide, mortgage debt rose to an all-time high of $6.2 trillion in the first quarter. The seasonally adjusted percentage of mortgage payments 30 or more days past due for all home loans rose to 4.62 percent in the second quarter, up from 4.52 percent in the first three months of this year, the Mortgage Bankers Association of America reported last month. The survey covers about 34 million mortgage loans.

When you set out to buy a home, you should know that there may be no relationship between the size of the loan you qualify for and the size of the loan you can afford.

"The qualification is setting the top bar," said Craig Watts, consumer affairs manager at Fair, Isaac & Co., which developed the FICO credit score. "It shows you what [lenders] are willing to extend."

Industry experts say lenders often qualify you for the maximum possible house based on your income and your credit history. But the amount you can afford is much lower than that.

"Mortgage isn't going to be the only obligation," Watts said.

Rodney Anderson, division vice president at CTX Mortgage Co., said many consumers do not understand the system.

"We've got people coming in here that qualify and go out and pay the maximum," he said. "A lot of people are overextended. They have big houses - but they have no furniture. They have no draperies."

The lender's role is to help you find a good loan with the best rate possible. But it's your job to figure out if the loan works for you. This is not to fault lenders, but it's just not their job to help you plan your household budget or to look at how a $2,000 monthly payment ties in with your financial goals.

"They look at formulas," said Marianne Gray, president of the Consumer Credit Counseling Service of Greater Fort Worth, Texas. "They can't possibly know all the details of your spending habits."

Some loan officers say they do talk to consumers about how they can fit mortgage payments into their household budgets.

"We point out the obvious things, but 99 out of 100 times they disregard our advice," said Craig Jarrell, president of the Dallas branch of Pulaski Mortgage Co.

Though lenders deny that they ever push a consumer into a big loan, they are paid a commission that is a percentage of the value of the home. Lenders say they are more interested in referral business and in customer service than in getting a few hundred dollars more when a consumer buys a bigger house.

At any rate, it is important to know that lending standards have loosened.

There was a time when your mortgage debt had to be no more than 28 percent of your gross income and your total debt never exceeded 36 percent of your gross income. Now lenders allow total debt-to-income ratios of 45 percent or 50 percent - as long as you have excellent credit history and fat reserves to back you up.

Also, mortgage companies used to lend only up to 70 percent or at best 80 percent of the value of the home. But now the loan-to-value ratio can go up to 100 percent. Lenders manage that risk by asking you to buy mortgage insurance if the ratio rises. They say they've developed sophisticated ways of hedging risks.

"It's not that we have relaxed credit standards, but we have ... a better understanding of what contributes to delinquencies." said Gretchen Hobbs, director of marketing at Fannie Mae, the mortgage giant.

Automated underwriting systems used by many lenders make the process more balanced. But even within the lending community, some consider the standards too lenient.

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