U.S Debt Turns into Our Debt

U.S Debt Turns into Our Debt

One of the reasons why the U.S. in a financial crisis is due to the extreme growth in the real estate market tied to the flawed lending practices to increase non traditional ability to pay level of standards purchasing power.

How many times in the last two decades has the U.S. been in a recession?

How world crisis has the U.S. been involved in during that period? (Persian Gulf, Iraq etc.)

Where has the attention been on the whole time? Was it on other countries or ours?

While this occurred, the rich became richer, and many people have been taken advantage of. Those that can pay cash for a home are not subject to these claims of being taken advantage of. Who does this affect? Well we are all in use of the financial system that has been built over the years made possible through the Federal Reserve System.

So how do we pay for homes? We use this vehicle called a mortgage, for those who do not know this; it’s another term for a loan, which involves the lenders insight in the borrower’s ability to pay. The financial industry manage their accounts receivable (your ability to pay them back) through their general set standards.

Here are the categories:
Character – the borrower’s history of paying bills – credit report
Capacity – The borrower’s quantity of money borrowed and repaid – credit report
Capital – debt to income ratio, how much debt (open credit cards, car notes, all debt) compared to incoming salary.
Collateral – what do you have in value (stocks, other homes paid off, retirement accounts or liquid assets?)
Conditions – this is the part that is currently based on the industry trends or economy situations, 1st time buyer loans etc.

One of the traits that helped excel the mortgage loan increases were the subprime loans which made the loans available to those that lacked Character. This was definitely an adjustment in the backs “conditions” that are apparently not so favorable today. When the general standards of credit are not met more loan defaults occur, causing the industry to have substantial amounts of defaulted loans. Another twist to this, there was a lot of dishonest financial institutions that took advantage of the system to gain financial profits. Who is paying for those profits today? Who is stuck with the bad credit ratings?

To see where your state is in this cloud of financial woe visit: http://www.newyorkfed.org/mortgagemaps/

Forward thoughts!
Plan, Plan, and Plan some more!
Debt for school vs. debt to have to buy fun.
Plan for the debt, when you will repay.
Determine how much risk you are taking to meet the conditions that you have planned for.
Plan for additional risk, determine worst case scenario and develop a plan that will provide you support through the situation
Remember no plan is full proof that why it is called a plan.

If you would like to add to this post, please submit your comments or suggestion for new topics.

Regards,
Shaun Manzano