The financial news since 2005 has focused on the housing bubble and its ultimate effects on the average homeowner; consumer; and the economy in general. All those predictions about the housing bubble is now materializing in 2006, as the balloon stopped inflating and the air has been let out rather sharply. But the real story that has been overlooked in the mainstream media is the lending bubble that is about to explode.
Throughout my lifetime, it had always been conventional wisdom to work diligently in order to pay your bills on time and develop a good credit standing. Everyone stressed the importance of oneís credit rating, and how difficult it would be to get credit cards or mortgages if you were not credit worthy. However since the stock market bubble burst in the beginning of this new millennium, lenders from all walks of life from Banks; Saving and Loans; Mortgage Lenders; and even Hedge Funds have participated in the greatest credit lending bubble in the history of mankind. Big money has been made by all of these entities and will continue to be made in the future Ė at the expense of the hard working breadwinners who often have two or three jobs and still canít make their credit card and loan payments.
During the last six years, lending standards have become so loose and in many cases totally irresponsible, on the part of both lenders and borrowers. While many individuals were gambling and flipping houses with the hopes of making quick easy money; banks and lenders were flipping questionable loans to Fannie Mae, private investors and hedge funds to relieve themselves of future risks and headaches.
I remember when it was the norm to put at least a 20% down payment to obtain a fixed rate mortgage. That 20% was eventually reduced to 10% and then by 2005 over 43% of first time buyers put no-money-down on their first mortgage. Another scary, irresponsible statistic is that 32% of new mortgages and home-equity loans in 2005 were interest only loans up from less than 1% in 2000. And 15% of 2005 buyers owe at least 10% more than their home is worth today. This negative equity will only drop as home prices sink. In essence, lots of people were borrowing lots of money between 2001 and 2005, who couldnít even dream of qualifying for the amounts they borrowed, before 2000.
The excess of home inventories now in the home market, which were constructed for the gamblers and home flippers; and irresponsibly financed with no-money-down, interest-only, and adjustable-rate mortgages; can only spell trouble for millions of debt ridden mortgagees who will not be able to afford their future payments that are set to rise soon. This lending bubble is one we will all wish never happened. The traditional low-risk mortgage has become a high risk scheme to feed the appetites of greed and excessiveness.
As if the home lending bubble was not enough to contend with, letís not forget the credit card debt individuals are accumulating at the same time. Itís estimated that the credit card industry in the U.S. sent out six billion credit card applications in the mail in 2005. College students without jobs or the ability to pay a credit card are barraged with pre-approved offers. Many college students graduate deeply in debt from student loans and a slew of credit cards they should have never been offered in the first place. Bank fees, interest and dreaded penalties for late payments can keep a newly minted graduate in financial strife for a decade or more. Then at 30 or 40 years old, they just continue spending more than they make for the rest of their lives.
Thus the lesson to be learned this week is ďto act responsibly when it comes to spending and borrowing money.Ē Donít spend foolishly with borrowed money. Better yet, only borrow money as a last resort, for an absolute necessity. As parents and teachers, we need to re-invent the word SAVE! Not to be confused with how much you save on the latest video game thatís on sale and buy on credit. But rather the word, ďSAVEĒ as in a savings account! When I was growing up, our elementary school offered a passbook savings account for each student. My father would give me two dollars each week to bring to school and hand to the teacher Ė who stamped my passbook with the deposit amount. Little did I realize at the time, the value of this important exercise. I actually learned the habit of saving each week and was proud to watch my bank account grow. I had many part time jobs as a kid and actually enjoyed making deposits into the bank. This early lesson developed a lifetime discipline of saving, and spending money responsibly.
Itís important to teach your children how to save. Buy savings bonds for your kids and grandkids instead of expensive toys that theyíll be tired of in a week. Help your children to become responsible adults by setting a good example. If you do not spend wisely, how will they learn to do so? If you borrow recklessly, they will learn from you. Take spending and borrowing seriously. Your lifestyle and that of your children are at stake.