Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.

Mortgage Crisis Spreads Past Subprime Loans
VIKAS BAJAJ and LOUISE STORY
Tue, 12 Feb 2008 12:06:57 GMT

I am beginning to see more articles talking about the relationship between credit card debt, equity lines of credit, and mortgages. I think the next sign to look for is weakness in the stock price for companies with a large exposure to credit card debt due to increased amounts of debt being written off. This could snowball. With the very high interest rates existing on credit card debt there is no where for the credit card companies to go. I have already seen increased consumer activism to lower credit card rates because other rates have declined. The longer the real estate market declines, the more likely that this financial crisis is going get even uglier.

Subprime victims are the new heroes.

This article finally forced me to sit down and write out my thoughts on the subprime mortgage crisis. Since I am the treasurer for a local Habitat affiliate I have an above average interest in how the subprime mortgage crisis is affecting low income families. The issues affecting low income home owners and their communities are significantly different than their brethren in the higher income communities. Over the last year we had several families inquire about refinancing their house. The primary reasons they were looking at refinancing a zero interest l mortgage was to free up their home equity to pay off debts. Every Habitat affiliate has dual missions, build houses that low income families can afford and to help these families navigate the treacherous path to financial independence. There is a fine line between helping a Habitat family achieve the American dream of home ownership and building tomorrow’s slums. About 50% of our home owners will never have a financial problem. Twenty five percent of the home owners are in serious financial problems. They are behind in their payments and one step from foreclosure. The remaining twenty five percent of our home owners were recently in severe financial problems and have worked out financial plans to get themselves out of trouble. Working out financial plans for these home owners at risk is as important part of Habitat’s mission as building houses even though it gets a lot less press.  Every year we get at least one homeowner who is going through bankruptcy. Each bankruptcy is a complex story of unfortunate events but the common denominator of every bankruptcy story is overwhelming credit card debt.  I guess in today’s society it is not surprising that the people at the lowest rung of the income ladder do not have a problem getting credit cards and getting themselves overextended.  From my limited perspective the impact of the subprime mortgage crisis is affecting low income areas in several ways.

1. I think it is reasonable to assume that commercial home builders will not be building in low income areas despite government incentives. Before the subprime mortgage crisis I did a study of houses on one street in a low income area and found that seven of the eight highest priced houses on the street were Habitat houses. Unfortunately these houses were appraised at a price that was just above our cost to build them. I think commercial home builders and their more upscale clients will be intimidated with the prospective real estate appraisals and the difficult financing options. Until this problem is addressed real estate in low income areas will remain at depressed valuations.
2. I suspect that there will be an above average amount of foreclosures in the low income areas due to escalating interest on subprime mortgages. In one low income area where we build, our local paper says the majority of the mortgages issued over the last couple of years were subprime mortgages. Based on the information I have gleaned from our Habitat homeowners it is likely that a majority of these foreclosures will be related to second mortgages used to pay off credit card debt. In the areas where we build, I do not remember ever seeing a “For Sale” on any of the houses on the street. In these low income areas I doubt that any of these subprime mortgages were for people who thought they could “flip” the house in these neighborhoods.
3. With the recent drop in real estate values the second mortgage option to refinance credit card debt  is quickly vanishing. Since the credit card debt is not going away, we should see more bankruptcies.
4. Due to the dropping real estate prices it will become more difficult for the Habitat home owners to sell their houses. This is generally a good thing since we set up the mortgage payments to be around 25% of their income and our home owners are not as mobile as the rest of the population. Since our mortgage payments are considerably less than the cost to rent most low quality apartments, owning a Habitat house is in home owners best financial interest. Dropping real estate values is a bad thing if the home owner dies or their job  moves to Dallas.

From my perspective the subprime mortgage crisis is not as serious as the credit card debt problem. Low income home owners will continue to be plagued by people encouraging them to live beyond their means and paying for it with credit cards. Low income people are just like everyone else but with fewer financial opportunities to screw up and even fewer ways to recover from life’s hardships. I think if the government rescues the “subprime victims”, these “victims” are doomed to repeat their errors. Their only chance is if the government chooses to scale back the credit card debt problem and tighten mortgage rules at the same time they rescue these victims. I think it is about time we reclaimed the moral high ground in consumer debt financing and seek a softer landing from the impending credit card debt crisis.