Weathering The Credit Crunch

By Katherine Reynolds Lewis
Illustration by Monica Seaberry
c.2007 Newhouse News Service

You've heard about subprime borrowers falling into foreclosure as their adjustable rate mortgages reset to higher, fixed rates.

You've heard that financial institutions, losing money as this happens, are tightening standards for mortgages and other forms of credit.

The headlines say housing's in a slump, consumer confidence is falling, and some experts predict a recession.

You're wondering, "Should I worry?''

The short answer is yes.

"It's a very far-reaching crisis that affects so many elements of our economy,'' said Bill Hardekopf, CEO of http://www.lowcards.com/. His Birmingham, Ala.-based Web site lets consumers compare credit-card offers.


"Chances are it will reach out and touch you in some way.''

Frank Nothaft, chief economist at Freddie Mac in McLean, Va., put it starkly: "The downturn in housing activity over the past year has subtracted a full percentage point off economic growth.''

And it's not going away soon.

Consider that 37 percent of existing adjustable rate mortgages will reset in 2008, on top of the 31.4 percent that reset this year, according to First American LoanPerformance in San Francisco. That means more people looking at payments they can't afford, more potential foreclosures and more economic fits and starts.

Fortunately, there are things you can do — now.

Here are 10 practical tips for insulating your personal finances from the real estate fallout:

1) Step back and assess matters before acting.

Think about your debt load and investments in the context of your future plans. Are you three years from retirement, or 15?

"Separate the emotional response from your financial or rational response,'' said Richard Hisey, chief investment officer for AARP Financial, a subsidiary of the AARP nonprofit.

2) If you're planning to sell a home, be realistic.

Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, warned that in a neighborhood already hard hit by foreclosures, you may not be in a position to move. "In Cleveland, it's so bad already,'' Faith said. "It's just a matter of riding out the storm.''

3) Buying your first home? Take your time.

"First-time homebuyers, there's no need to rush,'' said Greg McBride, senior financial analyst at Bankrate.com, based in North Palm Beach, Fla. "Take six months, pay down some debt, boost your savings, raise your credit score, and then take the plunge into homeownership. Prices won't run away from you in the meantime.''

4) If your files are a mess, get organized.

"Use your computer to help you. ... As you start to focus on it, it becomes simple,'' said Scott Bilker, creator of www.DebtSmart.com, based in Barnegat, N.J. "When you start to work on your finances, you see all these opportunities.''

5) Prioritize your expenses. Rein in what's unneccessary, and make sure you live within your means.

If you carry credit card debt, pay down the cards with the highest rates first, making minimum payments on the others, suggests Connie Stone, a certified financial planner in Chagrin Falls, Ohio.

"This is a good wake-up call for people to be concerned about the level of debt they might have and take action about it,'' she said.

6) Pay attention to the mail — both incoming and outgoing.

Hardekopf points out that letters from credit card companies may contain notice of an increase in interest rates. And Stone notes that one late or missed payment is a black mark on your credit report. It could cause your card rate to skyrocket.

7) When you sense trouble, seek help.

"If you contact your lender at the first hint of a problem and keep them informed, they're much more likely to work a deal with you that you're likely to afford,'' said Sandra Dunaway, director of Consumer Credit Counseling Service of Mobile, Ala.

If you anticipate being late with a house payment, call your mortgage company. Don't ask for the collections department; contact the loss mitigation department, where their job is preventing foreclosures, said Rick Sharga, vice president of marketing at RealtyTrac Inc., an Irvine, Calif.-based online foreclosure marketplace.

"There are a lot of people who are unnecessarily losing their homes to foreclosure because either they don't act or they act too late,'' Sharga said.

8) Consider credit counseling.

But be careful of fraudsters who promise to consolidate your debts for pennies on the dollar, or say they can keep you in your house after taking out your equity in a refinancing. Reputable counselors offer free information and workshops and will analyze your situation before suggesting a debt management plan.

9) Save — even if it's just $5 a month.

In a down economy, it's more important than ever to have an emergency fund. You may not be able to get a quick loan if your car breaks down. And if the country does go into a recession, jobs could be harder to find.

Financial counselors suggest reserves to cover three to six months worth of expenses. While that sounds daunting, if you set up an automatic deduction from your paycheck or checking account, the money adds up quickly.

"You need to save the most when you can least afford to do so,'' Stone said. "It's very important for people to get in the habit of saving.''

10) Hang on, and keep your blood-pressure pills handy.

"The pendulum of easy credit swung way too far in one direction and now it's swinging back,'' said Bankrate.com's McBride. "It's probably going to be 2009 before this fades from the front page.''

(Katherine Reynolds Lewis can be contacted at katherine.lewis(at)newhouse.com)

This article was originally published on Thursday, September 6, 2007.