While Wall Street and Main Street compete in a tug-o-war over the mortgage bailout plan, average Americans wonder how the colossal expenditure will impact their personal finances. It's too soon too to predict the overall outcome, but some good and bad consequences are inevitable.

An expensive rescue plan, like the one crafted by the Treasury Department, is primarily meant to buy up bad mortgage assets to unburden banks. But long after any formal bailout plan is approved, the housing market will struggle to regain normalcy because of two opposing strategies.

  • On the one hand, tighter underwriting makes it more difficult for consumers to take out a mortgage or do a refinance. With increased government oversight, that's a mandatory requirement.
  • On the other hand, unless banks approve more mortgages and make them accessible and affordable, Americans won't be able to buy or sell homes.

Americans and mortgage payments

Traditionally, prudent mortgage guidelines, which were abandoned during the recklessness and predatory lending of the expanding housing bubble that got us into this mess, call for homeowners to pay no more than about 30 percent of their monthly income toward housing expenses. These might include not only the mortgage, but homeowner's insurance and property taxes, as well. Today, while about 10,000 homes enter foreclosure each day, 7.5 million people spend 50 percent of their income on housing, according to recent Census Bureau data. That means that nearly 15 percent of Americans who make monthly mortgage payments are laying out significantly more than they should be. With national attention now focused on the financial crisis, lenders will most likely go back to their old arithmetic, and that means that millions of homeowners will be forced to downsize their personal finances and the value of their equity.

Coping with the credit crunch

The credit crunch has also caused a spike in credit card delinquencies, which recently rose nearly 15 percent. Reacting to that trend, lenders have slashed credit limits by as much half, according to the American Bankers Association. Almost two out three credit card companies have shrunk credit lines, and even those cardholders with good credit are being affected by the changes.

With suddenly lower credit ceilings, many consumers find themselves getting hit with over-the-limit penalties, and that can have an immediately adverse effect on credit scores. But to get preferential rates on a mortgage in today's environment, borrowers need to have a credit score that's at least in the 720 to 740 range.

The best news for mortgage holders is that the Fed is aggressive about halting foreclosures. In addition to buying off bad loans to help banks, officials, including the head of the FDIC and the new director of Fannie and Freddie, are radically modifying troublesome loans to make mortgage payments easier for borrowers. That means that homeowners across the country will find it easier to avoid foreclosure and get the support and cooperation they need from lenders who may have been reluctant to offer concessions before the bailout.

Published on October 14, 2008