This is a scary one. Rising income, looser loans, and inflated real estate are stampeding millions into bankruptcy.
Elizabeth Warren is a Harvard law professor who compared over 2000 recent bankruptcy surveys to 1980s studies. (TH, I suspect that she's objective, or at least not funded by biased sources. She covers this subject in other books as well.) In a study that's heavily documented with supporting data & analysis, she found that the #1 predictor of bankruptcy was having kids.
The logic is counter-intuitive. She claims that more women than ever are entering the workplace (a good thing) and raising American's incomes (another good thing). Starting a family translates to finding a home near a good school (whatever that is), so millions of two-income families have fueled a nationwide bidding war that's driven home prices higher than a one-income family can afford. (There's no salvation for them unless they join the two-income ranks.)
Luckily for the two-income families, they can afford it. Before the 1970s banks used to ignore the spouse's earnings in the misguided belief that they'd drop out of the workplace when they started families. Lending criteria were also much tougher, so credit was tighter.
But fair-credit legislation has ended that gender discrimination and one spouse's income counts just as much as the other's. (Whether it'll continue for the duration of the mortgage is irrelevant to the bank.) Fueled by easy credit (more on that later) the family joins the bidding war to put as much as 45% of their dual income toward their home expenses. Note that this amount might exceed one wage-earner's income and that the mortgage is non-discretionary.
Eventually chaos strikes and one of the couple loses their job. Because the mortgage is a non-discretionary expense, it quickly sucks down all cash reserves and becomes delinquent. The bank offers additional equity loans and "debt consolidation". Credit-card companies note the late mortgage payments and raise their own interest rates (legally). As additional charges & penalties pile on, bankruptcy is the best solution to avoid foreclosure.
Ironically, single-income families with frivolous spending habits are much less likely to declare bankruptcy. If one spouse loses their job, the other can usually enter the workplace. Both can cut back on their discretionary (wasteful) spending. Unlike the two-income family, disaster is easily averted.
Lenders used to be constrained by state usury laws until 1970s-80s federal legislation (and loopholes) removed those limits. As home prices took off, banks discovered the subprime lending market. Astute analysts could make crappy loans and triple their default rates while income soared on penalties & fee income. Quickly rising home values enabled foreclosures to stay above the mortgage balances so banks were happy to become temporary homeowners. Forget the 750+ FICO scores-- banks make more money lending to the sub-500 crowd. In fact, bankruptcy filers received a median of 30 unsolicited credit-card and home-equity offers when their filings were recorded (public knowledge).
So a two-income family loses the safety net of the stay-at-home spouse. It's not over-consumption (unless you put a home mortgage in that category). It's not immoral debtors. It's not going to be solved by tougher bankruptcy laws. It's just well-intentioned spending that turns out to be highly leveraged to the slightest drop in income.
Don't even think about the odds for single parents. And it's not caused by deadbeat child-support payments, either.
Warren has no easy solutions. She recommends holding mortgage debt within one income, which may mean saving for many more years to chase a 20% down payment in a rising market. Insurance is another option, especially disability.
She also suggests legislative solutions that might not work, such as interest-rate caps (tied to the CPI) and an end to predatory lending. She claims that public pre-school funding and school vouchers would end the spending frenzy to get your toddlers & kids into the "right" programs.
I could fill another two posts with statistics & quotes. Instead I recommend borrowing from the library, especially if you have adult children embarking upon this bidding war. It's a compelling read.
Elizabeth Warren is a Harvard law professor who compared over 2000 recent bankruptcy surveys to 1980s studies. (TH, I suspect that she's objective, or at least not funded by biased sources. She covers this subject in other books as well.) In a study that's heavily documented with supporting data & analysis, she found that the #1 predictor of bankruptcy was having kids.
The logic is counter-intuitive. She claims that more women than ever are entering the workplace (a good thing) and raising American's incomes (another good thing). Starting a family translates to finding a home near a good school (whatever that is), so millions of two-income families have fueled a nationwide bidding war that's driven home prices higher than a one-income family can afford. (There's no salvation for them unless they join the two-income ranks.)
Luckily for the two-income families, they can afford it. Before the 1970s banks used to ignore the spouse's earnings in the misguided belief that they'd drop out of the workplace when they started families. Lending criteria were also much tougher, so credit was tighter.
But fair-credit legislation has ended that gender discrimination and one spouse's income counts just as much as the other's. (Whether it'll continue for the duration of the mortgage is irrelevant to the bank.) Fueled by easy credit (more on that later) the family joins the bidding war to put as much as 45% of their dual income toward their home expenses. Note that this amount might exceed one wage-earner's income and that the mortgage is non-discretionary.
Eventually chaos strikes and one of the couple loses their job. Because the mortgage is a non-discretionary expense, it quickly sucks down all cash reserves and becomes delinquent. The bank offers additional equity loans and "debt consolidation". Credit-card companies note the late mortgage payments and raise their own interest rates (legally). As additional charges & penalties pile on, bankruptcy is the best solution to avoid foreclosure.
Ironically, single-income families with frivolous spending habits are much less likely to declare bankruptcy. If one spouse loses their job, the other can usually enter the workplace. Both can cut back on their discretionary (wasteful) spending. Unlike the two-income family, disaster is easily averted.
Lenders used to be constrained by state usury laws until 1970s-80s federal legislation (and loopholes) removed those limits. As home prices took off, banks discovered the subprime lending market. Astute analysts could make crappy loans and triple their default rates while income soared on penalties & fee income. Quickly rising home values enabled foreclosures to stay above the mortgage balances so banks were happy to become temporary homeowners. Forget the 750+ FICO scores-- banks make more money lending to the sub-500 crowd. In fact, bankruptcy filers received a median of 30 unsolicited credit-card and home-equity offers when their filings were recorded (public knowledge).
So a two-income family loses the safety net of the stay-at-home spouse. It's not over-consumption (unless you put a home mortgage in that category). It's not immoral debtors. It's not going to be solved by tougher bankruptcy laws. It's just well-intentioned spending that turns out to be highly leveraged to the slightest drop in income.
Don't even think about the odds for single parents. And it's not caused by deadbeat child-support payments, either.
Warren has no easy solutions. She recommends holding mortgage debt within one income, which may mean saving for many more years to chase a 20% down payment in a rising market. Insurance is another option, especially disability.
She also suggests legislative solutions that might not work, such as interest-rate caps (tied to the CPI) and an end to predatory lending. She claims that public pre-school funding and school vouchers would end the spending frenzy to get your toddlers & kids into the "right" programs.
I could fill another two posts with statistics & quotes. Instead I recommend borrowing from the library, especially if you have adult children embarking upon this bidding war. It's a compelling read.
