by Lana Stockton

Created on: November 16, 2008   Last Updated: November 11, 2009

As a loan officer until 2006, I saw banking practices in the 1990s that began concerning me.

For example, why would anyone consider agreeing to an ARM (Adjusted Rate Mortgage)? The selling point, of course, was that if interest rates should go down, so would your mortgage payment. Even though the mortgage officer mentioned rates could go up, I noticed clients becoming excited about the possibility of the reduced payments.

The mortgage officer will sit down with you, determine your debt to income ratio, then tell you how much payment you can afford. The wise home buyers listened to their gut feeling. They knew what they realistically could afford to dish out each month on housing expense. But too many clients believed they really could afford that astronomical payment. And they could afford it...if nothing went wrong, if there were no financial emergencies, no medical co-pays...all the additional expenses many clients forgot to take into consideration when getting excited about purchasing a home.

More concerning than the ARM, however, was the popular balloon note. Unfortunately, many home buyers didn't think past that first five years of easy payments and low introductory rates to see what was lurking down the road. In some cases, during the first five years homeowners paid little, if any, on the principle which produced delightfully small monthly payments.

At the end of five years, when the loan became due in full. many found it difficult to get financing, or at least financing they could afford since now they would be paying both interest and principle. Also, their job situation may have changed, or their credit score may have gone down enough to put them in a higher interest category for a new loan.

The ever increasing cost of living coupled with company downsizing and resulting joblessness across the nation has left the middle class poor and the lower economic class poorer yet.

From my experience I see the credit crisis as a result not of the poor receiving loans, but of people in general biting off more loan payment than they realistically could afford. Or latching onto low payments without putting a pencil to how that low payment will affect them a few years down the road.

Another aspect of the credit crisis deals with unsecured loans; lines of credit and credit cards. Have you ever opened a credit card statement and discovered your limit suddenly was increased?

At some financial institutions it's the practice to periodically raise the credit limit. Remember, you weren't expecting the increase so you didn't provide any pay verification. Unless you have direct deposit at the same bank that issues credit card, the new increase may have been handed to you because of your good payment history and current credit report.

You spend up to your new limit which, by the way, you couldn't afford to do. You now have higher monthly payments and more debt, a tighter debt to income ratio.

When going loan shopping remember to ask that all important question: And what's the downside? Listen carefully. Then trust your gut feeling.

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