While the emerging softer economy suggests prudent financial behavior, more and more consumers from college students to home owners are giving in to easy credit, piling on debt and putting their homes in the line of fire.

Ironically, the growing access to easy money is often designed to help house more Americans or allow them to tap their equity, but one segment of the housing market and it's customers have fallen victim to the trend.

"I agree that lending is too easy and the chance for making the mistake of a lifetime is out there for some people. Anyone who is not always certain about their employment, they need to be cautious in the emerging market," said Ken Willis, president of the Upland, CA-based League of California Homeowners.

The average U.S. household now owes 107 percent of its annual income, with most of the recent increase due to a shift in debt from installment and credit cards to mortgage debt, according to Standard & Poors "How Much Could A U.S. Recession Hurt Credit Card Losses".

"You can typically borrow three times the amount of your income, and that's okay if you have a small mortgage balance, but the savings rate has been low for a long time and if you are a California dot commer in the street with a big $500,000 mortgage for a postage stamp-sized condo you are in a tight situation," said Bruce Hahn, president of the Arlington, VA-based American Homeowner's Foundation.

The S&P report says the stock market's wealth effect could be waning at a time when household savings and income growth can't make up the difference and bankruptcies and credit card charge offs are on the rise.

"With the economy decelerating, employment growth will slow sharply. The unemployment rate is expected to rise above 5 percent later this year, and the layoffs will impact household ability to pay," says the report.

"The doubling of the stock market from 1995 through 1999 convinced Americans that they were rich enough to spend more. Since the stock market was doing our saving for us, Americans felt comfortable in spending more than they earned. Trading up homes increased mortgage debt, as did the increase in the home ownership rate. In addition, many Americans took advantage of low mortgage rates and the deductibility of mortgage debt by rolling consumer credit into their mortgage," S&P says.

Meanwhile, lenders waving a home ownership advocacy banner say reducing borrowing constraints still more is the solution to increase home owner ship rates -- already at a record 67.5 percent.

Just days before the S&P study, the Research Institute for Housing America (RIHA) said eliminating borrowing constraints would increase the owner-occupancy rate among nonfarm families in the U.S. by 4 percentage points, by 7 percentage points for young and by 10 percentage points for low-income families.

Borrowing constraints include down payment standards, house payment-to-income ratios and total debt payment-to-income ratios imposed by lenders.

"This study points to untapped market opportunities for lenders," said Steven Hornburg, executive director of RIHA, founded in 1998 by the Mortgage Bankers of America.

The manufactured housing industry was after similar "untapped market opportunities" before it saw its market share plummet and repossessions soar in recent years after allowing too many bad loans.

After peaking at about 373,000 units in 1998, the industry is expected to move only 200,000 homes this year, reflecting a 20 percent year-to-year loss in sales, according to another Standard & Poor's study "U.S. Homebuilders' Outlook for Credit Quality".

The Manufactured Housing Institute itself estimates retail sales were off 30 percent in January 2001 compared to January 2000, while shipments declined 41.5 percent.

The culprit was bad loans, often made to those who could least afford to lose their home. "The cause of the precipitous decline is the confluence of very aggressive underwriting by a small group of large lenders (whose activity appears to have artificially expanded the pool of qualified buyers)," S&P says.

The lending expansion spawned greater factory-built home production followed by increased delinquencies, defaults and repossessions before lenders scrambled to tighten underwriting standards. With only a few lenders controlling the market, a finance shortage ensued, the report says.

Now, tighter credit, repossessions and a softer economy have combined to make absorbing the bulging supply a tough task.

The greater resale and new site-built home market likely isn't in as much jeopardy, but it also faces an easy-money threat -- the next generation of would-be home buyers may be learning poor borrowing habits from their predecessors.

Two recent reports show college students are clueless about the effects of piling on both student loan and expensive credit card debt at a time when they are least able to afford it.

"A home may be some people's retirement account. It's important to realize what you have and don't fall for the easy money for things you don't really need in this economy," said Jordan Clark, president of the Washington, D.C.-based United Homeowner's Association.

For more articles by Broderick Perkins, please press here.

Published: April 12, 2001

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.