Is the next generation better prepared to manage debt

[Radiance]

Considering debt, debt consolidation and free credit reports all over the news, the internet, etc.

Will the next generation be better prepared not to make the same mistakes?

You know, more public awareness like it is happening with environmentally friendly habits. When I grew up green was the color of money and recycle was not heard of. Not kids are very savvy about green living.

Will the same happen with debt management, will the new generation be better prepared?

[disneysteve]

Not at all. I think that unless significant regulation comes back to the banking and lending fields, current and future generations will be in more trouble than ever. I've seen plenty of stories and reports recently showing that despite all that has taken place in the past couple of years, nothing has changed. Lenders are back to giving huge loans, well beyond what people can comfortably afford. People are getting back to their old spending habits. I've heard numerous ads on TV and radio for home equity loans, refinancing, credit cards, etc. It doesn't seem like many have learned anything from the whole financial meltdown.

[wincrasher]

I don't see the banks going back to their "old" ways anytime soon - many banks have already reported a dearth of people that they can actually lend to. There will always be bottom feeders hawking their easy loans - good luck ever getting to closing unless the rate is astronomical. Regulation would be a great thing - having banks keep a portion of thier loans instead of securitizing 100%. But it won't fix the economy.

We have a much bigger problem. The downward mobility we've all feared.

People are overleveraged already with hardly any room in their budgets to climb out. Add in the inflation and new taxation that is coming and the sqeeze is only going to get worse. Wages on average are falling. We're probably going to have a jobless recovery.

Kids coming out of college are under an impossible mountain of debt and wages are falling/limited jobs. The era of home ownership may be over for many of these kids.

Imagine the effect on the economy of inflation, higher taxes plus falling wages. Scary.

[disneysteve]

I don't see the banks going back to their "old" ways anytime soon - many banks have already reported a dearth of people that they can actually lend to.

There is one bank, a big player, running ads currently for their home equity loans. The ad says that with the low rate, you can think big, really big, pie in the sky big. Just come in and get this loan and make all your dreams come true.

Now it may be true that qualifying isn't at easy as it once was, but it certainly hasn't stopped the marketing teams from using the same hyperbole to encourage people to live beyond their means. That's where I see the problem.

Just in the past week or so, there was a thread here that mentioned someone who had just bought a home for well over 3 times income. That person qualified so I guess they had good credit. So folks with poor credit might have trouble but folks with good credit are still being lent money possibly beyond their ability to repay it.

[wincrasher]

I think it's wishful thinking that aspirational marketing will go away. People always wanting bigger and better, some would argue, is the engine that has made America great.

Aspiring for more may always be there. Think that there are big brakes on that now for quite a while. You may still see lots of ads enticing people to go for the American dream - it will just be hard and frustrating, if not impossible to get it. People won't give up on it easily.

[disneysteve]

I think it's wishful thinking that aspirational marketing will go away. People always wanting bigger and better, some would argue, is the engine that has made America great.

Aspiring for more may always be there. Think that there are big brakes on that now for quite a while. You may still see lots of ads enticing people to go for the American dream - it will just be hard and frustrating, if not impossible to get it. People won't give up on it easily.

Sad but true. And the government is aggravating the problem with things like cash for clunkers and first time homebuyers tax credits.

[Broken Arrow]

Well, I'm an optimist at heart and would like to think the next generation will be better at this than we are.

I think part of this will be the technology they have available. As a teen, I certainly do not have all the available resources and services available online that they now have easy access to. I wrote actual paper checks, and later on, even waited in lines to pay water bills. This generation doesn't have to do any of that if they don't want to.

The other aspect is that the teens are getting hit with the recession now. Yeah, the impact may be minimal to them, but I hope it will leave just enough of an influence that they can draw positively from. Maybe they know a relative or friend's family that have lost jobs or are struggling with the bills, and maybe it will be enough to impress upon them the importance of financial responsibility.

Plus, the way the economy is going, I kind of fear what they may end up with if they don't learn some financial self defense. Yeah, I know probably every generation has their apocalyptic view on the future, but seriously, the Social Security trust fund is being depleted at a time when the Baby Boomer generation is heading well into retirement, all the while, the deficit is running at an all-time high. Actually, I am convinced that even our generations will be negatively impacted by all this....

So, I'm not just optimistic about it... but I also think it's going to be critical for survival into the future.

[wincrasher]

Change isn't the problem. It's that it's happening in every sector, virtually overnight that is the problem.

That's why the government stepping in is probably for the best. The trick will be when to pull back.

[Radiance]

While I thought that the information overload would at least make a dent on their young minds I guess it is up to us parents then.

I think we can help even if it is by showing them our mistakes. Unfortunatelly finances was always a "grown up" topic so I was never involved as a child. Most of the time I didn't even know what the household income was.

I hope we can teach our children about the dangers of debt in the same way we attempt to warn them about drugs.

And I think I will want to do that as a positive note, instead of just talking about how bad drugs are, I think I want to emphasize cool ways to stay hip, release tensions, or whatever other reasons kids try drugs these days.

Likewise instead of only warning about debt as evil, I would like to teach positive ways to benefit from being debt free. "We can do this and that, because we are debt free", etc etc.

I don't think I want to wait for the govenrment, the laws or the banks to get their act together. They won't be ready for my kid, not even for my grandchildren

[rizzmo]

A good friend of mine and his wife are in the market for a new home. They went into a big named bank two months ago and this is what they were told.

"With home values at all time lows, it's the best time to buy the biggest property you can qualify for (can't afford); after all it can only go up from here."

By contrast, when my wife and I first started looking for a home before the whole crisis happened, this is what we were told.

"With home values at all time highs, it's the best time to buy the most expensive home you can qualify for (can't afford); after all it can only go up from here."

Basically, it is the exact same pitch they have been using for years. The truth of it is no one learned anything. People who knew better than to overextend themselves in the first place, got to see firsthand why it's a good idea not to.

[disneysteve]

A good friend of mine and his wife are in the market for a new home. They went into a big named bank two months ago and this is what they were told.

"With home values at all time lows, it's the best time to buy the biggest property you can qualify for (can't afford); after all it can only go up from here."

By contrast, when my wife and I first started looking for a home before the whole crisis happened, this is what we were told.

"With home values at all time highs, it's the best time to buy the most expensive home you can qualify for (can't afford); after all it can only go up from here."

Basically, it is the exact same pitch they have been using for years. The truth of it is no one learned anything. People who knew better than to overextend themselves in the first place, got to see firsthand why it's a good idea not to.

This is my concern exactly, and what I've been seeing and reading. Yes, credit seems to be a little harder to come by, but otherwise, it doesn't seem as if anything has changed.

[wincrasher]

Say what they want, it all comes down to the formulas for approval:

Appraisal
Debt to income no more than 41% of gross
Mortgage no more than 31% of gross
Down payment

That's it. If you think 41% of your gross is too much debt for any god fearing good citizen, then you have unconventional thinking

If you meet these critiria, then according to the bank, and more importantly to Freddie and Fannie Mae, then you can afford it.

[disneysteve]

wincrasher, where did that formula come from and who is using it? Are all lenders required by law to adhere to that formula or can they be more generous in their guidelines if they choose to be?

Even that formula, though, is more generous than what used to be standard which was 28% to mortgage and 36% total to debt. Considering all that has happened, why not go back to that standard?

[boosami]

Lenders only shoot for some criteria like that for so-called "conforming" loans. Banks don't have to offer 100% conforming loans, but they typically want to so they can sell the mortgages to buyers like Fannie and Freddie, who won't buy them if they don't conform. If the banks don't plan on selling that particular mortgage, they can approve whatever they want or set their own standards for approval. There's no law saying you have to make $X amount of money or have less than Y% of debt to be loaned $Z amount of money.

Right now, banks are leaning toward conventional loans because they are hurting and need to sell mortgages off to buffer their losses from defaults. When we return to a prosperous time and defaults are lower, they won't care as much and will go back to unconventional loans simply to get more business.

[Radiance]

Right now, banks are leaning toward conventional loans because they are hurting and need to sell mortgages off to buffer their losses from defaults. When we return to a prosperous time and defaults are lower, they won't care as much and will go back to unconventional loans simply to get more business.

Right now, or later, we need to understand the banks motivations and realize they don't have the consumer best interest in mind. Why would they?

It goes back to responsible debt management. If I ever take on a mortgage again I am having it checked by a personal finance advisor and by this forum!