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Creditors And Mortgage Lenders.

By John Dietz - Email Editor

Date: 27-Sep-2005

The dictionary defines a creditor as “a person or organization that money or equivalent is owed to by another.” Most of us in the real world associate creditors with judgments from the losing side of a lawsuit. The reality is that there are a myriad of creditors that surround your life. Lost wages, lost accounts receivable and higher insurance premiums are just a few likely creditor suspects. Every single day the mouths that you feed are creditors.

The worker that asks you for an advance every week is another type creditor. When I was growing up, it was always the guy who told you he just won a bet gambling, and then he’d ask if he could borrow $20. Don’t laugh; we all grew up with a razzle-dazzle person like that! How about the IRS, are they a creditor? They certainly could be. The point is that creditors come from everywhere and generally don’t walk through the front door.

Today's concern: IS YOUR REAL ESTATE TURNING YOU FROM A TYCOON INTO A BESIEGED DEBTOR?

We have all heard about a possible housing bubble. Every news organization can’t stop scaring you about it. If you have not heard, or you've missed the memo, I think there is a mortgage broker for every man, woman and child in the U.S. When you have that kind of competition, things are bound to get dicey. Lately, the whole industry has come under fire for irresponsible lending and loose credit practices. No money down was traditionally for late night insomniacs; now it’s considered the norm.

Shockingly, at the same time the Federal Reserve was raising short-term interest rates, mortgage companies were easing credit standards by offering adjustable rate mortgages giving the borrower the choice of payment options. These options include the minimum payment option, which is based on an initial interest rate that can be as low as 1%. (By the way, I have no problem with equity stripping of your home as an Asset Protection method as long as you don’t live in Florida or Texas.) The basic problem is that these appealing, teaser payment options run out quickly. You want to know how to make winter go by fast? Just have a balloon payment due in March!

The worst-case scenario is that the backlash of the many loan defaulters could filter through the financial system into other marketplaces, leading to depreciating real estate prices, which would result in a lot of people having little or no equity in their properties.

Anyone that understands the fundamentals of credit knows that it’s a precarious era when you have no equity and recurring payments.

One of the ways to avoid all of this mess is to stick to the basics. Make each real estate deal stand on its own. The second, often missed rule is the reason for the purchase or the sale. Too many of our clients try to use 1031 exchanges to put off capital gains. That is all you do, you put them off. Often a 1031 exchange is nothing more than taking a property you know very well and trading it for one you don’t know much about. Let’s stop the madness and do some real planning and potentially solve the capital gains issue. Next week we will delve into a solution.

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