This weekend I was going over a clients bank statements to find some additional income to get her a better rate when I noticed something that didn't make any sense. I noticed that each month she transferred money from her savings to her checking to meet the shortfall in her income, yet she had late payments. When I first got her as a client I refinanced her debts, getting rid of most of them, and giving her the savings account to make up the difference until she could either earn more money, get a better interest rate, cut her overhead or all of the above. Why then did she have late payments? The astonishing answer was she had been afraid to use to much of her savings/reserves and was trying to manager her money better.
Have I seen this before ? Hundreds of times. People will sit with equity in their house and skimp and save and pay late and continue to bury themselves when the life saver is hanging on the wall. It has to stop. Hugh Hewitt made me aware of a law that we should all pay attention to, the law of holes. It's number one rule is "first stop digging". This rule now hangs on the wall in my office so I can remind myself of it. It's a law that enough people either haven't discovered it or don't grasp the meaning. You have to quit making it worse before you can make it better. It's as simple as that but my young client hasn't grasped it and hundreds, if not thousands haven't either. Why?
FEAR! Just plain fear keeps making it worse. People who end up in foreclosure have warning after warning before they even get the letter that says if they don't get current they are going into foreclosure and they just don't act. I actually had a business man who I had refinanced giving him a new first mortgage to help clean up his credit. Sometime later he called and said he needed more cash and I got him a private second mortgage that would come due when his first mortgage was going to reset. Apparently he had some problems and without calling me he let his first mortgage go into foreclosure, but was still paying the second. Huh! The second holder called me and I was dumb founded as to what went on. I did find out later that the borrower had great respect for the individual who held the second and couldn't allow himself to be late, so while he was going down the path toward losing his house he kept paying on the second mortgage. Again I ask why?
Do we try to out think ourselves at times? Perhaps. My father always told me to take care of business first and the rest will work out. I tend to modify that statement by saying "take care of your credit first and the options will be much better!" Once again the answer is to take action when the first sign of a problem arises. My doctor friends tell me that a cold is hard to cure but they are equipped to deal with something more dramatic and life threatening. Nobody tries to get sicker because it is easier to cure. Why then would anyone wait to act on a problem concerning their property. I can assure the remedies are not easier at all.
A current 30 day late on your mortgage can drop your credit score up to 100 points. A 60 day late changes your credit classification and limits the loan to value for a refinance on your house. A 60 day late generally ends any chance of you being an A borrower and doesn't help you much as a sub prime borrower. A 90 day late is tantamount to a foreclosure in both your credit classification and the loan to value. Naturally a 90 day late makes you a sub prime borrower and will cause a notice of default to be sent to you followed by the foreclosure notice if something isn't done immediately.
When I tell you all of this generally can be alleviated if you only act when the first sign of trouble hits I am speaking with years of experience. Reserves help when problems strike but most people are without sufficient reserves. So let me enumerate the many things that should perk up your senses and get you prepared to act. Loss of a job, accidents or illnesses, loss of a spouse from any cause including divorce, disasters of all sizes caused by mother nature or the loss of income or savings stemming from everything from criminal activity to gambling to carelessness. I am sure there are many more that I am forgetting at this time but the key is to recognize you may need help and when you do pursue it quickly and with all your energy.
A friend of mine told me that he just got tickets to the Red Sox-Yankee game next month, or there about, being played at Fenway Park. His benefactor who supplied the tickets told my friend to root quietly for the Yankees, under his breath would be better, and not wear any Yankee clothing. Seems a bit over the top, but I certainly understand rivalries.
I am trying to tell you that you have tickets to smooth sailing financially if you see what is happening to your financial condition and act appropriately when your condition is beginning to deteriorate. That seems pretty simple, I only wish it was for most people.Make sure it is for you.