Counselors Advise: Don't Ignore Debt, Seek Solutions
Local Help Is Available as People Struggle To Manage Rising Costs, Mounting Debt
By Amy Polk By Amy Polk

The days of charging a lavish lifestyle are giving way to a time when people charge essentials like bread, milk, and doctor bills to credit cards. The recent mortgage meltdown has snapped the nation's credit crisis into focus, revealing a problem that has been simmering below the surface for some time.

"People used to make lifestyle and luxury purchases on their credit cards," said Eve Pidgeon of Green- Path, a nonprofit credit counseling service based in Farmington Hills that counsels Upper Peninsula clients. "But now, a growing number are charging everyday, basic living expenses like groceries, gasoline, and utility payments."

"Our lives are a lot more expensive than they used to be 50 years ago. We have two cars to a family, when it used to be one. Two parents are working who need to pay for daycare. We have cell phones, Internet, and a lot of other stuff we think we need, but maybe we really don't," said Stuart Baker, a Greenpath financial counselor based in Marquette. He counsels clients from the Eastern Upper Peninsula, and said the average debt of his clients is about $30,000, not including a mortgage.

His clients' debt ranges from as little as $2,000 to as much as $138,000 in unsecured debt, which includes things like credit cards, department store cards, and medical bills. It is not unusual for these clients to have interest rates of 30% on their cards. There is no set pattern to the amount of debt or the kind of debt they have, he said, but utility bills plague borrowers during the winter months.

"We, especially at this time of year, see debt due to the increasing cost of utilities, electricity, heating fuel, and even gas for driving to and from work," Mr. Baker said. "Gas is two to three times higher than it was several years ago."

"Consumers are pretty stressed out," said Jim North, chief executive officer of First National Bank of St. Ignace. "Energy prices are up; home heating costs like gas and oil have doubled over the past several years. Businesses are stressed, too, and their costs are not going down. Property taxes are still going up, too."

Businesses are willing to absorb a limited amount of increasing costs before are passing them on to the consumer in the form of higher prices. The price of wheat has roughly doubled in the last year and is pushing bread prices up. Staples like milk, butter, and eggs are all at least 10% more expensive now than they were a year ago. Electric bills spiked approximately 10% earlier this year. The people most vulnerable to money trouble, who were already stretching their purchases through credit cards and loans, are struggling to pay bills as they try to keep up with rising costs. People overwhelmed by these costs have increasingly turned to credit to pay doctor bills, make mortgage payments, and buy groceries.

"Everyone needs to realize there are numerous and various reasons for the current financial crisis," said Dave Firack, chief executive officer of Old Mission Bank in Sault Ste. Marie. "Legislators, regulators, borrowers, lenders, and investors all have had a part in it. It did not just happen overnight. It happened over time. It appalls me that our elected officials and regulators are stating, 'There is no way we could have seen this coming.'"

He attributes much of the problem to easy credit terms and lowering standards to borrow money for many of the loans that have now become defaults or foreclosures. Investors have been too willing to buy investments when they did not understand underlying risks or collateral, he said, and legislative action and a lack of regulator oversight have compounded the problem.

He faults credit card companies and out-of-area loan agencies that extend credit to people regardless of their income or ability to pay their bills. Mr. Firack and Mr. North both noted the majority of foreclosures in the area had mortgages issued by out-of-area mortgage companies and banks.

Of the 145 homes that were foreclosed on in Chippewa County in 2007, six were homes with mortgages issued by Eastern Upper Peninsula banks or credit unions, according to an account by John Allison of Central Savings Bank in Sault Ste. Marie. Mr. Allison counted the number of foreclosures advertised in The Evening News in Sault Ste. Marie.

Mackinac County had 65 foreclosures in 2007, and 14 of those had mortgages from an Eastern Upper Peninsula lender, according to a count of notices published in The St. Ignace News. Foreclosure public notices, a legal requirement of the foreclosure process, used to average two in The St. Ignace News, but are now averaging about 10 a week, said Mary Maurer, business manager and associate publisher of The St. Ignace News.

"Many of the mortgage foreclosures are the result of borrowers being given a mortgage they never could succeed in," Mr. Firack said. "Many times, the consumers bought more than they could afford."

To compensate for potential losses from low income and "risky" borrowers, lenders sometimes issue those borrowers a "sub-prime mortgage," including adjustable rate mortgages and interest-only mortgages. Some of these mortgages offered interest rates the borrower could afford at first, Mr. Firack added, such as only 3% interest for the first three years. After that, the mortgage rate would reset to a higher rate and include interest and principal in the monthly payment, resulting in a much higher monthly payment than the borrower could afford.

Sub-prime mortgages are granted to a borrower who has a lessthan perfect credit report because they might have missed payments on a debt, or made late payments. Borrowers with dreams of owning a home are lured into high interest mortgages by offers of low monthly payments to start, "no money down," or only 5% to 10% down. The tactics make buying a home seem affordable to start, Mr. North said, but eventually a mortgage with an initial 5% interest rate turned into rates as high as 8% to 11%, resulting in unaffordable payments for some people.

"A lot of people heard from lenders a lot of things that were too good to be true, and they were," said John Fisher, chief lending officer at First National Bank.

To stop the bleeding in the mortgage market, Governor Jennifer Granholm signed into law Save the Dream legislation Wednesday, April 2. The new laws allow homeowners struggling to make payments to refinance their homes at a lower rate through a 30-year, conventional loan through the Michigan State Housing Development Authority. The action does not rid the owner of any debt, but does allow homeowners suddenly slammed with higher monthly payments to redistribute their debt over a longer period of time, usually at a lower interest rate.

The Save the Dream program is available to qualifying homeowners who have either an adjustable rate mortgage or who have missed one or more mortgage payments. The program is designed to help people who risk losing their home to foreclosure because of either circumstance. They must meet certain income, residency, and home value guidelines.

The Save the Dream legislation responds to the sub-prime mortgage crisis, which is at its worst in the southeast Lower Peninsula.

The effects of significant auto industry job losses in that region have crept into northern Michigan.

"A lot of people aren't coming up here anymore," Mr. Fisher said. "A lot of these people were the blue collar auto workers, and they just don't have the money to come up here anymore. The economy of the U.P. isn't that complicated; it's mostly tourism."

Travel expenses like gasoline, bridge fares, and airfare, and the cost of owning and maintaining a second home are among the pricey extras residents of southeast Michigan are shedding as they lose income.

As fewer cottagers come up for the summer and weekends, spending fewer and fewer dollars at local businesses, those businesses lose revenue and struggle. Some even close.

Mr. North has observed that, up here, a larger percentage of the foreclosures have been business related properties. The current mortgage crisis has attracted much attention this year, but the economic decline actually started seven years ago, he said.

"2001 is the first year we started seeing a decline, and now we're six years into it," Mr. North said. "The businesses that were slow to react to the change, thinking things would get better, are suffering the most, and in some cases have closed. Those that didn't have a lot of debt, who adjusted quicker to the changing economy, are surviving."

Business closure means fewer jobs in an already limited job market. People who lose their jobs and choose to stay in the area, jobless and seeking work, are having a hard time paying their bills. This, in turn, has resulted in perhaps the highest foreclosure rate real estate agent Jerry Murray of St. Ignace has ever seen. According to his own research, he estimates foreclosures have increased in the Eastern Upper Peninsula by 300%.

"Per capita, we have one of the highest unemployment rates in the state," Mr. Murray said. "Everyone is concerned right now. My neighbors are concerned about their jobs and being able to keep their homes."

Home sales in the region have been slow, but there are "pockets" where property is still selling, he said, particularly Clark Township, where agents are still selling seasonal homes and waterfront property. Waterfront property, he believes, will probably retain values better because there are limited parcels and it is still in demand. The type of buyer has shifted, he said, to second home buyers from the Chicago and Milwaukee areas "where people still have money." Buyers used to come from lower Michigan.

"All the marketing we started was in southeast Michigan, but now we're spreading out" beyond the Michigan border, said Mr. Murray.

Mr. North concurred, adding, "There is a definite up-tick in real estate inquiries." Most of the interest is from prospective second home buyers from outside Michigan, he said.

"In southeast Michigan, real estate values have dropped about 20%. One thing about here is the values have not gone down that much. From what I've been gleaning, people are recognizing the steadier values here, fewer natural disasters, and better quality of life," Mr. North said.

After a stagnant year, Mr. North said the bank has had more serious buyers seeking mortgages in the past month. The buyers are mainly from other states.

"The reality is we need to get more people up here. We need to boost tourism," Mr. Fisher said, calling for special events, weekend activities, and extending the state's tourism advertising campaign.

While these events target tourists and people who may stay in the area only a few days, they bring the badly needed crowds and buying power that infuses businesses with customers. He cited a few examples of events that, while caused by unfortunate circumstances, boosted business in those towns. A temporary Mackinac Bridge closure due to severe weather conditions this winter helped give St. Ignace a lift, he said, and the Sleeper Lake Fire kept firefighters in Newberry nearly a month. All of those people stayed in motels, ate in restaurants, and probably bought things in stores while they were there, he said.

Mr. Firack joins Mr. North and Mr. Fisher in their assessment that things are not as bad in the Eastern Upper Peninsula as they are downstate.

"We need to recognize that different areas of the state are experiencing the real estate issue to differing degrees," Mr. Firack said. "The Upper Peninsula's (economic) peaks and valleys are more gradual, and do not normally show the dramatic swings we see elsewhere."

Mr. North predicts the region is on the front of an economic upturn, and is optimistic that the current "buyers" market may attract people to buy real estate while prices are lower than they were in the 1990s. He believes the new Mackinac Straits Hospital, for example, slated for construction in St. Ignace this year, will attract new business and people to the area. Mr. Fisher said he knows of one prospective new business that may open in St. Ignace because of the hospital construction plans.

Noting a trend of inflated real estate prices in the last decade, Mr. North, Mr. Firack, and Mr. Baker all predicted that real estate prices will "normalize" closer to assessed values. As fewer people can afford the asking prices of some homes, they will refuse to pay prices they consider too high.

"Ultimately the housing market is starting to correct itself," Mr. Baker said, which should make home prices more affordable for buyers.

If You Are Struggling, Here Are Some Resources To Find Help

 

Help is available locally for people struggling to pay bills and make mortgage payments. The worst thing people can do in that situation, counselors advise, is to ignore the problem. Mediation, credit counseling services, and a new state program to move debt into long-term fixed loans are among the remedies.

Mediators and credit counseling services operate by negotiating with lenders to sometimes drop late payment fees or forgive a portion of the debt in the interest of enabling the borrower to pay something.

"We guide the conversation between the two parties to reach some kind of agreement both of them can live with," said Geraldine Stelmaszek of the Eastern Upper Peninsula Community Dispute Resolution Center. "With downstate firms, it's a little more difficult, but locally we can sometimes get more creative. Sometimes we have actually been able to get a lender to forgive the debt."

Such creative solutions may include allowing a borrower to work off a portion of their debt.

Poor health, gambling, and job losses are frequent reasons for unmanageable debt in the E.U.P., said Mrs. Stelmaszek.

The Dispute Resolution Center in Sault Ste. Marie performs courtordered mediations between borrowers and lenders after lenders bring a complaint to small claims court. Since 2005, Mrs. Stelmaszek estimates, Judge Beth Gibson of 92nd District Court has ordered mediations to settle debts in Chippewa, Luce, and Mackinac counties. Mrs. Stelmaszek estimates 67% of the mediations her office performs are related to debt. Much of the debt is attributed to poor health, she observes, including people who pay medical bills they can't afford with a credit card, and people who can't work because they are sick, and therefore do not have the income to pay their bills. Gambling and job loss are two other major reasons for debt in this area, she believes. Mortgage-related debt is more infrequent.

She advises people overwhelmed by bills to seek help and talk to the lender before the crisis reaches the court, or property gets seized.

"The worst thing you can do is ignore the debt when you owe money," Mrs. Stelmaszek said. "You may be able to negotiate with the lender."

Mackinac County Sheriff Scott Strait said local property seizures, performed by the sheriff's department to satisfy an unpaid debt, have increased significantly. The department has seized property 20 times in the past two years. In the 18 years he worked as a deputy, he estimates he performed two to three seizures the whole time.

"Foreclosures used to average one to two a month," Sheriff Strait said. "Now it's been about two a week."

Credit debt and trouble with bills may be resolved through a local bank, which may design a payment or budget plan. The bank may also refer the person to a credit management service. GreenPath is one Michigan-based nonprofit credit counseling and management service that works with local banks to resolve debt.

"A vast majority of the people we're working with have too much credit and too many credit card bills," said Stuart Baker, who works in GreenPath's Marquette office.

Unfortunately, he said, "Jobs in the Upper Peninsula generally don't pay as much as they do downstate, but the credit availability is still there. It is very easy to get credit."

He described debt crisis as a vicious cycle that can be difficult to climb out of. He advises people to learn how much their bills and utilities cost each month, and build a savings account with the minimum amount needed to pay three months of bills.

"That way, if you lose your job, you can get by while you're looking for another job," he said. "If you can't make your car payment, and you lose your car, you can't get to work, and you won't be able to pay any bills."

He also advised talking to lenders, who can sometimes extend a payment period or allow borrowers to skip a payment or two during lean months. Dave Firack of Old Mission Bank strongly urged people to create a budget and spending plan to avoid spending money they might not really have.

Michigan adopted programs Tuesday, April 2, to help homeowners prevent foreclosure by moving their debt into a longer term, fixed rate loan. The "Save the Dream" program targets homeowners stuck with a high interest, adjustable rate mortgage they can no longer afford. It also may help homeowners who have missed mortgage payments to qualify for a 30-year, fixed rate loan as long as they have demonstrated timely debt payments in the past.

The two programs are:

• Adjustable Rate Mortgage (ARM) Assist Program - will help qualifying homeowners who have an adjustable rate mortgage convert their mortgage to a 30-year, fixed-rate, conventional loan. The household income of borrowers cannot exceed $108,000, and the sales price of the home cannot exceed $224,500. The interest rate is 6.75%.

• The Rescue Refinance program that will help "at-risk" homeowners who have missed one or more payments by giving them the opportunity to get into a more affordable 30-year, fixed-rate, conventional loan. Income and home price limits are the same as for the ARM Assist Program. The interest rate is the same.

Homeowners interested in the state program should call (866) 946-7432 or visit www.michigan. gov/savethedream.