I just read that more borrowers are at least 30 days past due than at any time in the last 16 years. And Ben Bernanke, the chairman of the Federal Reserve, has now told Congress that a recession is possible. What should we do?
Over the last few decades, I remember reading that we had tamed the “business cycle,” meaning that we had figured out how to have a Goldilocks economy — not too hot, not too cold. It seems that, about every 10 years, we learn that’s not the case. We still experience ups and downs. It’s a wise person who understands this and plots a financial course that leads to long-term financial stability.
The news continues to be dominated by the impact of sub-prime loans and falling housing prices on the broader economy. While the news statistics focus on the broad economy, they translate into millions of individuals and families having to navigate rough financial waters.
Two of the biggest impediments to successful financial management occur when people spend more than they should on housing and transportation, and borrow heavy amounts in the process.
Too often, spending decisions made in these areas make it difficult for folks to properly manage the rest of their finances. Sirach 18:33 reminds us not to overdo it with spending, especially with debt. “Do not become a beggar by feasting with borrowed money,” we are warned, “when you have nothing in your purse.”
My rule of thumb is that all housing expenses should be in the low- to mid-30% range when taken as a percentage of gross income. That includes all housing-related expenses such as property taxes, insurance, utilities, gardening, maintenance and improvements.
In most cases, transportation costs shouldn’t exceed 10% of your gross income. If you find yourself over-extended, what steps can you take to bring these areas into balance?
I know of a number of people who have chosen to downsize their homes and sell cars they spent too much on. While initially discouraged by the very thought, they have found a sense of freedom through the lower payments.
Of course, the current housing market makes selling a home more challenging, especially if your loan amount now exceeds the value of your home.
Don’t allow yourself to be paralyzed in such a situation. Make an objective assessment. Maybe it still makes sense for you to stay in the home and ride out these turbulent times. But for some — even in this tough market — it will make sense to sell and downsize.
If your loan value exceeds what you sell your house for, you’ll need to work with your lender regarding the difference. Seek to have them accept the sale proceeds as the complete payment, and have them forgive the balance of the loan (a short sale).
In prior years, this would have led to taxable income, but with the housing crisis, Congress passed the Mortgage Forgiveness Debt Relief Act and eliminated such taxable events through 2009. God love you.
Phil Lenahan is online at