Credit crunch gives borrowers a chance to escape debt

There may be an upside to the credit crunch's overarching doom and gloom: Americans can use the receding interest rates to get out of debt.

Lower rates fueled a 92 percent jump in refinance application volume for the week ended Jan. 18, according to the Mortgage Bankers Association. And according to Jeff Segal, president of Hauppauge- based Lighthouse Mortgage Corp., that's because a restructured loan could be used to pay off credit card, car loan and utility bills, while locking in a low interest rate.

"People are more willing to refinance when they hear that rates are low," said Segal, who's already seen an increase in refinancing. "We could be on the verge of a refinancing boom."

The rate for a 30-year fixed mortgage was 5.49 percent for the week ended Jan. 18, compared with 6.39 percent at the end of 2005, considered the start of the housing boom, according to HSH Associates, a publisher of mortgage information.

That's good news for consumers holding a piece of the $2.5 trillion in outstanding national debt, most of whom have lost traditional financing avenues because of the credit and housing crises.

Traditionally, home equity loans and second mortgages provided homeowners a way to use the equity in their homes to pay off debt. However, with home values cowering in this rough economic climate, that's getting harder to do.

Average home sale prices in Nassau and Suffolk counties fell 3 percent and 2 percent respectively in November 2007, according to the New York State Association of Realtors. And many lenders have declared the two counties to be declining value zones, meaning lenders decrease the portion of the home price they'll cover by 5 percent, Segal said.

Pearl Kamer, chief economist for the Long Island Association, agrees it may be a good market to refinance in.

"If you have an opportunity to refinance your mortgage at an extremely low interest rate, you're not concerned about your ability to pay off that mortgage and you have high interest credit card debt, you might want to consider [refinancing]," she said.

Not an option

Tighter lending standards mean refinancing may only be available to a select few, and not those whose ratings have already been hurt by the debt. For them, there's always a traditional debt consolidator.

Leslie Tayne, a debt elimination attorney in Melville, collects monthly payments from troubled borrowers while she negotiates with their creditors to lower interest rates or reduce overall debt. Then, when a settlement is reached, she pays off the borrowers' debts.

And while the volume of business for this traditional consolidation has remained unchanged by the credit crunch, according to Tayne, what has changed is the amount of debt people are bringing to her door.

Before the mortgage and housing crises, the average debt Tayne worked with was $20,000. Now, consumers are juggling upwards of $100,000, maxing out at $250,000 in unsecured credit card debt, she said.

The scapegoat is the mortgage mess, Tayne said, as adjustable mortgage resets force many consumers to live solely on credit cards.

But while debt consolidators can help clear debts, there is a downside.

The biggest risk with traditional consolidators is the process can damage a borrower's credit, according to Paul Rivera, president of South Shore Credit Consulting in Lindenhurst.

While borrowers are paying consolidators every month, the consolidators are holding the money, waiting until a settlement with creditors is reached.

That could take anywhere from 24 hours to four years, Tayne said.

But after months of delinquent balances, the borrower's credit starts to plummet. "It's a scam. And the person who really gets hurt is the person who enrolls in the program," Rivera said.

Kirk Kordeleski, chief executive of Bethpage Federal Credit Union, also cautions against debt consolidators.

"There are some that are out there (just) to make a profit and they're kind of scary," he said.

His credit union offers members free credit counseling to help them manage debt, and Kordeleski has seen more borrowers taking advantage of the program.

"There's been so much publicity about reaching out and getting to your mortgage holder before you go delinquent and because of that we're having people reach out," Kordeleski said.

Bethpage also helps members negotiate lower interest rates with creditors as part of the counseling program, helping them to avoid turning to debt consolidators.

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