Homing In on a Loan : With Credit Debt Up, Buyers and Lenders Have to Innovate

S outhern Californians are taking on increasing loads of debt this year, boosting their balances on everything from credit cards to personal loans to equity lines. Experts worry that consumer debt is being pushed to alarming new levels, leaving consumers vulnerable if there is a serious economic downturn.

The trend especially affects the housing market. Bad credit or meager savings make it hard for first-time buyers to achieve the American dream of homeownership. And falling home values have meant little or no equity for financially strapped homeowners to tap. But lenders are responding with a number of innovative loans.

Here is a look at three families, the credit problems they’ve had and the home-loan solutions they’ve come up with.

Easing the Credit Payment Burden

ANAHEIM HILLS--After Ted Kaminsky and his wife, Stephanie, bought a house in Anaheim Hills last year for $187,000, they began to take a hard took at their financial future.

With a baby on the way, the couple wanted to get rid of $17,000 in high-interest credit card debt they had run up paying tax bills and medical expenses. Each year they found themselves paying $800 or more in interest alone.

“We knew we weren’t as bad as most people, but we wanted to get rid of this. So we decided to stop using our credit cards completely,” said Ted Kaminsky, 31, who is a department head at Ikea. “Then we tried to find a way to pay them off.”

The couple knew that coming up with more money to pay off the cards would be impossible. Stephanie, 28, was staying home with 6-month-old Arianna and they were down to one salary.

They asked their mortgage broker if they could get a home equity loan they could use as a tax write-off. But because the couple had put only 5% down on the house and still owed $177,000, the bank would not make the loan.

But after searching, the couple were able to borrow $20,000 in a home equity loan at about 14% interest. Called a 100% equity loan, the money matched the remaining equity in their house, which had gone up in value.

Lake Forest broker Jeff Lazerson said the Kaminskys were perfect candidates for the 100% equity loan because they had good credit, even though they had credit card debt, and some equity remaining in their house.

“We were able to get our finances in order,” Kaminsky said.

Now the couple have gotten rid of both their MasterCard and Optima card and keep their Visa only for emergencies.

“You get so caught up in debt when you get out of college. They keep sending you all these cards,” Kaminsky said. “Once your balance gets so high, you eventually find yourself giving someone $1,000 a year in interest.”

He said many of his friends are reducing debt and trying to cut up their cards.

And what about Ikea shoppers?

“I think most people are still using credit to buy,” he said.

A Way for First-Timers

LONG BEACH--Robert Mendoza and his wife, Angela, thought they would need at least $20,000 to buy a house in Southern California.

Already paying $1,200 monthly in rent on their Long Beach apartment, they weren’t sure the $3,000 they had in savings was enough for a down payment.

But they longed for the tax advantages of homeownership, so they began scouring housing developments in Orange and Los Angeles counties.

Eventually, they fell in love with a $169,000 home in Lake Forest, near Angela’s family.

They were afraid they couldn’t afford their dream home, until their broker told them about a home loan that required just 5% down.

Because they were first-time buyers, they qualified for a low-down-payment loan at Sanwa Bank at a fixed 7.5% interest rate. With no points and closing costs of only $3,000, the couple got into their home for only $11,500.

“Everyone was willing to loan to us at 5% down,” Robert Mendoza said. “But they wanted us to pay 8% interest and all these points. The loan we found was great.”

Mendoza, who works as a programmer for Rockwell International in Downey, and his wife, an elementary school teacher in Cerritos, have a combined monthly income of more than $7,000. It didn’t take too long to save the extra money.

“A 20% down loan would have been out of the question--that would be like $30,000. It would have taken us two years to save that much,” Mendoza said. “I guess these low-down-payment loans could be risky, but they are what’s needed now.”

He said that with their combined good credit history, low debt and solid earnings, they should have no trouble paying back their loan.

“I guess it could be more risky for people who are more on the edge. That’s not us,” Mendoza said.

The Mendozas’ mortgage payment is $1,350 a month, which includes mortgage insurance, and they pay an additional $162 in association fees. But despite the added costs, the couple are enthusiastic about the tax breaks. And most important, they love their home despite the long commutes they now make.

“We have a real community here. We are walled in so it’s safe. And there is a lake,” Mendoza said. “We love it.”

No-Equity Loan

MENTONE--The deluge began as soon as escrow closed on Charlie and Beth Dean’s three-bedroom home.

Their mailbox filled up with offers enticing them to further mortgage their home in Mentone, a rural community of 5,675 in unincorporated San Bernardino County.

Besides shouldering a home loan, Charlie, 28, an engineer with Southern Pacific Railroad, and Beth, 28, a preschool teacher at their church, had run up more than $12,500 on their credit cards.

The debt came from “normal, American expenses--getting things we probably should have waited on,” Charlie Dean said.

With four children ranging in age from 4 to 11, the couple realized their home needed improvements. So, before they had even made their first $950 monthly mortgage payment, they applied for a second loan at Citizens Thrift & Loan in Tustin.

Because they got their $115,000 home with a Veterans Affairs loan with zero down, they had no equity.

But that wasn’t a problem at Citizens. The couple got a $25,000 loan in late October at 15% interest for 15 years.

“It scared us a little,” Charlie Dean said. “But this allowed us to get our credit card debt under control.”

The couple used half the loan for home improvements, putting in a new lawn, carpeting and blinds. The rest was used to pay down credit card debt that was accruing 19% interest.

“It would have taken us forever to pay down that debt otherwise. We’d make an $80 payment and only $15 would go toward principal,” said Dean, who said the thrift asked the couple to get rid of those cards as part of the loan agreement.

The couple still have at least two credit cards, which they are saving for emergencies, Dean said.

“We’d only use them if we had to fly out of town in the middle of the night or the engine on the van blew,” he said. “Our Christmas will be completely in cash.”

As for his newfound home-loan burden, Dean isn’t worried.

“I’m sure if I sell this house with all the improvements, I will be able to pay off all the loans,” he said. “I mean, look at us. Here I am in my new house and my kids haven’t missed a meal.”

* MAIN STORY: A1

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The Bankruptcy Option

Though it is considered the measure of last resort, overwhelmed debtors can turn to bankruptcy as a way out of their debt binds. Below is a primer on personal bankruptcy:

Advantages

* Provides legal protection from creditors

* Prevents financial ruin

* Prevents foreclosure of your house

* Prevents IRS seizure of property for back taxes

* Provides fresh start

Disadvantages

* Harms credit rating

* Possible loss of assets

* Certain debts cannot be discharged

* Social stigma

* Loss of privacy

Long-Term Effects

* Credit reporting agencies such as TRW list bankruptcies on personal credit records for up to 10 years.

* Those who have filed bankruptcy may be turned down or have to pay higher interest rates for credit cards and loans.

* Landlords often refuse to rent to those with credit problems.

* Some employers consider an applicant’s credit history as criteria for hiring.

Personal Bankruptcy Options

Chapter 13

* Allows debtors to consolidate debts and pay creditors back in full or in part over three to five years.

* Interest on unsecured debt such as credit card borrowing is waived--payment goes entirely to principal.

* Lump-sum payments are made to a court-appointed trustee who supervises the payment plan.

* Protects homeowners from foreclosure by allowing them to make up missed mortgage payments over time.

* $160 filing fee

* No time limit on repeat filings.

* Typical attorney fee: $800-$1,600

Chapter 7

* Also called “straight” bankruptcy.

* Wipes out unsecured debt.

* Debtor has option to return items bought with secured loans, such as a car, and owe nothing, or keep belongings and continue making payments.

* May keep homes and automobiles with a limited amount of equity.* $175 filing fee

* Can be filed once every six years

* Typical attorney fee for personal filings: $500-$1,000

The Process

* Debtor files petition in federal court claiming insolvency.

* Within 15 days, debtor must file papers listing all debts, assets, income, living expenses and personal information

* Case is reviewed by a court-appointed trustee. A notice is sent to each of the filer’s creditors.

* Within six weeks of initial filing, an administrative hearing is held by the trustee, the debtor and the debtor’s attorney. Creditors may also attend.* Case is finalized within 90 days of hearing.

Sources: Joseph Weber, attorney; Times reports; Compiled by JANICE L. JONES / Los Angeles Times