Andy Ross Articles

Saving Joe the Plumber – and America – from “Joe the Debtor”

By Andy Ross

While Joe the Plumber emerged during the election campaign as an icon representing both mainstream American values and the travails of the average Joe, the post election focus is beginning to shift to Joe the Debtor. The average Joe, despite a good job, home ownership, and a decent credit rating, is living so far beyond his financial means that he is drowning in debt. The unprecedented borrowing binge has been facilitated by credit cards, car loans, home equity lines of credit, and a host of other debt products extended primarily based on his all-important credit score and frequently without further scrutiny.

What we are faced with is a virtual house of cards made up of credit extended to those who cannot truly afford it. Now that our debts are being called in the house has come crashing down around us.

While robbing from Peter to pay Paul, the fact of the matter is that Joe is basically just borrowing from himself and at a high cost. A prime example of this in recent years was the practice of buying a home with little or no money down and using the instant equity that built up due to a run-a-way real estate market to finance a lifestyle. A mortgage with little or no down payment is where Joe began his foray into the American Dream. Once true equity was built up, he then siphoned it off through home equity loans and cash-out refinancing. The additive effect of a decrease in current home values has pushed down any remaining available cash that has not already been siphoned off. Now many are being pushed into foreclosure leaving no where else to borrow to pay bill and the mortgage it’s self. Estimates are that twenty percent of Americans now owe more than their homes are worth.

Debt, when managed properly, can be a good thing but Joe the Debtor caught in the spiral and culture of habitual debt, is currently caught in cycle of debt mismanagement that includes gaming the system in order to maintain the perfect credit that enables him to perpetuate the manipulation and obfuscate the depths of his truly precarious position . Joe the Debtor has a false sense of his actual net worth mainly because he is flush with “make believe” cash. When he uses credit, he is actually using debt, but most Americans don’t make that important connection. They just see their ability to borrow as buying power, mistaking debt for wealth. They treat their credit advances as income and view them as perks bestowed by lenders to reward them for maintaining a good credit score. Just because consumers are not financially qualified to borrow and repay their obligations does not mean they are not educated about the credit process. In fact it is the opposite; they are savvy when it comes to enhancing their credit scores. Most active borrowers continuously monitor and tweak their credit profile in order to deliberately and successfully beat lenders at their own game. They continue to meet minimum monthly obligations, even if that means borrowing themselves deeper into a hole in order to keep their precious credit score intact.

Information on how to bolster a score is readily and freely published by the three major credit reporting bureaus, and there are numerous credit repair web sites that help Joe navigate his way to more credit. Joe can tweak his profile to earn a stellar credit number while sitting atop a mountain of debt with no verifiable income or savings.

Because lenders rely too heavily on FICO scores they systematically cut corners in terms of underwriting. This has now cutting into their profits and has caused many of them to suffer insurmountable financial losses.

For a small business owner to obtain the dollars consumers do is, by contrast, difficult, if not impossible. Lenders hold commercial borrowers to a much higher standard, yet individual consumers can amass extraordinary debt just by filling out half-page applications. In fact many small businesses have figured out how to use credit card debt as alternative financing. In fact, Joe the Debtor can extend his consumer borrowing even further and use it in place of harder to get commercial loans.

The solution is for lenders to take charge in a proactive way, by using confidential criteria that cannot be artificially manipulated by borrowers. Lenders should use due diligent research to positively verify income and assets and reign in reckless debt. Until they take those steps the overall economy of good debt and responsible consumers will be plagued by higher interest rates, shrinking supplies of loan capital, and an environment where Joe the Debtor destroys the housing market, the job market, the stock market, and his chances for financial prosperity.

By Andy Ross
New Haven CT
Real Estate and Credit Counselor
New Haven CT
Andy@andyrossgroup.com
203-641-4666