Mortgage foreclosure and delinquencies, now affecting some 3.6 million loans, are on the rise despite higher wages and low inflation. That could be because too many home owners are throwing financial caution to the wind and signing for mortgages they can't afford.

Financial counselors caution home owners against using their home to finance more than they can afford and say they should avoid using home equity to finance discretionary spending. Home owners who do use home equity should spend it on capital improvements or for investments that offer a better return than putting it back in the home.

Otherwise, home owners are engaged in financial behavior as risky as that of investors who a few years ago held portfolios heavy in technology industry stocks.

The percentage of loans on one-to-four-unit residential properties in the process of foreclosure at the end of the first quarter 2002 was 1.10 percent, up 20 basis points from 0.90 percent during the first quarter in 2001, according to the Mortgage Bankers Association of America's (MBAA) latest National Delinquency Survey. A basis point is 100th of 1 percent.

The overall, seasonally adjusted delinquency rate for loans on one-to-four-unit residential properties was 4.65 percent in the first quarter of 2002, up 28 basis points from the previous year's 4.37 percent mark.

The percentages are small, but the numbers aren't. The percentages represent some 640,000 home owners about to lose their homes and nearly 3 million home owners in line behind them making late mortgage payments.

The survey covers more than 32 million loans on one-to-four-unit residential properties, representing about half of all the U.S.'s outstanding first-lien residential mortgages. The loans are held by some 130 lenders, including mortgage bankers, commercial banks, thrifts, and life insurance companies, according to MBAA.

The increases in foreclosures and delinquencies come despite steady wage increases and virtually nonexistent inflation.

Median weekly earnings of the nation's 98.7 million full-time wage and salary workers rose 2.2 percent to $608 in the second quarter of 2002, according to the U.S. Department of Labor's (DOL) recent quarterly wage and salary report.

Meanwhile, the Consumer Price Index (CPI) rose only 1.1 percent during the same period. The CPI is one measure of inflation that monitors the average change in prices over time in a market basket of goods and services, including food, clothing, shelter, transportation, energy, medical costs and other goods and services people buy for day-to-day living.

Selective inflation, retail spending, joblosses up

Some of the higher rates of foreclosures and delinquencies can be attributed to factors over which home owners have little control, including the higher cost of certain necessary goods and services some consumers may need more than others. The medical care component of the CPI, for example, rose 4.5 in June 2002, compared to June 2001.

Unexpected job loss plays a factor too. The 6 percent rate of unemployment in June was largely unchanged from May, but 1.3 percent higher than in was in June of 2001, according to the DOL.

More often, however, home owners get in over their heads because of poor budgeting that spawns impulse buying and out-of-control discretionary spending.

The U.S. Department Of Commerce (DOC) reported retail spending rose 3.3 percent in June compared to June 2001. Retail spending also rose 3.1 percent from the first quarter to the second quarter this year. Electronics and appliance store sales rose 9.7 percent from June 2001 to June this year and general merchandise store sales were up 8.2 percent.

Meanwhile, chain store sales also enjoyed a healthy, year-to-year jump up 5.1 percent from June 2001 to June 2002, according to the Bank of Tokyo-Mitsubishi's same-store index of 82-chain stores nationwide.

To finance the spending, more and more homeowners are taking on larger "cash-out" mortgages.

In the second quarter of 2002, 67 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least five percent higher in amount than the original mortgages, according to Freddie Mac.

That's up from 60 percent from the previous quarter and 58 percent from the second quarter in 2001.

A conservative, but sage approach to home ownership is to never borrow against home value, but to finish paying off the mortgage before retirement to live mortgage-free with what's likely to be reduced income.

Experts say any loan tied to your home's equity is an equity depleting loan and, for those who do obtain them, the credit is best used for capital improvements and other investments that provide a return on your money -- home improvements, education and new business financing.

Equity tapped before it is needed can also provide shelter from emergencies and unforeseen events that might reduce your income or place added demands on your wages -- job loss, births, illness, injury, death and others.

However, the growing numbers of delinquencies and foreclosures indicate many home owners are not using equity wisely.

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