Co-signing

By: Karen O'Shea
Advance Staff Writer

Reprinted from the Staten Island Advance, Friday, September 24, 1999
Page E1

It would be nice to have a friend like Terry McAuliffe.

Remember him? He's the chief political fund-raiser for the Clintons and the man who personally put up $1.35 million for the First Family so they could buy a $1.7 million house in Chappaqua, N.Y.

McAuliffe didn't exactly co-sign for the loan, he went one better and put up cash with Bankers Trust as a guarantee that the bank will get its money if the Clintons, who have about $6 million in legal debt, can't make good on the mortgage note.

But many more people this year will help secure a loan for a friend or relative by co-signing for a mortgage, often times by offering up their own assets as collateral. With home prices rising sharply and many more buyers shopping for a loan - the Mortgage Bankers Association estimates that $1.27 trillion in mortgage loans will be made this year - industry experts see a steady stream of co-signers.

"As prices go up you see more of it, as prices go down you see less of it," said Richard Corash, a real estate attorney with the West Brighton firm Corash and Hollender. The office specializes in counseling clients on credit and bankruptcy matters.

"There seems to be a fair incidence of (co-signing) because if you look at a starter home on Staten Island, even if its an attached home or in a planned-unit development, the starting price is in the area of at least $150,000. If you go with a minimum of 5 or 10 percent down, that is still a substantial amount of money for young people."

Corash said about 5 to 10 percent of people who are planning to co-sign for a loan will come to his office for advice before they actually guarantee a loan. On the bankruptcy end of the law practice, about 20 percent of the clients who end up seeking protection from creditors are those who have co-signed for a loan.

And while Corash has not seen any recent dramatic increases in the number of people acting as guarantors for a loan, he said the economic and real estate climate could be ripe for such a scenario. The last time he saw a jump in the number of people co-signing for loans was in the late 1980's, when real estate prices skyrocketed. Some of those folks ended up in his office in the early 1990s, when the recession hit and values dropped.

"Usually when values are up everybody is excited and banks start making loans with 5 or 3 percent down and there is no equity cushion. When the economy goes down, things get difficult and once there is no equity in the house they may be forced to go after the guarantor," he said.

"A lot of people don't realize what is means," David Gelinas, director of the Family Debt Arbitration & Counseling Services, a federal non-profit consumer credit counseling agency in Candia, N.H., says of co-signing. "I've seen cases where parents have to step up to bat to resolve the issue for children after they are on the hook and they have no choice."

Gelinas said some co-signers think they are only liable for 50 percent of the loan. That's not the case, and a lender can go after whatever is due on the note, plus legal costs, if the person who took out the loan can't make the payments.

"It's the whole nine yards," he says.

While he has seen an increase in the number of domestic partners co-signing for loans, traditionally co-signers have been friends, relatives or business associates.

He said co-signing is not uncommon in a culture of consumer borrowing. Over the last 10 years Americans have borrowed billions of dollars but have been less likely to create a savings cushion, he said. People who are often overextended on credit may need to turn to co-signers to get a loan for a house.

Nancy Nolan Tien, a home ownership counselor with Neighborhood Housing Services in West Brighton, said most of the pluses of co-signing usually accrue to the person who needs the loan. However, a person who has no credit and needs to build credit could consider co-signing for a loan to start that process.

Mostly though, cautions Ms. Tien, co-signing is a "Huge obligation" that can follow the person for the life of the mortgage.

She said some people also don't realize that co-signing for a loan will affect a person's debt-to-income ratio and their own ability to borrow money for themselves in the future. If a person co-signs a mortgage for their children, lenders will view the $1,000 mortgage payment against their own credit.

John Brady, executive vice president of Staten Island Savings Bank, said people who need a co-signer are often those people who have had recent credit problems, no credit at all, just started a job or have incomes that are not quite strong enough for the loan requirements.

"The co-signer, with his or her financial strength, would make the applicant stronger," says Brady. "Most of the time you see a relative or long-term friend, possibly someone who had known the person in business. Those are three types of co-signers you see the most.

Brady said many people coming out of the real estate collapse of the late 1980s often needed someone to co-sign because of past financial problems. Today, he says, good economic times have lessened the need for co-signers and there has been no substantial increase in the amount of people co-signing for a loan at the bank.

The secret to our success is that we care about our clients