Monthly Archive for December, 2008

Debt consolidation seems like a no-brainer. You replace high-interest credit card debt--issued by companies that can seemingly change the rate and terms of your loan at will--with a better loan. The new loan lets you lower the payment by stretching the balance over a longer term, the rate is often much lower, the interest may be tax-deductable, and the terms you sign up for are the terms you get. A fixed rate stays fixed, an adjustable rate changes according to the rules. No bait. No switch. So, what's not to like?

The reason that debt consolidation interest rates are so much lower than credit card rates is that the loan is secured. By YOUR home. If you end up filing for bankruptcy, you can tell your credit card companies to pound sand and there's nothing they can do. But if you have paid them off with a home equity loan, you're still on the hook for the money. You have changed your credit card debt from unsecured to secured--and secured debt can't be blown off, except by allowing the lender to foreclose and evict you from your home.

Before opting for debt consolidation, look at your entire financial picture. How secure is your job? Do you have medical insurance? How is your family situation? Because the top causes of bankruptcy are job loss, medical problems, and divorce. And if you are just an illness, accident, or indescretion away from bankruptcy, then debt consolidation may not be for you.

So, if there's a decent chance that you could end up in bankruptcy any time soon, protecting your home equity is more important than protecting your unsecured creditors. If your debt consolidation loan doesn't get your total payments (housing, autos, loans) down to less than 45% of your gross pay, then there's a good chance that you won't be able to make your payments as agreed. If you don't have a secure job, or health insurance, or your marriage is on the rocks, now is NOT the time to be using up your equity on debt consolidation. Now is the time for credit counseling (and possibly family counseling). Once your job, medical, and family situations are reasonably secure, it's safer to take advantage of a debt consolidation loan. Then, it IS a no-brainer.

Many people with credit problems also have IRS problems. And if you're a homeowner with IRS tax debt, you may have a big ugly tax lien against your home. If you have a tax lien on your home and you've tried to refinance, you know it's pretty much impossible. Until now.

The IRS has announced that its new policy of quickly subordinating its liens so that people can get refinances they need to stay in their homes. Subordinating doesn't mean the lien goes away; what it does is guaranty that in the event you default on your mortgage, your lender gets paid before the IRS does. And without a subordination agreement, your chances of getting approved for a refinance are akin to those of a snowball in the Mojave.

So, with expanded FHA guidelines, IRS cooperation, and lower rates than ever, anyone with the equity to refinance should be jumping on the bandwagon. You won't know what's possible until you try.

Fannie Mae doesn't want to kick you out of your rented home. The mortgage behemoth is finalizing plans to allow renters who pay their rent to remain in homes that have been foreclosed upon. Residents can either sign a new lease with Fannie Mae and continue to live in the property until it is sold, or take a cash payment for moving expenses.

The new policy should be in place by early January, and rival Freddie Mac has promised its customers something similar. So renters in foreclosure property, if the loan is owned by Fannie Mae, can breathe easier, knowing their Christmas won't be disrupted by an eviction as long as the rent gets paid. If concerned, checl with your county clerk's office or a local title company to see who owns the loan on the home you're living in.

You need some help. You've heard lenders everywhere are modifying mortgages for those in trouble. So you call yours. You wait on hold for 45 minutes. Someone finally answers, speaks to you for 15 seconds, and promises to send you a form. And there you are, days later, formless and your next payment due with no help forthcoming.

Treasury Secretary Henry Paulson has pretty much consigned troubled borrowers to the trash-heap, claiming, "“We’re never going to be able to process the number of workouts and modifications that are going to be necessary doing it just sort of one-off, I’ve talked to enough people now to know there’s no way that’s going to work.”

If you look online you'll find hundreds of firms promising to work with your lender and get you the help you need. For a not-so-small upfront fee, of course. Is it worth it?

Look out for phonies. Mortgage modification is a new field and there are no licensing requirements, oversight boards, etc. Anyone can hang a shingle and claim to be a modification specialist. Recently, two California firms were shut down for perpetrating fraud on their clients. However, some professionals do have a code of conduct and board they answer to. Attorneys, CPAs, Certified Financial Planners, and nationally-regulated credit counseling or debt settlement firms have standards of ethics that at least in theory preclude them from making promises they can't keep or ripping you off.

When You Have a Need for Speed
Attorneys who offer modification service claim that their calls get answered and their letters responded to more readily than those of consumers. If you are on the brink of foreclosure and need help fast, it may be worth it to engage a lawyer with a good reputation. Beyond making contact with your lender, negotiating changes to the loan, and in some cases financial counseling, a reputable firm cannot make any guarantees. For example promising a $100,000 principal reduction or a 3% lower rate is a red flag that should have you running.

Beware High Upfront Fees
Avoid any outfit that wants a large fee before doing any work; these are non-refundable to you even if there is no progress in your modification. And that's money you could be using to pay for necessities when you're pinched for funds.

Try DIY or Non-profits First
An online search turns up all kinds of examples of hardship letters and instruction for making your request to your lender. Before contracting with a for-profit company, at-risk borrowers should contact their lenders or the Homeowner's Help Hotline (1-888-995-HOPE) run by the Homeowner's Preservation Foundation. They might get a comprehensive, affordable mortgage modification that won't cost them a dime

Watching your neighbor with the three cars, RV, and boat get a mortgage bailout and a lower rate--while you keep paying more--is tough. You'd like to refinance to a better rate, but your home value is down and there's no equity for refinancing. And there's your irresponsible buddy down the street, seemingly being rewarded for his spendthrift behavior. You can't beat him--should you stop making your mortgage payments and join him?

Homeowners nationwide are feeling the sting. "It's a problem," says Mark Zandi of Moody's Economy.com in a USA Today interview. "A lot of the programs require you to be at some stage of delinquency, so homeowners say, 'What about me?' and they get delinquent in order to get help." Most lenders won't even talk to you about a mortgage modification unless you're 60 to 90 days late on your payments, which could have the effect of encouraging homeowners to stop struggling and let the payments go for a few months. Then, hopefully they can put the screws to their lenders and get a better deal.

That strategy is pretty risky, though. When you apply for a modification, you are pretty much applying for a mortgage all over again. Lenders scrutinize your debts, assets, and income, and determine if you should be able to make your payments. And it's easy for a homeowner to miss qualifying for help--first, mortgage lenders expect you to put your mortgage first--so if you are paying your credit cards, auto loans, and other debts, your lender will not be impressed. Second, if your income is so low that you can't come close to paying your mortgage, the lender may feel that modifying your home loan would just put off the inevitable foreclosure and refuse to help.

Trying to work the system is a risky game. Even a single late mortgage payment on a credit history is considered serious. Multiple late payments could keep you from getting decent rates on credit for years, and can even cause your insurance rates to increase or make it hard to get a job. If you get behind on your mortgage, and don't qualify for a modification, you will have trashed your credit for nothing and could lose your home as well.

And consider that the economy and housing markets always bounce back. You will eventually be in a position to take advantage of that. So suck it up, keep paying your mortgage on time, and know that in the long run you will be much better off than your neighbor with the crappy credit.

While lenders have come under fire for not doing enough to help borrowers remain in their homes, it looks as though those who have tried are meeting with surprisingly high failure rates. An Office of Comptroller of the Currency (OCC) report shows that mortgages which were modified by the lender (actual terms changed to lower ...

There are many ways to give yourself some breathing room in a financial downturn. Refinancing, consolidating debt, using low-or-no interest balance transfers, eating in, using the library, taking a second job--but one often-overlooked option could put money instantly in your pocket. In an emergency, you need your money more than the government does. By adjusting your ...