Monthly Archive for November, 2009

FICO has finally disclosed how much late payments, maxed out credit accounts, or more serious mishaps can damage your credit score. You know paying late is bad for your score, but now you know how bad. Paying thirty days late can drop your score 60 to 80 points. Even if you pay on time, maxing out your card can drop your score 10 to 45 points.The good news? This kind of hit can be put behind you relatively quickly--your most recent history counts most when it comes to calculating your scores. Also, paying late enough to incur a late charge but less than thirty days late does NOT get reported to credit bureaus and does NOT impact your score.

FICO refers to these hits as "damage points" and they are subtracted from your score if you do not pay as agreed or appear to be in financial trouble (which is what maxing out available credit implies). Great credit scores require not only paying on time every month, but using credit conservatively--carrying low or no balances and only using a few accounts.

FICO scores range from 300 to 850, and these days it takes a score of 720-740 or better to be eligible for the best mortgage interest rates. While FHA itself doesn't have hard-and-fast credit score rules, many FHA lenders do-you want a score of at least 620 to be eligible with many lenders.

Your payment history accounts for 35% of your credit score. Here is how the following events affect you if your score is 680:

1. 30 day late payment: subtract 60 to 80 points.
2. Debt settlement: subtract 45 to 65 points (but keep in mind that most debt settlement companies have to stop making payments for several months before attempting to settle your debts, so the hit to your score from several months of non-payment can be hundreds of points).
3. Foreclosure:subtract 85 to 105 points (but again, most people in foreclosure miss a few payments before this happens--so the score can go significantly lower than this).
4. Bankruptcy: subtract 130 to 150 points, plus whatever penalties you incur for paying late before filing.

Those with higher scores can see bigger drops in their scores from the same events. If your score is 780 instead of 680, expect a bankruptcy to drop your score a whopping 220 to 240 points. Note that most bankruptcies start with several months' of missed payments, so by the time you get around to filing your score could go considerably lower than 130-150 points. If bankruptcy or foreclosure is in your future, you can minimize the impact by making your payments on time up to the day you file.

Another part of your score is credit utilization--the idea being that financially responsible people use credit for convenience, not because they are spending more than they earn. Using a large chunk of your available credit or carrying balances month after month is a good sign that your earnings are not keeping up with your spending. That's why maxing out a card triggers a 10 to 45 point drop in your FICO score.

Some events that can cause your score to drop aren't even in your control. It's been all over the news--credit card companies have been cutting customers' credit lines like crazy. Thirty-three million had their credit lines reduced an average of $5,100 between October 2008 and April 2009. Twenty-four million of these people had excellent payment records with average FICO scores of 760, according to the Washington Post. And unfortunately, a drop in available credit automatically increases your credit utilization ratio and can drop your score.

Of course, knowing the impact on a FICO score and actually avoiding credit boogers are two different things. You can't get blood from a turnip, and people witout jobs can't pay their bills like they used to.

While knowing the numbers may not be able to help you keep your score high if your job evaporates, the information may help you make the best decision in the face of financial tragedy--for example, it may be preferable to file for bankruptcy protection immediately rather than pay your bills late for six months and then have to file anyway. Or raid your savings to make your minimum payments no matter what until you find a new job. Protecting your credit score as best you can is important for your long-term financial future.

You had a job yesterday, but don't today. Your wife got sick. Your car gave up the ghost. And paying your mortgage just got a whole lot harder, maybe even impossible. So what's next? Do you go hat-in-hand to your lender and beg for help? That's been the advice of most columnists and bloggers, including this one--speak to your lender as soon as possible, come up with reams of paperwork, and you will get the help you need. Except that method hasn't been working very well.

Why? Your original lender is probably out of business, the funders got their money back, and the investor who bought the loan was insured. The tax payers bailed out the insurers. That leaves the servicer holding the bag. This company buys the right to collect your payments and keep a small percentage of what they collect, plus all the late fees and other charges. And that's why they like to drag out the process, tacking numerous fees onto your loan and making you jump through a gazillion hoops before ultimately informing you that they can't or won't modify your loan. While they don't really want to take your home, they do want every spare cent they can steamroll out of you. And they don't care if they squish you flat in the process.

So, what should you do then, if having a conversation with your servicer is out of the question?

You want to slow them down first. Maybe a little time can solve your problem--you may find a new job, save money, get well--and get back on your feet. Then, decide what you want to accomplish and how you want to go about it. First, do you want to keep your home or just drag out the foreclosure? If you are underwater and have no way of making payments, dragging it out may be the best outcome you can hope for.

Next, find out if your loan was sold as part of a securitized pool of mortgage backed investments. This means that the lender that underwrote and funded your loan no longer owns it--a source of frustration for those looking for modifications, but which could mean opportunity for you. Fannie Mae and Freddie Mac have been doing it for years, but so do others--that's how sub-prime loans ended up being packaged and sold as high-quality investments. Oops.

The cool thing is that the very thing that makes it so hard to get these loans modified also makes them very hard to foreclose on--if you know how to fight it. If you want to keep your home and you live in a state that does not require the foreclosing entity to take you to court, a non-judicial foreclosure state, you have to sue. Yes, it's intimidating and possibly expensive, but unless the lender has followed legal foreclosure procedure to the letter, you could wind up owning your home without a mortgage. Ask a lawyer. Even if you've already lost your home, you might get it back.

Do you have a MERS loan?

No, it's not a respiratory disease. MERS stands for Mortgage Electronic Registration Systems. It was developed by the real estate finance industry and sold as a way to "eliminate the need to prepare and record assignments when trading residential and commercial mortgages." But now it's biting a lot of servicers on the butt--a MERS filing means that your loan has been securitized in a way that could make foreclosure impossible. Go to your County Recorder's Office or look up your filings online and see if MERS is recorded on your deed. If your loan has been assigned through MERS, your note and the trust deed may have been separated, or the lender may not be able to produce the note at all. Oops.

In a judicial foreclosure state, , the lender has to sue you. So demand to see the original note (not a copy). You may be able to find a TIL or RESPA violation and stop the foreclosure in its tracks. Keep in mind that lenders have been known to try and manufacture evidence--get a good real estate lawyer, not the guy who did your will ten years ago.

Are there RESPA and/or TILA violations in your loan documents?

In a non-judicial foreclosure state, this is your best shot at winning. Loan paperwork can be sloppy and not unlikely to have one or more violations of the Real Estate Settlement Procedures Act (RESPA) or Truth in Lending Act (TILA). You will need a legitimate Forensic Loan Audit to see if there are violations and what your compensation should be. This should cost between $350 and $1,500.

So, to recap:

1. Decide if you want to keep your home or just drag out the foreclosure while you try to save money and find another place to live.
2. See who owns your loan by checking with your county recorder. If your loan is being held by your original lender and not sold, call its workout department and try for a modification.
3. If your loan has been securitized, check to see how foreclosure is handled in your state. Then, call in a good real estate lawyer.

Who knows? You could end up living rent-free for a long time or even getting your home with no mortgage.

This is not intended to be taken as legal advice and does not necessarily represent the opinion of MortgageCreditproblems.com or its publisher.

It's no secret--mortgage underwriting guidelines have become stricter, and home loan refinancing has become much harder to come by. For those who don't have little halos hanging over their heads, getting approved for a mortgage refinance may be a pipe dream. Ironically, one of the exceptions to this rule is bad credit refinancing. So these days, bad is good.

How is this possible? Well, lenders have figured out they aren't going to get their money back in the event of a foreclosure most of the time--borrowers simply don't have the equity or the resources to make good on their loans, and lenders stand to lose a great deal when borrowers are upside down on their mortgages and unable to make payments. This goes double for borrowers with bad credit, who are even more likely to end up in default because their interest rates and payments are higher.

So your bad credit mortgage lender may be willing to refinance you to a lower interest rate to avoid taking a loss later. Even if you don't meet the criteria for a mortgage modification through the Making Home Affordable plan, your lender may be willing to refinance you to a better loan now to avoid problems later. And if your credit has improved since you took out a sub-prime mortgage, you may be considered a higher subprime grade or even eligible for an FHA refinance.

You could increase your chances of a favorable decision by getting into a credit counseling program, creating a budget, and demonstrating a commitment to paying off debt without filing for bankruptcy protection.

Right now, people with bad credit actually have some leverage with their lenders--yep, they are scared of you! This is because they have taken serious losses on bad debts that cannot be collected. So they may be more than willing to help you if it ensures that the money they have loaned out will be repaid, even if it means they have to refinance you at a lower interest rate. And over the life of the loan, refinancing even at a lower rate may allow lenders to collect more interest over a longer period of time, making it a win/win situation.

You can't browse the Internet or pick up a newspaper without someone telling you that if you don't want to be a financial idiot and end up homeless and stealing from bag ladies you need to pay your mortgage off as soon as possible. Because you will pay less interest over the life of the loan, retire your mortgage early, and beautiful supermodels or hunky movie stars will throw themselves at you. And to a certain extent, that's true (not about the models, silly). But you do pay less interest over the life of the loan and you may feel more financially secure with no mortgage.

But what about now? Who is better off in a shaky economy? One newly-unemployed homeowner put every extra cent into prepaying her mortgage. But in an emergency, the only way to get that money back is to borrow against her home equity. And guess what? Her bank isn't exactly bending over backwards to lend her money while she's out of work--in other words, banks are notorious for only being willing to lend to those who don't actually need the cash. The other homeowner put his money into a savings account instead, and when he lost his job he was able to pay his bills until he got a new one. He didn't end up with bad credit or the Foreclosure Police breathing down his neck. And he didn't need his lender's permission to take care of business.

The one legitimate reason for paying down a mortgage early is to get rid of a really expensive sub-prime or bad credit home loan. If you are paying 12% on your home loan, and can reduce that balance enough to qualify for a 6% refinance, it probably makes sense for you to do so.

And for those who can't shake the image of the hunks and supermodels, those who really want to pay their mortgage off early, here's a plan:

1. Build up an emergency fund first--depending on how secure your job and health are, it should be three to nine months of expenses.
2. Pay off high interest debt like credit cards. Those cost you a lot more than your mortgage and are not tax deductible.
3. Open a savings account for your house. Put money in whenever you can, and look for safe accounts with the best interest rates. This way you have access to your money if you need it. And you can earn interest too.
4. Pay off that sucker when you have enough savings to retire your mortgage and are financially secure. Then congratulate yourself!

Some creative types may try to sell you an early payoff service. Don't bite. Many of them simply have you pay your mortgage every two weeks instead of once a month. By making half a mortgage payment every two weeks, you make an extra mortgage payment every year--not exactly rocket science. And it's crazy--companies like that can charge hundreds of dollars to enroll in their programs. Plus up to $40 for each payment!

To add injury to insult, these clowns don't send in the extra payments as you make them. They hang onto your money (and your interest) until the end of the month. And it may not even be safe--what if the company makes your payment late and trashes your credit?! What if it goes belly up? It happens--just say no to creeps getting their hands on your money.

You can pay your mortgage down the same way without the help of a dubious firm--simply transfer half a mortgage payment every two weeks into a checking account (preferably interest-bearing), then pay your mortgage from that account once a month. The balance of that account will grow until you have saved anough to pay off your mortgage. Or you can add a little extra to every payment and request that it be credited towardyour principal balance. Then you will be smartly managing your money and your mortgage.

Think credit reform ala the CARD Act is helping consumers? Think again! The Center for Responsible Lending (CRL) claims that card companies are doing whatever they can to add, um, whimsical price changes and interest rate increases for multitudes of customers. Here are 10 ways credit card companies are still putting the screws to their clients--even their best ones.

1. Pre-emptive rate hikes. One of the largest issuers recently hiked the rate across the board on its low risk consumers who have always paid on time to an outrageous 30%! A new Federal Reserve study on the CARD Act shows that 54% of banks have already increased or plan to increase the rates on their prime customers. But wait, there's more! 74% of banks have or will increase rates on those with credit problems.

2. Penalty rates are also going up. You can be hit with these if you pay even one day late or exceed your limit. There's a reason for the rush to screw the customer--as with regular rate increases, anybody who has an APR raised to a penalty rate before the new CARD law takes effect does not benefit from its rules on APR changes. Rate changes are permanent and will not be reversed, even if implemented the day before the reform date.

3. Issuers are reducing credit limits. They are doing this sometimes with no notice, says consumer Web site LowCards.com. This can harm cardholders' credit ratings by reducing the amount of available credit and thus increasing credit utilization, a key component of credit scoring models.

4. Getting approved for new cards is tougher than ever. The Federal Reserve study shows that 47% of the loan officers said they have raised or will raise the credit score requirements for prime customers. And for sub-prime consumers, that number is 53%. So it's harder to dump a mean card for a nicer one.

5. Increased fees. The CRL says that card companies have raised cash advance and balance transfer fees to unprecedented highs. Can you hear your wallet screaming?

6. Annual fees to be imposed. LowCards.com claims that while only about 20% of cards have annual fees, that will go up. And according to the Federal Reserve, nearly 40% of the banks had increased or will increase the annual fees on credit cards. Some Bank of America cards for existing customers now have $29 to $99 annual fees. So, they expect you to pay for the privilege of paying....

7. Variable interest rates. CRL states that card issuers are converting fixed rates to variable ones, just when prime rate is extremely low and likely to go up. Also, issuers are adding floors to the variable rates which limit how low they can go (the rates, not the card companies--there's no end to how low those guys can go!), so if rates go down, the banks' profits can actually increase because they won't have to pass on the reduction to their customers.

8. More dirty tricks with fees. When is a fee a fee? When credit card companies say it is--banks are changing the fees' definitions to trap more customers. For example, some changed the definition of an international fee to apply even if the transaction is in US dollars. Some issuers are adding fees they never had before, says CRL. For example, at least one large company added an inactivity fee. Another added a fee if activity falls below a certain level (a low activity fee). They should call it the damned-if-you-do-damned-if-you-don't fee.

9. Stingy rewards. Rewards cards are less rewarding. According to LowCards.com, some issuers are changing rewards programs, like making the threshold for a free flight or getting cash back higher. So the million air-miles you spent ten years racking up won't get you that first-class flight to Tahiti--more like a Greyhound to Bakersfield.

10. Disappearing accounts. Finally, some issurers are closing accounts, sometimes without notice, according to LowCards.com. That means you could be stranded on a trip or embarassed while taking a client to lunch--a tough way to discover that your Visa card was canceled.

Dirtbag credit card companies can sneak in all the high fees and dirty tricks they want, but they can only shaft you if you let them. If you can't just pay off your cards, now is the time to consolidate your debt with a home equity loan or line of credit. Then tell those losers to take their fees and.... Your mortgage lender can't pull dirty tricks like yanking up your interest rate and inventing fees just because. Your debt consolidation interest rate should be much lower and you may get a nice tax deduction too. Not to mention the satisfaction of telling off your bank.

For those with good credit or bad credit, debt consolidation has become more difficult as home values tumble and available home equity evaporates. But what about debt consolidation with personal unsecured loans? Can you still get them if you have bad credit? Do you even want one if you can get it? Recently, Bank of America ...

Some of the most affordable housing can be some of the hardest to get financed. Ever see commercials for those outfits that loan on mobile homes? Only 14%! Wow. Maybe I'll just put it on my Visa card instead. So, can you really get an affordable mortgage on manufactured housing? Sure, if you buy the ...