Monthly Archive for December, 2009

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 doesn't even go into effect until February 2010--but it's already having some unintended consequences. Credit card companies scrambled to hike interest rates before restrictions on rate increases kicks in. Consumers screamed.

The lenders' immediate increases and the cacophony of consumer complaints caused legislators to consider a 16% maximum rate for credit card interest as well as a $15 cap on late payment fees. But look out! Credit card companies will likely find another strategy to respond to these new reforms and protect their profits.

Credit Card Companies: Either Way, They Make Us Pay

While a credit card rate cap looks good to consumers at first, the backlash by banks and lenders may be more painful that people expect.

Since credit card companies prefer to extend the best credit terms and rates to people with good credit, you can expect fewer loans to be available to consumers with poor or even average credit. Because if you have millions of people looking for credit, and only so much available, and there are limits on what you can charge, why would you ever lend to the people with bad credit? You wouldn't make any more money by doing so, but you'd be taking on more risk.

Credit: Good or Bad, We'll All Be Had

Even cardholders with good or excellent credit may pay more, since the companies must shift higher rates from average or riskier borrowers to those who presently enjoy seven-to-ten percent rates. You can also expect your annual fees to go up as credit card companies could use higher fees to offset a loss in earnings caused by the Credit CARD Act.

Band-aid Reform not Sticking

Certainly regulations to stop and impose penalties on those practicing unfair lending practices are a great start. But someone is going to have to pay for the caps imposed by the credit CARD Act, and it looks like it's going to be us--as usual.

The primary cause of credit problems goes untreated as we continue a culture that worships conspicuous spending and borrowing. Short-sighted parents teach their kids the power of plastic but not the consequences. APRs on outrageous payday loans, borrowing against anticipated tax returns, and pawn shop loans can exceed 400%, and business is booming. Stopgap measures like rate caps just backfire when our deepest credit problems go unsolved.

According to a story in the New York Times, one of the nation's largest lenders is being sued by government officials in Tennessee for discrimination in mortgage lending. The suit charges that some silly loan agents stupidly steered minority borrowers into more expensive sub-prime and bad credit mortgages than white borrowers. Now (CYA disclaimer follows), this lender may or may not have committed discrimination. And most loan officers at this and other banks are probably not discriminating against applicants. But, it does happen. So how can you be sure that your lender isn't being dumb and discriminating against you? Actually, it isn't that hard.

Studies have shown that when discrimination appears in commerce, such as when car dealers offer better deals to white male buyers, it is often unconscious--on some level, the sales agent is deciding that the buyer is less educated or less assertive--less likely to know if he or she is being overcharged, and less likely to do something about it.

So what do you do? Well, you could buy some nerdy glasses and a monkey suit, borrow a BMW, stick your nose in the air, and run around saying things like "in the final analysis, I don't believe that you are offering me the most advantageous opportunity possible." Or you could just shop for your mortgage online.

Buyers who shop online are routinely perceived as being savvier and more assertive. Obviously, if you are comparing mortgage deals online you are a serious shopper, not to be taken lightly. And, even better, those who might want to discriminate don't know who you are, what you look like, or anything personal about you. To get a meaningful interest rate quote, all you have to provide is four pieces of information: Your credit scores, the value or sales price of the property, the size of your down payment, or the amount of the mortgage to be refinanced. The loan agent doesn't need to know if your name is Buffy, Jamal, or Hermosilla.

But if you want to call yourself Donald Trump while shopping for your mortgage it's okay by me.

Okay, you're probably going to be glad to see 2009 go. You lost income. You gained debt. Cutting out lattes ain't going to cut it when it comes to debt relief. You want to start the new year by getting a handle on your debt. You could be good in the future if you could just get the past off your back--right?
Well, you can. It's won't be easy, but it can be possible. I'm gonna show you a couple of debt solutions that are similar but have some pretty important differences. I'm talking about debt management plans and Chapter 13 bankruptcies.

Chapter 13 Bankruptcy IS a Debt Management Plan

All debt management plans involve you making a single monthly payment to a third party, and that party making multiple payments to your creditors. The idea is that the single payment is supposed to be a lot smaller than the total of all the debt payments, and this is supposed to make it easier for you to manage your debts--hence the name, debt management. The main difference between the two is HOW the decrease in your monthly payment is achieved.

Debt management plans start with the creditors. Your credit counselor goes to your creditors and tries to negotiate lower payments, interest rates, and maybe even lower balances. Then you are given a total payment that you pay the credit counselor each month, which can be up to 40% lower than the total of all of your monthly obligations.

Debt Management Pros

• You minimize credit score damage.
• You could pay less interest.
• Your balances might be lowered.
• One payment simplifies bill-paying.

Debt Management Cons

• Agency fees may chew up savings.
• Forgiven balances are taxable.
• There may be amounts due when the plan ends.
• Debt consolidation mortgages may result in mortgage foreclosure.
• The plan may not be affordable.
• Creditor participation is voluntary.

The main thing to remember with a debt management plan is that the creditors run the show. Make sure that the payment is something you can afford. And if a debt consolidation loan secured by your home is involved, be very very sure that you won't get in over your head--or you'll be taking home equity that could be protected in a bankruptcy and giving it to the unsecured creditors who could be blown off in a bankruptcy. The best case outcome of debt management is that you pay off all of your debt within a few years and experience little or no damage to your credit rating.

Chapter 13 Bankruptcy--The Court-ordered Debt Management Plan

Chapter 13 bankruptcy is administered by a bankruptcy trustee. You make your monthly payment, which is distributed to your creditors as ordered by the court. At the end your your term, usually three to five years, any remaining balances are discharged for good.

Chapter 13 starts with you. A bankruptcy judge looks at your financial position, determines how much you need for reasonable living expenses, and subtracts it from your income after taxes to determine your monthly payment. Your creditors don't get to decide how much they want you to pay, and they don't get to opt out of the plan either--their participation is mandatory.

Chapter 13 Pros

• Debts such as back taxes can be discharged in addition to unsecured debts.
• You probably won't have to repay the entire balances.
• Forgiven debt is not taxable if done in bankruptcy proceedings.
• Creditors can't refuse to participate.
• The plan is created to be affordable to you.
• Creditors must stop charging interest and end collection efforts.
• Debts are wiped out on completion of the plan.

Chapter 13 Cons

• Your credit score may take a big hit.
• The filing is public record for ten years.
• It may make it harder to get jobs, insurance, or loans in the future.

Whatever solution you choose to blow away debt, get good help--no dirtbag lawyers working out of their garages, no sleazy credit counselors who want to help themselves, not you. Many smart people have been successful at debt reduction by trying credit counseling and debt management first and only opting for bankruptcy if they can't get an affordable plan.

HUD Feels Your Pain--And Does Something About It

Shopping for a refinance mortgage in 2010? You can lose the Advil--comparing mortgage quotes won't be causing any headaches after January 1st, 2010. The new forms are easy to understand, and all the important stuff is right up front. In 2010, you won't have to wade through piles of disclosures, looking for evil fine print. And it won't matter whether the lender chooses to call a fee "administration," "underwriting," "extra silly charges" or "garbage," you get a bottom line figure that lets you cut to the chase and compare loans easily from one lender to the next.

Regulation X Gits Rid of Hidden Boogers

Changes to Regulation X means no more "gotchas" when you finalize your home loan--no surprise fees, no amazing interest rate increases, no "mis-underestimated" mortgage costs. It standardizes the way every lender discloses its loan charges and interest rates, so shopping your next new home loan or mortgage refinance should be almost fun. This is actually a good thing for lenders, too--the honest ones (the majority) won't be at a disadvantage to the few sneaky ones that routinely low-ball their loan offers.

(Drum Roll Please......) Introducing the New Good Faith Estimate (GFE) and Settlement (HUD-1) Forms

The highlights:
?? All lenders have to disclose their fees the same way.
?? Loan feature information (penalties, adjustments, negative amortization, etc.) is on the forms, front and center.
?? Total lender fees are shown as a single amount so you can make comparisons between lenders easily.
?? The GFE must reconcile to the HUD-1 within certain tolerances, so estimates must be fact not fantasy.

The Settlement Service Provider List--Buyer Beware!

Lenders have to furnish a list of service providers like title companies to you--choose any provider you like; they don't have to be on the list. If you do select a provider from the list, the fees are guaranteed to stay within 10% of the estimate. If you choose a provider not on the list, that protection goes away. But this is important: the providers on the list are the not necessarily the lowest-priced--unless you compare title and escrow services, you could pay more than you need to. And one bank in America provides a "list" but only has its own title company on it--definitely shop around in that case!

Mortgage Rates and Fees: Disclosures Up the Yin-Yang!

On your final closing documents, the lender's charges must be what was disclosed on your GFE--even if the charges were mistakenly underestimated. And any time there is a legally-defined "changed circumstance," the lender must update and re-disclose its fees and terms within three business days. What is a "changed circumstance?"

• War, disaster, or "act of God";
• Changes to information provided by you (if for example you switched jobs);
• Different loan amount or appraised value of the property (which affects the loan-to-value);
• Locking your rate or a rate lock expiration;
• A change in the deal requested by you--for example, switching from a fixed to an adjustable mortgage.

A Little Tolerance

Some charges like origination fees, discount points, and transfer taxes cannot change at all. Others, if the provider is on the lender's list, have a tolerance of up to10%. Changes beyond that 10% threshold must be paid by the lender, not you. Check out the new forms. I think you and borrowers everywhere will approve.

If refinancing out of a bad credit mortgage isn't in the cards this year, you still might be able to save some money by getting a better deal on your homeowner's insurance. It's required by your mortgage lender, so you have to have it. But you don't have to spend an arm and a leg.

1. Shop--Every Year

Don't just renew your policy without making sure you are getting the best deal you can. Look at pricing, of course, but also the service you could expect if you needed to file a claim. So ask friends and check consumer resources for service ratings. And ask insurers what you could do to lower your costs.

You can check out the financial stability of the firms you are considering with rating companies such as A.M. Best and Standard & Poor's . Also, you can consult consumer magazines. Find three good insurers and get price quotes.

2. Up Your Deductible

Deductibles are what you have to pay before your insurance company reimburses you for your damage claim and is determined by the terms of your policy. A higher deductible means savings on premiums. If you can raise your deductible from $500 to $1,000, you could save up to 25%.

3. Don't Insure the Home's Sales Price

The land under your house won't be stolen, blown away, or burned down, duh. So don't include its value when buying home insurance. If you do, you may pay a lot more than you should. I have seen people with$25,000 mobile homes insure them for $125,000, when $100,000 is land--look at your appraisal, and insure enough to replace the dwelling only.

4. Get Multiple-policy Discounts

Some insurers take 5% to 15% off your premium if you buy two or more policies. But make certain this combined price is lower than buying the different coverage from different companies, or all your policies from a new company.

5. Master Home Disaster

Ask your insurance agent what you can do to make your home stronger against natural disasters and see what discounts you could get.

6. Be Secure

Make sure you get discounts of at least 5% for a smoke detector, burglar alarm, or dead-bolt locks. Some companies will discount your premium by up to 20% if you install a comprehensive monitored sprinkler, fire, and burglar system.

7. More Discounts!

Retirees or those in certain careers like science, military, or teaching may get discounts of up to 10% at some companies. Employers and professional associations sometimes offer group insurance programs with special rates.

8. Take Credit

Establishing a solid credit history can cut your insurance costs. Insurers often pull credit information to price insurance policies. This is good for your future mortgage refinance, too.

9. Shop Around, But Sometimes Loyalty Pays

If you've been with an insurer for years, you could receive a special discount. Some companies will drop their premiums by 5% if you remain with them for three to five years and by 10% if you keep your policies for six years or more.

10. Evaluate Your Coverage

Make sure you add any major purchases or renovations to your home. But don't waste money on useless coverage. If your five-year-old computer is no longer worth the $4,000 you paid for it, cancel your excess coverage and save some money.

Refinancing is about more than getting the lowest mortgage rates. So compare mortgage rates, but also look to lower the other costs of home ownership.

A new study by First American CoreLogic predicted that refinancing will result in $2.3 billion in savings for those who refinanced during the first six months of 2009. According to the study, the median individual monthly savings was $120, 10.5% less than the previous mortgage payment. The total benefit over the next five years to ...

Many a refinancing homeowners is unpleasantly surprised to find that he or she is getting "impounded" by a new mortgage company. What does "impounded" mean? They aren't being towed; they aren't being locked up--just what is being done to these borrowers? Impound or escrow accounts are not usually required by bad credit or sub-prime mortgage lenders, ...