Stressed borrowers use plastic to delay default
October 30, 2007
I was reading a recent news article on Yahoo! Finance (http://news.yahoo.com/s/nm/20071028/us_nm/usa_creditcards_debt_dc) about how mortgage borrowers are using credit cards to get cash so they can make their mortgage payments, and in turn delay the default on their homes.
At first glance, one may ask why people would continue to get themselves deeper and deeper into debt once they are in a foreclosure situation. The answer is simple: This is how the banks designed the modern credit system. People will borrow and borrow from wherever they can get the money regardless of the future repercussions. They way it starts is simple: The homeowner has a situation which causes a portion of their income, which is usually earmarked for the mortgage payment, to go to a surprise expense such as a medical emergency, auto repair, etc. This begins the downward spiral towards a foreclosure. Credit cards then start being used for basic necessities such as gas, groceries, and eventually cash advances to pay the mortgage payment (i.e Borrowing at 22% to pay a 6% mortgage). If the credit score of the homeowner hasnt been severely damaged, they are able to apply & receive more and more credit which they use until there is none left. Eventually, that is what always happens, and at that time the home goes into foreclosure and the borrower is left with (typically) tens of thousands or more in credit card debt as well as a severely blemished credit report.
This makes it even tougher to get back to a normal financial situation due to the high interest, penalties, and fees charged by the credit card companies. So, while I understand why homeowners would use plastic to delay default, it must be noted that they will only delay the inevitable foreclosure of the property and dig a deeper hole into debt. By setting up a cash reserve of several months before a problem hits, homeowners can avoid this problem all together. Then an emergency expense like a car repair or medical bill can be paid out of the cash reserve/savings and not alter the other expenses. Sudden financial demands WILL come up, no matter how much money you make or where you live, so it is important to be prepared before they happen! The majority of my clients save enough money that they can add more flexibility to their budget as well as put some money away each month for a “rainy day fund”.
Are you struggling each month just to pay the bills you have, so it is nearly impossible to put any money away for emergencies and other sudden expenses? Contact me today for your FREE debt melt-down analysis and let me show you how!
Your friend,
Robert Weinberg
Office 888-456-5635
FDIC to mortgage servicers: Freeze ARM rates
October 13, 2007
Top bank regulator suggests industry cuts losses now to prevent foreclosures.
“Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,” Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor’s conference.
ARMs often have a low introductory interest rate for two or three years and then reset to much higher levels.
Roughly 1.3 million subprime ARMs are due for a rate reset between now and the end of 2008, according to data from First American Loan Performance.
Bair proposed that servicers convert only those ARMs that haven’t reset yet and only for borrowers who are current in their payments and occupy their homes. Loans taken out by speculators who don’t live in the homes they bought would not qualify for the automatic conversion.
Consumer advocates have also been calling on lenders and servicers to modify subprime mortgages to make the payments affordable for homeowners who would struggle to keep the house once their rates reset. But rate reductions, while they do happen in some cases, are far from widespread, they say.
“We can’t just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs,” Bair said, citing a recent Moody’s survey, which found that less than 1 percent of problem subprime ARMs were being restructured.
“[Bair's recommendation] is exactly what’s needed,” said Michael Shea, executive director of ACORN Housing, which has offices around the country where counselors have been working with troubled homeowners to renegotiate their subprime mortgages with servicers.
Mortgage servicers – those that administer and collect payments on the loans – may be restricted by the terms of their pool servicing agreements (PSAs), which are their contracts with the investors who own the loans being serviced. Those contracts may specify when and how many loans may be modified.
But the servicer typically does have discretion when a loan has become or is likely to become delinquent. And investors are unlikely to object if the servicer can make the case why a modification will lose less money than a foreclosure, said William Rinehart, vice president and chief risk officer of Ocwen, a loan servicer that administers 470,000 loans.
And in many instances, foreclosures can create bigger losses for investors. “[E]ffective restructuring can preserve credit support [and] reduce credit losses,” Bair told the investor conference.
If servicers acted on Bair’s suggestion verbatim, “you’d likely have a backlash, particularly from your senior investors,” said Larry Litton, president of Litton Loan Servicing, which has been proactive about contacting borrowers before their rates reset and modifying their loans in instances where a rate reset would make the home unaffordable for them.
The message Litton thinks the industry will take away from Bair’s proposal is “you have to do a better job of fixing loans that are fixable. And if you don’t do it, someone else will do it for you,” he said, noting, for instance, that a proposal on the Hill to let bankruptcy judges reduce the mortgages of borrowers filing for Chapter 13 would not go over big with the industry.
If you are someone whose payment will be increasing in the near future and you will not be able to make the payment it is important to restructure the debt or have a loan modification done in order to avoid major financial problems. Call your lender directly and let them know, or call my office for a free consultation.
Robert Weinberg
Office 888-456-5635
