Bankruptcy & Foreclosures

According to the Mortgage Bankers Association’s weekly application survey, the volume of mortgage applications taken dropped an incredible 22.6% during the week ending February 15th as interest rates crept higher. This coinciding with a disturbing report from Freddie Mac claiming that adjustable-rate mortgages could become more popular as the difference between long-term fixed rates and adjustable rates increases.

Back in October Freddie Mac reported that Adjustable Rate Mortgages (ARMs) made up 17 percent of loan applications, their lowest level since June 2003. Back then the ARMs were being blamed for high foreclosure rates as many ARM programs offered low introductory teaser rates that quickly rose to payments that homeowners could no longer afford.

Back to today refinance applications took a dip as well (27.9%) as well as new purchase applications (11.55%).

It may not come as much of a surprise to hear that the rate increase has a direct effect on the volume of mortgage applications being taken, what is more surprising is that the current fallout is suffering from an unanticipated side effect. While the economy braces for the inevitable impact that will occur when subprime adjustable rate mortgages start resetting to much higher interest rates, many of these loans are already defaulting (well before the rates increase)!
Many of these mortgages are in default before the subrime rate hike even takes place thanks in part to a lending environment that simply did not discriminate. In other words many potential borrowers were able to get approved for loans that they simply could not afford (even with the initial rate that was sure to rise down the road).

Plus with no-money-down programs, many homeowners literally entered into the mortgage with absolutely no equity in the home to fall back on. The problem really compounded back in 2006 when home prices started to tumble. Not only were mortgages suddenly worth more than the house on which they were paying for, the fact that so few borrowers had any equity to tap into created a downward spiral that we’re just now feeling today.

The lenders are now being credited for ignoring this downward spiral back in 2006 when rather than raising borrowing standards; they continued to push risky loans. Why you ask? Simple- short term profits on initial interest.

The bad news is that things aren’t expected to improve any time soon either. After all, these troubles are in full swing and the rate spike on these ARMs hasn’t even kicked in yet.

We may all owe the OTS a big thank you before all is said and done in the current economic slump of late. Don’t feel bad if you aren’t familiar with the OTS, when all goes well economically, they are rarely heard from. The Office of Thrift Supervision (OTS) is fighting for homeowners all across the country by urging federal savings and loans lenders to actually refinance your mortgage for you. That doesn’t sound too impressive at first but there’s more. This refinance would reduce the mortgage balance to the current market value of the home rather than how much you actually owe on the loan. Since home values have been on a steady decline, many homeowners are stuck with mortgages that are actually higher than the price of the house itself!

However, the OTS isn’t foolish enough to believe that the lenders should have to eat the difference on countless mortgages where the home value fell throughout the US. Their proposal would simply defer the balance in the event that the housing market regains its footing in the future. Under this proposal, lenders would issue a negative amortization certificate along with the refinance for the difference. This certificate would basically state that if a home happens to regain its market value while you are paying on a lesser amount and then you decide to sell that house at the inflated value, the lender would have claim on the profit.

Many mortgage holder will be eligible for this program, should it be fully approved, as it looks to target subprime loans, adjustable rate mortgages (ARMs), negative amortization mortgages and interest-only mortgage borrowers.

Naturally on the borrowers side of the coin, there are some major benefits especially to individuals who have no intention of selling their home before paying off the mortgage balance. The fact that the lender could stake claim in future profits may scare off many who are considering the benefits of the program but remember that even as it stands, the lenders are really taking the lion’s share of the risk in this situation. The idea to convince lenders to participate is that it would offset some of the high-costs associated with proceeding with foreclosures. At least the certificate would entitle the lender to recover a portion of their losses should things take a turn for the better.

The bottom line is that although the OTS’ plan has yet to be approved, it looks promising thus far and may prove adequate in both slowing down (or preventing entirely) foreclosures while reducing the lender’s losses in the process.

I know, I know, we hear it all the time: Pay your bills on time and you will be rewarded with a high credit score, slip up and your score drops. One of the most common questions around here is “how exactly is my score computed?” or better yet “how long does a mistake remain on my report?”

I have some good news and, well, some more good news. Fair Isaac & Company (FICO), the group responsible for the current credit score model, is just about set to release a new formula of computation! Better yet, the new formula plans to further benefit those who pay their bills on time.

Since 2006, FICO has been assembling their new credit rating system and may still take a few months before consumers see changes in their credit score (as the bureaus themselves (Experian and TransUnion) adapt to the new rating formula. Interestingly, the new model began development long before the current recession flared up.

So what’s the point of the model makeover you ask? Surprisingly, the core of the new design was intended to alleviate the exact economic situation we’re currently going through! The idea behind it is to provide a better differential between good risk borrowers and bad risk ones by giving creditors a more accurate prediction of the potential for default. What’s this mean to you? If you happen to be a consumer in fair standing with a pretty solid track record for making your payments, your score could very easily jump by as much as 25 points under the new formula.

Let’s take a look at some of the individual areas the new formula plans to improve:

The system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.

Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.

Finally, the new system actually rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, lines of credit) and installment loans (auto loans, mortgages). Believe it or not even if you show a hodgepodge of loans but a solid history of paying them on time, expect your score to jump up as well.