Bankruptcy & Foreclosures

We talk about the sub-prime mortgage mess quite often but some of my clients have recently presented a question that deserves some attention. With lenders wishing to take on less risk, many individuals are discovering that their home equity lines (or even revolving credit lines) have been frozen. The question of course is what can you do if this happens to you?

In recent months some hundreds of thousands of homeowners, some with perfect credit ratings, have witnessed shut-offs to their equity access. From a lender’s perspective this makes sense too as delinquencies on home equity lines were up 47% over last year (according to Economy.com) and what’s worse is that these numbers are expected to be worse in 2008.
Just last year it wasn’t uncommon for a consumer to have access up to 100% of a home’s value in borrowing. Today individuals with near-perfect credit would be hard pressed to get even up to 90% of their home’s value and in some areas 60% is the maximum!

So what can you do if it turns out yours is an account put on lock down? Contact your lender right away and don’t be afraid to request, in writing, an explanation as to why your line was suspended and the appeals process. If the lender says that your home’s value is simply too low to continue borrowing against, contact an approved appraiser and don’t be afraid to have an appraisal performed. Yes this will cost you out of pocket (a few hundred in most cases) but would be worth the investment if you happen to rely upon access to your credit line.

On the other hand it may be you and not the property that has fallen out of favor with the lender. If they report you as being the biggest risk factor check your credit and order a hard copy should you suspect an error. Remember that many lender moves are completely automated and don’t take errors or one-time slip ups into account.

If all else fails, try asking the lender to simply lower your available credit line rather than put a hold on it entirely. Even the most conservative lenders realize that the economy is cyclic in nature and should eventually stabilize itself. Sometimes they will allow a consumer limited access to their home’s equity until the situation improves.

Sure these are days where new mortgage loans are at an all time low in terms of volume but even in periods of industry-wide bottom-out, there are still countless numbers of individuals out there looking to borrow money for a home. And while lending standards are becoming increasingly stringent, there are a few tips to keep in mind should you happen to be one of those individuals mentioned above.

Credit

Before you even begin the process of applying for a mortgage, obtain a copy of your credit report and your FICO credit score.

Your FICO score is the three-digit number that’s responsible for a whopping 75% of a mortgage lender’s decision to issue you a loan. If your credit report shows collections or past due balances, odds are you need to focus on getting these issues resolved before you walk into the lender’s office. Remember that FICO score minimum cut offs are creeping up higher as the market continues to deteriorate. Scores that were acceptable a mere six months ago may now be too low for consideration.

Pre-approval Vs. Pre-qualification

Many borrowers confuse the terms pre-qualified with pre-approved. Pre-qualification is the more casual process of the two, where a lender simply estimates you how much money you can borrow based on how much money you make versus how much debt you may have and how much cash you can come up with for a down payment on the home. Pre-approval, on the other hand, is a much more thorough process which isn’t determined until after you’ve applying for the loan. After submitting proof of income (pay stubs), tax documentation (W2’s) and other information such as an appraisal of the home you intend to purchase, the lender considers the information along with a credit check. If your data happens to meet the lender’s criteria, the lender can agree in writing to make the loan; this is considered being pre-approved.

Know Your Limits

Part of the current mortgage crisis comes from people borrowing the maximum amount of money they are approved for. The best advice is to never borrow more than you can afford on a monthly basis with the hope that your income will increase down the line. Many renters fail to take into consideration the fact that aside from a mortgage payment, bills such as property taxes, homeowners insurance, utility bills, and maintenance and repairs are a reality of being a homeowner. When talking to the lender, keep in mind that the mortgage payment is only a small part of the debt you will be locking yourself into.

When thoughts of recession come storming into the forefront of our concerns, it’s easy to relate the situation to how it affects each of us personally; be it less pocket cash for a meal in a restaurant or being forced to carpool due to rising gas prices. Truth is even the big guys are feeling the crunch. Mortgage-finance key players (Fannie Mae and Freddie Mac) just may need a little help from Uncle Sam in the form of a federal bailout large enough to actually damage the U.S. government’s credit rating! Uh huh, even the government itself needs to be concerned with its credit rating.

It turns out that just like with you and I, a lower credit rating for the government would mean higher borrowing costs and could lessen the value of Treasury securities, which up until now, have been considered to be nearly risk-free to investors (including foreign governments).

It is important to note that the government isn’t obligated to assist Fannie or Freddie in the event of a financial emergency many analysts believe that a bail out would be a reality if the economy continues to collapse. Aiding Fannie Mae and Freddie Mac (plus the government agencies that back home loans and student loans) could total up to a whopping 10% of the gross domestic product, which in case your economic terms are a little rusty, equals the total value of all goods and services produced within a country.

Over the past year, Fannie Mae and Freddie Mac’s share of new mortgages has been on the up-rise as (and with good reason) investors have shied away from all but the safest mortgage-related securities. To give you an idea of the type of up-rise we’re talking about here, Freddie and Fannie backed loans went from 46% in the second quarter of 2007 to 80% in January.
Combined, the companies must provide some $200 billion in new funding for home loans in exchange for a reduction in their risk cash buffer. Of course the government does require them to keep a certain amount on reserve to guard against risk potential risk but things have progressed to the point where the government may be forced into handing out some big bucks to keep these giants afloat.