Protect Your Good Credit

In 2003, congress passed a law for Fair and Accurate Credit Transactions entitled Financial Literacy and Education Improvement. This law called for the establishment of the Financial Literacy and Education Commission. The Commission established and sponsors/hosts the website www.mymoney.gov. This website is essentially an index or a collection of links to other Departmental websites containing consumer information–some of it is useful, but consists largely of static text, the content of which is general in nature and requires the reader (1) to be highly literate, and (2) to do further, extensive research.

National Strategy for Financial Literacy-2006 and, subsequent addendum, clearly calls for more consumer education, but stops short of defining the means by which to do so. This is in spite of the presence of a number of financial literacy training advocates among the Commission’s working groups.

Treasury Secretary Henry M. Paulson, Jr. spoke on October 16, 2007 at the Georgetown University Law Center on Current Housing and Mortgage Market Developments and stated,

“…Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy.”

In the later half of his speech, he makes a number of statements which, inside the beltway, are considered a clear “call to action.”

“We need simple, clear and understandable mortgage disclosure. We must identify what information is most critical for borrowers to have so that they can make informed decisions. At closing, home buyers get writer’s cramp from initialing pages and pages of unintelligible and mostly unread boilerplate that appears to be designed to insulate the originator or lender from liability rather than to provide useful information to the borrower. We can and must do better.”

“Borrower’s have a responsibility as well. Mortgage providers must offer clear, transparent and understandable information on the mortgage products they sell. And home buyers have a responsibility to use that information. Buying a home today is a complex process, but than in no way excuses home buyers from their obligation for due diligence. Just as investors in the stock market have a responsibility to understand the risks associated with their investment, home buyers have a responsibility to understand their mortgages.”

“…we need to bring a higher level of integrity to the mortgage origination process. The development of a uniform national licensing, education, and monitoring system for all mortgage brokers is worth considering.”

It takes little effort or imagination to connect-the-dots from the Financial Literacy and Education Improvement Act of 2003 to the National Strategy for Financial Literacy of 2006 to Secretary Paulson’s comments, delivered just prior to a well-publicized meeting with the G7 Finance Ministers.

On October 22, US Representatives Brad Miller (NC 13th), Barney Frank (MA 4th) and Mel Watt (NC 12th), introduced HR-3915-The Mortgage Reform and Anti-Predatory Lending Act of 2007 in the House Financial Services Committee, where Rep. Frank presides as Chairman. This could be cause for concern if regulatory action, once implemented, becomes burdensome and costly to both the industry and consumers.

While the overarching problem effecting the mortgage industry is diverse and disparate in its origins, implementation of (1) a well-managed certification and accreditation program for mortgage professionals, (2) paralleled by a concerted effort to lift the veil of complexity on mortgage-buying for consumers, are an essential part of any solution whether devised by government or industry, and will serve to keep us from repeating this situation again when the market returns to good health.

The current mortgage crisis did not begin when the subprime lenders began to announce that they were facing financial difficulties due to a surge in defaults. It didn’t begin when Greenspan was discussing the housing market ‘conundrum’. It wasn’t caused by the real estate ‘bubble’ popping. It wasn’t terrorists, the war in Iraq, inflation or increased cost of barrel oil. While none of these things caused the current credit crisis, they certainly may have contributed to it. In addition, so did mortgage lenders, underwriters, appraisers, real estate agents, title companies AND consumers.

The responsibility for the current credit crisis can not be unilaterally assigned to one or all of the groups referenced above, moreover, it is an effort in futility. The road to recovery from this crisis and addressing the pervasive effect it is having on multiple levels within the economy must be focused on finding appropriate, lasting solutions. Not quick-fix, self-serving band-aids and/or rhetoric from lenders, brokers, appraisers, realtors, title agents and government agencies. We don’t need anyone else to tell us what’s wrong and who’s responsible–we need solutions. We need education and information; not legislation.

Consumer protection laws, disclosure documents, etc. have been around for years, yet it wasn’t sufficient to shield us from this crisis. We need to lift the veil of complexity and mystery rampant in the mortgage process. We need better education, information and training at all levels to both recover from the current crisis and produce lasting solutions for the future.

Anyone worried that late or non-payments will result in foreclosure should consider making a few phone calls to their lender and/or servicing agent. The federal government has recommended that lenders and servicing agents (companies that collect mortgage payments for lenders) take steps to work out payment plans or alternative financing solutions for many borrowers that are facing higher payments due to their ARMs adjusting. It may take several calls to find the right department or person to talk to but diligence can pay off big if you are able to work out a more favorable payment and/or refinance into a lower rate. No one wants to see a property go into foreclosure and most lenders will work with homeowners that make the effort to contact the company and ask for help. Foreclosure is devastating to an individual’s credit rating. Be proactive in looking for ways to make your payments and keep them timely—asking your lender and/or servicing agent for help and options is the first step.

Whether it’s a personal dilemma, such as whether to change your job, a relationship, your address or a life challenge such as serious illness, unexpected unemployment, or death of a loved one, we make dozens of decisions everyday that can positively or negatively affect our credit history. Only after a traumatic event, which results in poor decisions, do most individuals realize that small decisions can have big impact later.

An associate called recently and asked that I look at her mortgage situation. She refinanced a few months ago after her father passed away. Her father had been successfully fighting cancer but about 9 months ago, took a turn for the worse, needed more full-time care, so my associate took time off from her business (she’s self-employed) and began taking care of her father. As time went on and he lingered, she began “living off credit cards, etc” to cover her bills. By the time her father died, between her grief and her increased debt, she made several rash decisions regarding her finances which have had very negative results on her credit.

Hindsight is always 20/20 and no one can be certain how they will respond to a particular situation until they experience it but, sometimes, forewarned is forearmed. Had my associate been aware of some specific credit pitfalls prior to her father’s illness, she may have been able to make better decisions in her time of crisis.

1. Quick costs More!!! Just like buying a bottle of water at 7-Eleven will cost you more than it will at Sam’s club, credit costs more when it’s provided quickly. Instant credit via credit cards can carry interest rates over 20%. While it’s convenient, just like 7-Eleven, it’s more costly than other credit sources, such as a Home Equity Line of Credit (HELOC). Credit card companies will allow you to apply over the internet or phone and issue credit in minutes, while Home Equity lenders have a more lengthy application and approval process and can take several weeks but offer much more competitive rates of interest than credit cards.
2. Review Refinance Terms and Costs Carefully!!! Due to recent years of high real estate appreciation coupled with low mortgage interest rates, refinancing to consolidate credit card and/or other unsecured debt has become very popular. Many loan officers sell mortgages like car loans, focusing on the monthly payment amount instead of the terms of the loan. Teaser rates, pay-option programs (which allow you to pay less each month but can cause your principal balance to go up over the life of the loan instead of down), and interest-only payments can often mislead a borrower as to what the loan is actually costing in interest and fees. It is important to make sure you understand what you’re paying in both fees for the loan itself and the interest rate you’ll pay over the life of the loan, especially if it is any type of adjustable rate mortgage. When getting cash back at closing to pay off credit cards and other bills, the amount of money that the lender or loan officer is charging you for the loan is often overlooked and can add up to thousands in unnecessary expense if it goes unchecked by the borrower. It is important for every borrower to remember that ANY refinance loan includes a recission period of 3 days. If necessary, a borrower can opt to change his/her mind during that time with no financial penalty.
3. Review Decisions about Finances with a Professional!!! Since it’s so easy to make poor choices when you’re distracted by a crisis, talk about any big financial decisions with a trusted, professional financial advisor first. Doing so can help protect you from problems later.

A reported 35% increase in recent foreclosure fillings may be a result of many homeowners feeling the squeeze of increased payments as their adjustable mortgage rates went up. Hybrid ARMs with interest-only and/or flexible payments options have allowed many homeowners to keep payments unrealistically low while increasing their overall mortgage debt. Unpaid interest when choosing a flexible payment option is merely added to the mortgage principal balance so that after a year or two, homeowners can owe even more than what they paid for the property if they purchased with a no-down-payment loan.

Such scenarios can add thousands of dollars to a homeowners bottom-line balance. With many markets experiencing a slump in sales and appreciation rates stalling or property values falling, homeowners are finding they can’t sell their property quickly enough to avoid foreclosure.

One late mortgage payment can drop an individual’s credit score as much as 100 points, depending on their other credit history. A foreclosure affects credit much like a bankruptcy. Not only does it drop your score, it can result in limited loan options and/or higher interest rates in future transactions with other lenders.

With numerous subprime lenders closing their doors, regulators and lenders are anxious. The cost of foreclosure to the average lender can be as much as $50k or higher. Refinancing homeowners into more reasonable fixed rate programs seems a sound solution to the problems many are facing, but current regulations often prevent lenders and/or mortgage servicing companies from contacting homeowners until they are over 30 days late on their payments.

Any homeowner facing significant difficulty meeting their monthly mortgage obligation, whether due to rate adjustments, unemployment, illness, disability, or divorce should carefully review their mortgage note and terms. He/She should also seek the recommendations and advice of a trusted, professional financial advisor. Then homeowners can contact their mortgage lender or servicing company to find out what assistance they can provide to help the homeowner keep their home by refinancing their current loan into one with terms that are more workable for the homeowner and his/her budget.

Any application for credit can result in your credit report being pulled by the potential creditor. Whether it’s for a mortgage, a VISA card or a furniture store, it can impact your credit score. One potentially hazardous practice is applying for credit over the internet. If you apply for a mortgage loan or equity line on an internet site that offers “multiple” quotes from different lenders, your information is being distributed via that site to all of those potential lenders. In order for a lender to provide you with a quote for loan terms, they need your credit scores. If your qualifying information is sent to 12 lenders for rate quotes, each one of them can pull a credit report. That’s 12 credit inquiries, which can drop your score. Then, if you seek a loan with several local institutions, they will also pull a credit report. It is very easy for inexperienced borrowers to have their credit pulled excessively because they are “shopping” for the better mortgage rate.

A client was recently referred to me after her loan was denied by an online lender two days before closing. In order to determine whether or not I could help her get a loan, I had to pull her credit report. I discovered that, since she had applied for a mortgage with an online company that offered “competitive” quotes from multiple lenders, her credit had been pulled over 7 times. By the time she found a house, contracted to buy it and scheduled to close, her lender of choice pulled credit again, just prior to closing. The numerous credit pulls earlier had reduced her score to the point that she no longer qualified for their loan program. While I was ultimately able to get her a loan to purchase the house she wanted to buy, her rate was considerably higher than what it would have been with her initial credit scores.

Shopping online for anything can have potential pitfalls but shopping over the internet for mortgages is risky for anyone that isn’t extremely well-versed on credit and the mortgage process. If you are unsure of your credit status or lack a good understanding of the mortgage process, you would do well choosing local bank or mortgage broker to assist you when seeking financing for a home.

To protect themselves from identity theft, many consumers have purchased paper shredders to destroy their personal information before discarding it in their trash. While it’s better than just throwing offers of credit correspondence away, it may not be enough.

By watching any one of the numerous crime shows on TV, you’ll discover that strip shredded documents can be reconstructed by anyone with the patience and motivation to do so. I’ve also read some articles recently where the author has described credit applications that have been torn up, taped back together, filled out and mailed in to the creditor. The creditor, despite the questionable condition of the application has mailed the “applicant” a credit card.

Credit card companies, etc. buy your personal data from the credit bureaus, mail you an offer of pre-approved credit, and try to sell you something, namely their services. If they’ve spend time and money to attempt to get you as a customer, they may not be conscientious about ensuring their “services” are extended to the right person as long as they sell their services.

The simple solution is to replace your strip shredder with a cross-cut one. If you don’t own a shredder, buy one. You can buy one at any office supply store, Target, Wal-mart, K-Mart and numerous other retailers. There are many inexpensive types available. Protect yourself and your family by shredding all documents that have personal data on them and any credit applications that arrive in the mail.

Remember: Identity theft is what you may experience because of a lack of diligence to do these things. Consider it preventative medicine and be diligent about protecting your credit from thieves by cross-cut shredding your documents.

Routinely couples, whether married or just in a commited relationship, will come to my office to apply for a mortgage and only one of the parties present is aware of the “family” finances and credit history. Or, one member of the couple will come in to get the process started because of work or scheduling conflicts of the other individual, only to discover they don’t know enough about their joint finances and credit history to go through the application process.

Do you know where the money is? Do you know how it’s invested? Do you know what interest rate you are paying on your credit accounts and/or current mortgage? Where are your important documents kept? Who is your insurance carrier? Do you know your credit scores? Do you know your partner’s credit scores? These are all fairly basic pieces of financial information but, more often than not, only one member of the couple knows the answer. Bottom line, if you’re sharing finances, you’re sharing credit, whether you’re married or not.

For anyone to be able to maintain a good financial and credit history, they first need to understand what they have, what they owe, how much interest they’re paying for it, how it is insured and where the supporting documentation for everything is kept. It is fine for one member of the couple to handle the details of paying the bills, making the deposits, etc. as long as both are aware of the overall situation. Remember, sharing finances with someone means that you get the good with the bad. If one party is great at making sure the the bills are paid on time each month, then both will benefit. However, if the party responsible for paying the bills isn’t timely, both will suffer the credit consequences.

I hear comments from clients such as “well, he does a better job with that than me” or “she’s just more organized than me” and allowing the person with more organization skills or financial savvy handle the day-to-day responsibilities is fine. But that does not mean that you can abdicate your responsibility in maintaining a good grasp of your financial picture.

As a couple, it is imperative in sharing finances that you have shared goals for your financial future. Most people argue over money because they are not in agreement on what should be done with it, how it should be invested or what it is spent on. If you take the time to sit down together, review your finances regularly and agree on what your finanical goals are and the process you plan to use to achieve them, then the likelihood of arguments over money is greatly reduced. It may mean you have to agree to compromise. One individual believes in the need to save funds in safe, insured accounts, while one individual believes in the need to invest in potentially riskier ventures, you may have to agree to do a little of both. Or you may agree to be more conservative now in order to have the flexibility for more adventurous investing later. It doesn’t matter how you decide to compromise as long as you both understand the ups and downs of the decisions you make.

This is where the help of a good financial advisor and/or CPA can be beneficial. Also, there are numerous good books readily available, at the local bookstore or library, to assist you in understanding and developing your plan. Whatever you want your financial and credit picture to be, it can be realized if you are willing to invest the time, focus and research necessary to make it happen.