Credit/Debt Recovery

A sad angle on the mortgage crisis

My wife and I went to the local Humane Society last night and adopted this beauty:

Our previous cat sadly passed away on Halloween, and we were waiting until we were settled in at our new address to get a new pet. Budget-wise, we have a cat factored in to our expenses already, so we shouldn't have any trouble (See how I just snuck that in to make this post topical? Seriously, folks, getting a pet should always include some time spent on the budget, making sure you can afford it. And remember, there's no such thing as a free cat.)

I was impressed with the Humane Society here; they have a heck of an operation. As we were filling out the paperwork, an older couple brought in a gorgeous dog. It was huge, and looked like it might be a golden-retriever/chow mix. They were surrendering the dog, and they looked devastated by it. I don't know the exact reasons they were having to give up their pet, but it made me think of the people who will lose their homes to foreclosure, and what they'll do with their pets. I know the "mortgage crisis" is affecting a relatively tiny number of households, but it's sad to think about pet-owners who face eviction.

Even if you're hard-hearted and think the sub-prime borrowers committed fraud and deserve to lose their homes, it might be nice to think of their pets and make a donation to your local Humane Society.

And if you're thinking of getting a pet, start setting aside money now. Work with your budget to make sure it's something you can afford. You wouldn't want to find yourself in a situation where you have to give up your pet because you can't make ends meet.

The "Victim" in mortgage meltdowns

I don't know if I've mentioned it here yet, but the mortgage I recently got was by far the most strenuous yet. It was more of a hassle than my first mortgage, when my credit wasn't nearly as well established, and I had far less of a down payment to offer.

I had to fax hundreds of pages of documents, bank statements, tax returns. That's par for the course, I guess, but this time, they wanted everything. With my previous loans, they would accept a summary page of my bank statements; this time, they wanted to see everything for months. There are lots of other ways this loan was different that are too numerous & boring to go into.

I really think it was different because I wasn't dealing with my lender face-to-face, but I've learned another reason why this loan might have been more difficult to obtain. For the first time, my mortgage hasn't been immediately sold to a different lender. Previously I'd deal with a small, local bank, and then find that I was sending my house payments to Washington Mutual or Wells Fargo.

This time, the bank I applied to for the loan is the same one I'm sending my mortgage payments to. It actually surprised me, and I think it explains why the loan application process was so much more rigorous.

This is part of the problem with the mortgage meltdown; a lot of people are yelling about evil lenders and irresponsible borrowers. One side thinks the borrower is the victim, the other side correctly asks why a lender would prey on a borrower in this way, when the net result is a huge financial loss to the lender. I'd suggest the lender is as much a victim here as the borrower. Perhaps the culprit is an army of middle-men, mortgage brokers whose incentive is to package as many loans as possible and sell them to big anonymous lenders. They then don't have to directly bear the consequences of their indiscriminate lending, but they are punished, because their industry is in turmoil and many of them have found themselves out of work.

That last bit, the stories we hear of mortgage companies going out of business, is the market correcting the situation. Still we'll get a government solution as well, and it'll be a disaster in the long run. In the short term, I'm left wishing I had gotten an adjustable rate mortgage this time around, since it seems likely that lenders won't be allowed to raise rates again for the rest of the decade.

Mortgage situation

I've been woefully inattentive to the blog with my recent move, and I realize there is a lot happening with the mortgage market that warrants closer attention.

For a good take on the situation, Here's Reason on a proposed bailout of mortgage borrowers.

One of the disturbing things about all this is the way lenders are being characterized. Credit card companies are evil, sure. And maybe some mortgage lenders are too, but Steve Chapman's take is much closer to reality. Lenders just aren't eager to evict sub-prime borrowers and take their homes. They lose a lot of money when it comes to that (money they deserve to lose for indiscriminate lending).

In truth, mortgage lenders finally saw the light when it came to counseling, and have teamed up with counselors to help people who are in trouble. It took a lot of work by a few visionary credit counselors to get mortgage lenders to see the benefits and look past all the anti-credit counseling lies that have taken root (like the Wikipedia entry, or in the anti-BAPCPA rhetoric that's all over the net). Thankfully, some foresighted lenders worked with some credit counselors to create this: The Homeownership Preservation Foundation.

This is the 888-995-HOPE hotline that made headlines a few weeks ago when George Bush got the number wrong.

To me, this effort is an unimpeachably good thing. This is the way it's supposed to work. Everybody coming together to find solutions that work for everyone. The lenders really aren't ogres, and they really want these mortgages to work out. And yeah, they want the loans repaid, too, so they're not motivated by pure altruism here. (And so what if they aren't? Incentives matter.)

I look at the Homeownership Preservation Foundation and wonder how anyone could argue that any of those credit counselors should have their non-profit status revoked by the IRS. All off the agencies on board with this effort are providing a valuable non-profit service and should be applauded.

Where I'm less in line with Steve Chapman's Reason article is the treatment of borrowers.

... they punish lenders for the failings of borrowers. Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

I don't think it's as simple as that; the borrowers don't necessarily need to be victims of fraud to be tripped up by a predatory loan. If a mortgage broker or lender puts a borrower into a loan without explaining the "creative terms," the borrower can be caught off guard by unexpected balloon payments or rising interest rates. Even if everything was above-board and legal, sins of omission in the disclosure process can leave a borrower on the brink of foreclosure a few years later. And just because we can't point out specific examples of actionable fraud in the loan doesn't mean the lender didn't misbehave.

It can be said that these borrowers should understand what they're getting into, and they should be held accountable for agreements they sign. Of course, but I just completed a move, and the mortgage paperwork was a mountain of stuff. It would literally have taken me weeks to read every word. I signed so many documents so quickly that there's no way I could tell you what it all meant. I have to trust that the mortgage broker told me what I needed to know and that I won't get blindsided down the road.

If that did happen, at least it's good to know there's a number I can call for help.

Getting in the business of success

Paul Strassels said something once that has stayed on my mind for years. In the context of financial and credit education, he said "we need to get out of the financial failure business and into the financial success business."

When someone needs debt education, advice, counseling, or other services like bankruptcy or debt settlements, we need to be helping to move them toward a more successful future. It shouldn't be about managing failure; if circumstances have made it impossible to manage debts, it's a fresh start that's needed.

This is one of the reasons the bankruptcy code works better now than it used to. Debtors are required to get counseling that can help them make sure they're making the right choice, and it teaches them personal financial literacy so they can get a clean start after their bankruptcy filing. Bankruptcy used to be the worst thing that could happen to you financially. Now it's something one can survive, and the healing process can begin immediately, rather than 7 years later.

If you were a divorce lawyer, would you make sure that splitting up is the right choice for your clients? Would you ask them to try marriage counseling first, or at least ask them what they've done to avoid the dissolution of their marriage? It's depressing to imagine being in the marriage failure business. But if you make absolutely sure that divorce is the right choice for your clients (as I'm sure many divorce attorneys do), then you can feel confident that you're helping them get a fresh start toward a more successful future.

That's the way I'd like bankruptcy attorneys, credit counselors, settlement negotiators and housing counselors to think.

Credit counseling as a "negotiation"

One of the arguments enemies of credit counseling make is that the credit counselors don't really negotiate concessions with the creditors on behalf of their clients. "The terms are dictated by the credit card companies" goes the argument. (This anti-credit counseling slur is included on Wikipedia, for instance.)

It's complicated, but I think this is a false argument. No, credit counselors don't really "negotiate" each debt with the creditors, and the NFCC is useless when it comes to negotiating industry-wide concessions with creditors. But to say the terms are "dictated by the creditors" gets it wrong, I think.

I'd argue it's the market that dictates those terms. The creditors can play hardball if they want, and some individual creditors do, when it comes to concessions they offer to credit counseling clients who enroll in debt management plans. But if they're too tough, they force the client into a corner where the only alternative is bankruptcy. And legit credit counselors will recommend bankruptcy if that's the best option for the client. This is especially true since the credit counselors provide pre-bankruptcy counseling and education by law. Bankruptcy attorneys who hate credit counseling miss the point of all this; in fact having credit counselors as bk counseling providers makes their negotiating position much stronger, so the client is more likely to benefit with better terms when s/he agrees to a DMP.

Of course, a creditor offering good concessions to help a debtor avoid bankruptcy isn't a good thing for bankruptcy attorneys, so they're free to go on hating the whole concept of counseling. But they can't really say it's the debtor's interests they're trying to protect, but rather their own.