Credit/Debt Recovery

"Unbanked"

When we included a section in Repair Your Credit And Knock Out Your Debt on the unbanked, our editors protested, and later it kept appearing in the index as "unbanking" rather than "unbanked." It wasn't a real word yet, and we had to fight to get it in print.

Looks like the word, and the concept, has finally made it to the mainstream. Here's the Clinton-Schwartzenegger op-ed from the Wall Street Journal that discusses the issue.

The point isn't to pick on pawn shops, payday lenders, or institutions that sell money orders, but to educate consumers about how to become banked or regain their banking privileges if they've been lost. Unfortunately, the Patriot Act makes Chexsystems all but mandatory, but thankfully there's Get Checking for people who've been burned by Chexsystems. I spent a lot of time begging banks and credit unions to participate in the Get Checking program in our area, and mostly getting rejected. Maybe with the new Slick Willie Economic Opportunity Initiative, it'll be easier to get banks and credit unions to give Get Checking graduates a second chance at a checking account.

Insurance Information Institute

Having adequate insurance coverage is an important part of financial freedom. Especially if you do any kind of physical labor for a living, long-term disability insurance is an absolute must.

I'm also a big believer in renter's insurance: I learned that one the hard way over the years. I was always too broke to afford it, but when my stuff got stolen, it caused a lot more damage to my finances than renter's insurance would have. (And wouldn't you know it, I always managed to scrape together enough money to replace my stolen stuff. I could have figured out how to pay for renter's insurance if I weren't being an idiot.)

However, there is a flip side to insurance coverage. Your homeowner's policy almost certainly makes you get too much coverage. We tell clients to review their coverage and adjust it accordingly; I'm sure no one ever follows up on that. But the Insurance Information Institute has a tool that can help.

They host Know Your Stuff, a free home inventory program that you can download and use to catalog all of your belongings. This can really come in handy if you have an insurance claim. It also showed me that I'm paying for twice as much coverage as I need on my belongings. I'm sure when I talk to my insurance company and get that adjusted it won't change my insurance payments by much, but it'll be worth doing even if it's a tiny amount.

The III also has page on credit with some good information. Your credit really matters when it comes to your insurance. You may have gotten a letter from your insurer saying you weren't getting the best rate because of your credit history. I got one of those recently, and my credit score is reasonably high.

The bottom line is, you're probably paying too much for insurance, either because of something on your credit report or you're paying for too much coverage. Completing a home inventory is one way to make sure your insurance coverage is appropriate. It's not a trivial project (I've been working on a home inventory in my spare time for weeks now) but it's one worth doing.

Larry Winget's "You're Broke Because You Want To Be"

Larry Winget's new book, You're Broke Because You Want To Be, has turned me from a casual follower of his work into an outright fan. Winget's serious about helping people overcome their financial problems. He's tough, but not insulting or aggressive. I find him a welcome voice in the field.

Content-wise, the book is a quick read at 200 pages. I'm finding that it's desirable for such books to be accessible, because it makes it easier to re-read them periodically. This is kind of book you could pick up once a year, or whenever you need renewed inspiration, and read it in a weekend.

This book isn't chock-full of budgeting strategies and worksheets. Winget's job is to get you off your butt and motivated to change your situation. He offers a few worksheets and exercises, but the real meat is in the ideas communicated. He offers a great attitude adjustment toward wealth and money, and his advice on raising your kids to be money-smart is spot on.

Where Winget's book initially wins me over is when he advises, early in the book, to ditch your cable TV. He re-iterates that later in the book. This is not the kind of advice you'd normally get from a cable TV star. He seals the deal for me further in when he recommends other self-help books (though not mine, unfortunately).

Other personal finance gurus will try to sell you $150 worth of materials, or a $90-per year membership in their budgeting system. Larry Winget directs you to a dozen other books (10 of which aren't by him) as further help toward getting on the right course. He won't make a dime off of those other books sales, but he's sending to those other authors because they have something valuable to offer. That's someone who is on the level.

I'm sure Winget makes a lot of money from his personal speaking engagements, the TV show, and book deals. He doesn't also need to charge individuals (people who are ostensibly having money problems) hundreds of dollars to join his club. He's also set up a website with a free "Five Financial Lessons" video and budget sheet for those who purchase the book.

The bottom line is, this guy's legit. He's not trying to be cuddly and lovable, he's trying to wake you up and get you to stop choosing to be broke. And he manages to do it without ever calling you "stupid."

Visit his website, LarryWinget.com this week and check out everything he has to offer.

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.

Choosing a mortgage lender

Light posting lately because I'm undergoing yet another move. Some of the things I'm experiencing with my mortgage this time around lead me to offer this advice:

Borrow local. Ask your realtor to recommend some good local mortgage companies or banks (or better yet, credit unions) and shop them for the best rate. Even if a national lender offers a slightly better interest rate or lower fees, my experience is proving that it's not worth it.

For one thing, with a smaller, local lender, you can get more personalized service. Establishing a personal relationship with your lender will benefit with you in lots of ways throughout the mortgage process; it's difficult to list all the little ways your borrowing will improve, but those factors will all add up to a more positive experience.

And a local lender will know the local appraisers on a personal level. That makes them more likely to hire good appraisers. I have to say, in all the real estate transactions I've had, my experience with appraisers has been almost universally negative. And this time, using a large lender based out of state, it's worse than ever. They don't KNOW these appraisers, they just got them off a list, and so the work I need done remains on the bottom of a large stack. If I could go back a few weeks and give myself one piece of advice, it would be to choose a different lender, one where I can get my loan servicing in person, not by dozens of emails, faxes, and unanswered voicemails.

Here's a thought; even if you don't borrow local, make sure you can get the direct extension of the individual account manager or loan support person who is handling your mortgage loan. If your lender has you calling into the call center and getting put on hold every time you need to speak to them, find another lender.

Van Bakel Hit by B of A's New Terms

I've blogged before about Bank of America's odious changes to their credit card agreements. The irony is that it ceases to be an "agreement" when one party changes the terms without consulting the other.

Now, one of my favorite bloggers, Rogier van Bakel, has noticed the changes to the terms of his Bank of America credit card account. In his post, he asks the most pertinent question:

Since when is deliberately screwing your loyal customers a better long-term proposition than serving them?

I can't imagine how it could be. If you own any shares of this stock, you'd better sell.

As a credit card user, I'm jettisoning Bank of America altogether for BB&T. I think Rogier should, too. And so should you, if you're a B of A credit card holder.