CHESSNOID

I have worked in the credit and collections field for the last 20 years and have actually never seen it this bad. The recession is really taking its toll on most working American consumer. The price of gas as well as the cost of most foods are dizzying. All the articles I read are things I see in regular life. Today, I got a call from a customer asking for a discount on her balance once she gets her refund check. I told her yes we would negotiate a lower settlement. This to me is a common thing most people who have debt want to do, which is simply get out of debt. So I believe many of these refund checks will not be used to buy good and services, but to just pay down debt accrued over the last couple of years.

The first article I want to talk about is the one Dr Housing Bubble covered in his blog called: When $100,000 makes you Go Broke: The Invisible Hand Forces Americans Into Debt. In California, we have a lot of high income couples and yet they are struggling to make ends meet. Dr HB really breaks it down good. Even though $100,000 is a lot of money, everything in California seems to come at a premium. I can only imagine people in other states thinking we are just penny wise and dollar foolish. I think in his example, this is truly representative of your typical California family expenses.

The second article I found very interesting is about someone who bought a house before the housing bust who had and still has a great job, good income, excellent credit but found herself in foreclosure. She is not your true subprime customer but she did get one of those self-imploding loans that sabotages your finances. The title of the story is Good Credit can’t protect borrowers from bad loans and I think is representative of some of the people with excellent credit suckered into the housing boom with a poor loan product.

I was a little puzzled with some of the information it quoted such as the FICO score and loan performance:

In September 2007, the most recent month for which data is available, more than 20% of subprime mortgage borrowers with scores of between 840 and 900 were 60 days or more delinquent, according to First American LoanPerformance. That default rate was roughly equal to that of borrowers with much lower scores, in the 540 to 599 range.

I believe FICO scores range between 300 and 850. They may have been talking about some other credit scoring from another company. The borrower actually was ignorant of the loan and of course probably didn’t read the terms of the contract. Most home loans you sign are about 50-75 pages long and when you leave after signing a books worth of paper you really don’t want to read stuff that is boring and sometimes not understandable. In this case, the borrower just wanted the house.

Home buyers were also complicit, turning to option ARMs and other dicey loans to buy homes more expensive than they could really afford.

Trish Phillips had enough income to pay about $1,300, perhaps $1,400 a month for her home, which cost $279,900. The minimum payment on her option ARM was $1,276, but she was incurring interest of more than $2,000 a month. The difference of about $800 was added to her mortgage balance every month.

Option ARMs have what’s called a negative amortization cap. If the unpaid interest accrues to as little 10% of the original principal (that varies from loan to loan), the loan reverts to a traditional mortgage, where the borrow must make full monthly payments that pay down the loan’s principle.

According to Phillips, who was making the minimum payments, that meant her monthly bill would jump to $2,300 after just a couple of years and then to more than $3,000 a year after that She knew she couldn’t afford it and went for help.

Phillips admits that she didn’t clearly understand the loan terms before she closed on the house and says her mortgage broker didn’t explain them. She had misgivings but, “I was afraid of losing the down payment,” she said.

Home owners found themselves in this situation all over the nation - especially in pricey areas where many home buyers couldn’t afford to get on the real estate merry-go-round without resorting to exotic loans, such as option ARMs or 2/28 hybrid ARMs. The latter feature two years of low, fixed, introductory interest rates. After that, they reset much higher and adjust every six months or so.

This story has a happy ending so far. She didn’t ignore the problem but seeked assistance and the loan company actually responded by working out a temporary loan plan.

As for Phillips, she managed to get her loan modified, with Sichenzia’s help. Her payment is now frozen for three years at $1,281 a month and her balance will not increase during that time. She hopes to refinance into a fixed rate loan before those three years are up.

And, since she succeeded in getting her mortgage modified before she even fell behind on her payments, her FICO score is still a healthy 775.

The loan companies are usually not that cooperative. In this story, some details are missing. If her FICO score is still that high she probably didn’t go into foreclosure or even fell behind. It sounds like she pre-empted the problem she was about to incur when payments adjusted upward. Most mortgage collections departments in the past would not even be able to take the call and would send it back to customer service. Then the customer service department would just recommend she borrow the money, refinance with some other company, and say good luck. I think because of the severe recession we are going through and the bad press mortgage companies have recently received coupled with the skyrocketing foreclosures, there are definitely more options available than before. My other guess is that the loan product she received was inappropriate for her and that she may have actually been able to get a 30 year fixed rate loan with low payments to begin with, and the loan company doesn’t want to get to the point where she has a valid lawsuit.
It said her home was purchased at $280,000 and she was afraid to lose her down payment ( I am guessing it was substantial). Since I didn’t hear the mention of PMI, she may have actually put down a 20% down payment. On a loan amount of $224,000 on a 30 year fixed rate of 5.50% her monthly payment would have been only $1272 (completely amortized). That is making a lot of assumptions, but she seemed like the perfect borrower: 14 year job, 10-20% down payment, perfect credit with high 780 FICO score (that is the highest FICO score I have heard of). I don’t think refinancing will be possible for her with today’s underwriting requirements and she may also be upside down on the house since the housing markets have turned substantially down. I think she should hire an attorney and she might come out with a free house or at least with a better loan.