CHESSNOID

We have seen the housing bust cause a credit crunch this last year.  Even with perfect credit and a high FICO score, it isn’t that easy to get a home loan anymore. At least that has been my experience.

I have been in the credit industry for the last 20 years since I graduated from college, and it seems all the basics have been turned upside down.  Because we have so many foreclosures, the banks are now willing to modify if possible all the current accounts on the books.  This means if you have an adjustable rate loan you can now convert it to a fix rate, or if you are upside down in your loan the bank may modify it to a lower amount and write off the difference or stick it on as a balloon payment at the end of the loan term.

What is weird about this process or new way of doing credit is that these modifications are only available to you if you are in default.  That means if you are current on your loan and called in to get better rates or your principal amount reduced you would NOT qualify for them.  However, if you just stopped payment for 1 to 3 months, then you would qualify.  That seems backwards in approving credit but this exception may soon become the rule.  It seems like lower FICO scores could get you better terms in this case.

I know if you call in while your loan is current you will be transferred to customer service and be told that isn’t available on your loan.  After all, the company still wants to make money on you.  If you call in while you are late on your payments, then you will be transferred to the collections department. There they will have more options available to modify your loan.  Is it fair? I don’t think so which leads me to believe the landscape of credit may be changing for consumers.

There has been talk of a credit card bailout coming soon. The possible details are in that link where I blogged about this earlier.  Basically, credit card balances are slashed by 40% and consumers would be allowed to repay the remaining 60% of the debt at 0% or some other low rate over a few years.  It is a rumor but these things always seem to be leaked on purpose from the government to test the waters. Time:

The Treasury Department says nothing has been finalized, but reportedly Paulson and his advisers are looking into using TARP funds along with some money from outside investors to buy up credit card, auto loans and other, non-mortgage consumers debt. The financing mechanism for that type of debt, often called securitization, has stalled like much of the rest of the banking sector. Paulson is hoping that buying up debts directly will be a better way of stimulating lending than just purchasing banks’ shares and trying to force the firms to extend loans.

These credit card modifications already exist in most credit card collection departments with varying terms. When you fall behind, the credit card companies have modifications to help you get back on track. The difference in the bailout is that the credit card companies will now have the ability to get money from taxpayer money instead of writing it off as a loss.