Monday, March 26, 2007

Easy Money Mortgages Disappear

The sub-prime mortgage market has crashed. Major sub-prime lenders have gone bankrupt and some are under criminal investigation.

Sales of new homes are well under estimates and in most parts of the country it is a buyer's market. The inventory of homes for sale is growing daily.

Unfortunately for those with lower incomes or less than perfect credit, mortgages may no longer be available. Mortgage lenders are reverting to the old fashion practice of thoroughly checking the credit of potential borrowers, requiring they have sufficient income to afford the mortgage (including taxes and insurance) - and subsequent rate hikes if it is an ARM - and are requiring downpayments. Believe or not, this was not the practice as late as the beginning of this year.

If you have an ARM, I still think you should refinance to a fixed rate mortgage before rates start to rise. If you want to buy a home, this is a excellent time to do so.

However it is going to be tough for those who are already underwater or who will not be able to afford the next adjustment of their ARM interest rate. If you are in that situation, contact your lender now and start to work things out. There will be such a glut of houses on the market that lenders will be very willing to work with you to try to keep you from defaulting.

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Thursday, February 22, 2007

Easy Money Mortgages

Easy money and lax lending standards seem to be behind the bursting of the housing bubble.

Lenders have basically abandoned any sense of caution in making lending decisions. Part of this is due to competitive pressures in the industry and part is due to the fact that mortgage loans are packaged and sold off to investors. The mortgage company still makes money for servicing the loan, but no longer bears the risk of default.

This has allowed many people to buy homes they couldn't afford in hot markets. It has also allowed investors to buy up multiple properties with the idea of flipping them as their capital appreciation rose. Home builders were encouraged to overbuild to meet this demand.

Now, even though interest rates have not really risen much from their historic lows, many howeowners are finding they can't meet their mortgage obligations. Investors are finding there is little capital appreciation and, more commonly, depreciation in prices. As these groups try to bail out they further depress the market by adding more homes for sale, at lower prices.

Since homebuilding has been the major engine in the US ecomony since the dot-com crash of 2001, many experts are worried about a similiar scenario playing itself out now with a resulting market crash and economic stagnation.

If you have some kind of exotic mortgage package, it would be a good idea to convert to a conventional fixed rate mortgage. If you can afford to ride out this downturn, you still have your house to live in. And if you're in the market for a new home, you will find a buyer's market in many parts of the country.

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Friday, February 16, 2007

Too Much Credit

Credit is too easy to get. It seems that no matter what your credit history has been, there is always someone willing to lend to you - often at a very steep cost.

But is it the lenders' fault that so many Americans are so deeply in debt? The lender is in business to make money and the only way to do that is to extend credit to whomever needs it. But just because someone offfers you credit, does not mean you have to accept the offer or, if you do accept the offer, that you have to max out your credit line.

Obviously the lenders more and more reckless disregard of the consequences of what they are doing is not helping matters, but many people who complain about their debts - the lenders best customers - only have themselves to blame.

But I don't think we will have to wait too much longer before the trial lawyers get into the act and start class actions suits against the lenders for enticing the public to get into debt.

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Wednesday, February 14, 2007

Gaming the System

Does it bother you that so many people are gaming the system and seemingly getting away with it?

There are the serial bankruptcy filers who walk away from their debts every eight years, using what should be the last option of bankruptcy as a financial planning tool. Not only that, they make sure to max out their credit cards before they do it, to get the maximum effect from their filing.

Others hide assets from the trustee with seeming impunity. On financial forums, you can see people bragging about how they not only went through bankruptcy without losing a thing, but then immediately qualified for 100% financing on their mortgage. Others write how they managed to get all negative information about their finances, including a bankruptcy, removed from their credit reports by merely disputing the entry.

It should bother you, because, if any of this stuff is actually true, you are paying for it. The banks are not going to lose money on deadbeats, they will just make sure the good customers pay more for their credit.

I recently read an article that contained the proposition that most lenders that continue to extend credit to the deadbeats of the world know they will never get repaid. They, of course, make sure the deadbeat pays a lot more for his loan, but then they "securitize" their loans and sell them to investors who then take on the burden of the eventual default.

Whatever the answer is, it is certain that the financial health of the country and its citizens are not benefiting from this type of behavior.


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Monday, February 12, 2007

What Does It Take to Create Financial Responsibility?

I happened on a TV show on one of the cable networks this weekend about debt management. The guy who is the star of the show apparently treats overusage of credit as one would treat an physical addiction, with an intervention, some humilation of the "victim" and many tears.

But the advice is conventional. The subject must cut up all his or her credit cards, is put on a strict budget and is forced to increase income to pay down debt.

Of course, the star of the show is only on the scene for a little while and then the subject is left on his or her own. In the show I saw, the lady couldn't make it one week without wandering back to the mall.

Most of us will not get this special kind of attention and, if we did, would probably resent it. So I guess, like alcoholics, creditholics have to reach their own personal bottom before they begin to dig themselves out of their hole.

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Thursday, February 08, 2007

Living on $12000 a Year

Many people complain that they don't make enough money to afford to save. But it's really only a matter of creating a budget and sticking with it.

If you think this is impossible, read this article about living and saving on $12000 a year.

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Tuesday, February 06, 2007

The Stigma of Bankruptcy

Should filing for bankruptcy be as easy as it seems? It appears that the attempts at bankruptcy reform have failed and new filings are reaching record highs.

Although some people use bankruptcy as a financial planning tool, wiping out their debts every eight years, others still feel a moral obligation to repay their debts. And those who make the struggle have reported a feeling a self-satisfaction and accomplishment.

But according to experts in the credit counseling field, most bankruptcy filers really have no hope of ever repaying their debts. They express suprise that filings are not higher than they are.

It is true there is no social stigma to bankruptcy anymore. Only your creditors are likely to know you filed. But there are costs. Although it is unlikely that someone who has filed will not be able to get any credit, the cost can be very high. Bankruptcy can also effect your ability to get a job or rent an apartment and, unlike the availability of credit, this stigma will last the full ten years the bankruptcy is on your credit report.

Bankruptcy really should be a last resort. If you need it, use it. But consider the consequences of your actions and try to learn from your mistakes.

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