Archive for July, 2011

When Your Credit Score Drops, But You’ve Done Nothing New

Wednesday, July 27th, 2011

You’ve been taking good care of your credit. You’ve been diligent about paying all your bills on time, keeping your credit card balances low, and avoiding inquiries into your credit. Then suddenly, your previously good scores take a nose dive?

Two possibilities could be the cause of your troubles:
•    You’ve become the victim of Identity Theft
•    A ghost from the past has come back to haunt you

To learn which possibility is causing your credit score reduction, you’ll need to get a copy of your credit report and read it carefully.

Read the section that reports recent inquiries. If you haven’t authorized an inquiry, but someone has made a “hard inquiry,” it means that someone else is attempting to get credit in your name. Explore further, because they might be using your good credit at this very moment. Go over every account listed, checking to see that it actually belongs to you.

If you find an account that isn’t yours, contact the credit reporting agency and follow instructions for disputing the account. You’ll also have to file a report with law enforcement agencies, because you’re now an official victim of identity theft.

Something else you might find is an old ghost – in the form of a collection on a debt you didn’t even know you had.

This can happen when people move and mail is not correctly forwarded. Utility companies send a final bill but payment is not forthcoming because you never receive the bill.

After a while, your account goes into their bad debt file and because utility companies don’t routinely report to the credit bureaus, it never shows up on your credit report. Then, perhaps years later, the debt is sold or forwarded to a collection agency. They still don’t have your current address, so don’t write you. Instead they report it to the credit bureau under your social security number.

The good news is that an old debt such as this is far easier to resolve than identity theft.

First contact the supervisor at the collection agency. Explain that this debt came at you out of the blue and that you intend to pay it off. Ask to have it removed from your credit report in exchange for prompt payment.

Of course, if you believe the debt is not valid, you’ll need to send a request for verification. Use certified mail, with a return receipt requested. If you still believe it is not a valid debt after receiving their response, dispute it with both the collection agency and the credit bureau that reported the collection.

If the bureau can’t confirm it as a valid debt, they’re required to remove it from your credit report.

Do You Want the Federal Government as Your Landlord

Monday, July 25th, 2011

After watching failed program after failed program, many in the housing industry wish that the government would stop trying to “fix” the mess and leave real estate alone.

But instead, they’ve come up with a new plan. Right now it’s in the concept phase, but if carried out, it could mean that the Federal Government will be the proud owner of thousands of rental homes across the country.

One reason given is that rents are rising while home prices are continuing to fall.

The theory behind this plan is that Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development would hold these homes as rental properties until the market turns around and prices rise. Renting them out would offset the costs of holding them. Some believe they could actually turn a profit.

However, the cost of setting up rental management offices across the U.S. and maintaining good accounting records could quickly eat any profits. Perhaps if they turned management over to private rental management firms and paid the going rate for professional management, it could work.

Fannie and Freddie are already in the rental management business. At present, they rent a few thousand homes to former owners and tenants.

Another angle under consideration is that these entities would sell the homes to private investors who would agree to rehab and rent them, rather than putting them back on the market for sale.

Meanwhile, removing these homes from the glut of under-priced bank-owned properties could have the effect of allowing prices to stabilize.

Depending upon which analyst you listen to, taking these homes off the market could prevent an additional drop in home prices of from 3% to as much as 20%.

Because of the number of foreclosures over the past 5 years, the demand for single family rental homes has grown at 5 times the pace of demand for overall shelter.

While the Obama administration is promoting this plan, it cannot go forward without the approval of the Federal Housing Finance Agency. At this time, their spokesperson said the agency is “open to considering initiatives that are consistent with the goals of the conservatorship.”

What do you think? Should the Federal Government become a large-scale landlord to consumers who have lost their homes through foreclosure? Or will their involvement simply depress rental fees in the free market rental market?

Have they finally come up with an idea that has merit? Or not?

Or should the Federal Government back off entirely and let a free market take it’s course?

Federal Housing “Fixes” Continue to Fail

Thursday, July 21st, 2011

When the Obama administration offered $75 billion as an incentive to lenders to modify mortgages and help homeowners keep their homes, they overlooked one important fact: The plan was a suggestion, not a requirement.

So in spite of the fact that the banks received bail-out funds, they were under no obligation to return the favor by assisting troubled homeowners. To date, only 100,000 homeowners have been offered loan modifications, and fewer have taken the offer.

Why? According to “tales from the front,” one reason is that many of those loan modifications come with the requirement of a large lump sum payment. If those homeowners had the money for a lump sum payment, they wouldn’t have needed help with monthly payments.

Subsequent “fixes” have been equally ineffective. The Federal government has essentially said “Our regulations now allow you to do this to help. You don’t have to, but we hope you will.”

Why don’t they accept the incentives to help homeowners?

Because in their estimation, they will see a greater profit from taking the homes in foreclosure. Mortgage insurance, government guarantees against loss, and monthly profits for asset management companies apparently outweigh the incentives offered for helping homeowners.

As of now, approximately 4.2 million properties have been foreclosed, and experts forecast that the total will come to 10 million by the end of 2012. According to the Mortgage Bankers Association, 5.4 million mortgages are currently delinquent or in the formal stages of foreclosure.

But this could become more severe. Experts estimate that 16 million borrowers owe more on their homes than those homes will bring in today’s market. In addition, one third of homeowners surveyed say they’ll simply walk away from their mortgages if values continue to fall.

The latest regulation directs banks to offer 12 months of forbearance for unemployed homeowners. Unfortunately, this regulation is also filled with loopholes that allow banks to ignore it. We can only hope that this time they will cooperate, since forbearance means postponing collection rather than forgiving balances due.

Is the solution more government programs? Not unless banks are required to participate.

Is the solution a halt to all government participation in the housing market – including both guarantees and incentives? Many believe so, but we’re not likely to find out.

Will the Banks Deliberately Intensify the Housing Crisis?

Thursday, July 21st, 2011

Financial analysts are now predicting that 25% of all U.S. mortgage holders have faced or will face foreclosure by the end of 2012.

Since banks are not in the business of owning property, these bank-owned homes have been and will be offered for sale. And while getting those properties to market has been slow due to paperwork backlogs, once they’re listed, the banks want them sold and they’ll drop prices to get it done. In fact, with each month that a bank-owned home stays on the market, the price is almost automatically reduced.

Now rumor has it that banks are lowering their minimum price threshold on these homes – and will go as low as needed to get them off the books. That’s not good news for the real estate market.

These bank owned homes (REO’s) have a negative effect on the housing market for three reasons:
•    Their condition and lack of exterior maintenance make nearby homes less desirable, and thus lower their values.
•    Buyers, seeing the lower prices and overlooking the differences in condition, expect to pay “REO prices” on well-maintained homes.
•    The low selling prices of bank-owned homes become the “comparables” used when appraising nearby homes.

This last item is the most dangerous, especially combined with reports coming in from appraisers working in the field.

Some underwriters are now refusing to accept appraisals that come in higher than the most recent selling prices of nearby homes – even if they were bank-owned homes in poor repair. Appraisers who point out the important value differences in maintenance and condition are told to disregard that difference.

Thus, some banks seem to be working both sides of the issue to further deepen the housing crisis and create even more downward pressure on home prices.

We can see a frightening long term affect as homeowners who must relocate  join the ranks of underwater homeowners who either short sell or walk away.  Those who aren’t forced to sell may well try to ride out the crisis – removing their well-maintained homes from the market.

Let’s hope that those underwriters who wish to keep prices down are in a minority, and that home prices are once again allowed to appreciate normally.

No More Credit Score Secrets

Thursday, July 14th, 2011

Lenders can no longer deny you credit or offer you credit at less than favorable rates without telling you why.

Starting on July 21, 2011, they’re required to provide you with a letter explaining the reason for their decision, and to include the credit score they used.

This law was enacted in cooperation between the Federal Reserve Board and the Federal Trade Commission in an effort to create more transparency in the lending market. And indeed, it will prevent disreputable credit issuers from falsely putting consumers into high-interest loans when their scores don’t warrant such treatment.

Still, it’s better to be prepared and to know your credit scores before you go shopping for a car, a student loan, a small business loan, or a credit card. Extra inquiries on your credit report serve to lower scores, so find out how you stand ahead of time.

You can access your own credit scores in several ways – and checking your own credit doesn’t count as an “inquiry” to lower your scores.

If you want to learn your FICO score, which is the one used by most lenders, you can go to and order your full credit report from either Equifax or TransUnion. This comes at a cost of about $20, and includes a report telling you the positive and negative factors that are affecting your credit score.

To get an approximation of your credit scores, you can use a free mobile application called myFICO that gives you a score based on your answers to questions. This one is not absolutely accurate, because you don’t give your Social Security number. That means anything negative that you don’t know about or don’t reveal won’t be considered.

For a score that’s very close to the FICO score but at no cost, make your request at a site such as Here you can get a full credit report with scores from all 3 bureaus. You’ll be signing up for monthly credit monitoring at a fee, but you can cancel before the first billing if you don’t want to pay for monitoring.

Lastly, if you belong to a credit union, you may be entitled to free access to your credit scores on a regular basis. Some banks also offer this service to preferred checking customers.

FHA Extends Mortgage Forbearance to 12 Months

Monday, July 11th, 2011

In yet another change to FHA regulations, the administration announced on July 7, 2011 that the minimum forbearance period for unemployed homeowners will be extended to 12 months, effective August 1. Servicers will have 60 days to implement the change.

This adjustment affects only FHA loans, however the administration intends to require all servicers participating in the Making Home Affordable Program to implement the same change.

This FHA Type 1 Special Forbearance is explained in MORTGAGEE LETTER 2002-17, dated August 29, 2002. Under its terms, a homeowner must show proof of unemployment and must be actively seeking a job. The borrower must be an owner occupant, committed to occupy the property as a primary residence during the term of the special forbearance agreement.

However, the borrower is not required to have a long-term commitment to the home. This  special forbearance may be used to reinstate a loan to facilitate the eventual sale.

While all FHA approved servicers are required to participate in FHA’s loss Mitigation Programs and must adhere to the new regulations, this program, like the Making Home Affordable programs, is not without loopholes.

Note that the Mortgagee Letter states that the lender must exercise “good business judgment in determining that the borrower has the capacity to resume full monthly payments, and eventually reinstate the loan under the terms of the plan.”

Even the July 7 announcement states that this extension will be granted to eligible unemployed homeowners, “whenever possible subject to investor and regulator guidance for each mortgage loan.”

In other words, servicers must comply – perhaps.

At the end of the forbearance period, servicers will be required to conduct a review to evaluate the borrower for additional foreclosure assistance programs. If the borrower doesn’t qualify, the servicer must provide the reason why and give the borrower at least 7 days to submit additional information that may reverse the decision.

Forbearance doesn’t equal forgiveness or debt reduction.

During a forbearance period, the homeowner may or may not be expected to make reduced monthly payments. If payments are required and are not made, the agreement will end.

Meanwhile, all those principal, interest, tax and insurance payments that are not being paid in full will be added to the principal balance of the loan. These will be repaid over time when the homeowner is once again working and able to make payments.

The real saving grace is that while interest will accrue, the lender may not assess late fees during the forbearance period, nor may it proceed with a foreclosure. And, since the homeowner is not required to make a long-term commitment to the house, forbearance can give them the necessary time to get the house on the market and sold without threat of an impending foreclosure.

Little-known Program Eliminates Gift Letter Red Tape

Thursday, July 7th, 2011

You know about Bridal Registries at department stores, but have you ever heard of a Bridal Registry Account at a bank?

Under this little-known FHA program, a couple planning to marry can set up a Bridal Registry Savings Account at their own bank and use it to gather funds for the down payment on their FHA mortgage loan.

Instead of buying traditional wedding gifts, well-wishers can make deposits to the Bridal Registry Account. And they can do so without going through the red tape of writing gift letters, proving where they got the funds, etc. In addition, newlyweds who receive cash gifts can make the deposits themselves – without having to verify where those funds originated.

And it gets even better. The gift account is not limited just to couples who intend to marry, but according to an official HUD document, is “available for other situations where gifts are typically received by an individual or individuals.”

Graduation comes to mind. How about milestone anniversaries?

Bridal Registry funds do not have to be used for a down payment, and when they are, there is no requirement that the couple be married prior to the house purchase – or ever.

What are the requirements?

•    Open a savings account and name it “Bridal Registry Account” (or graduation, etc.)
•    Give friends and family banking information so they can make deposits.
•    No one with an interest in the purchase is allowed to participate – your real estate agent, for instance, may not deposit.
•    You provide your lender with bank statements showing the gift deposits.

In addition to FHA, some banks allow Bridal Registry Accounts for their conventional loans. In fact, banks were actually offering this plan before FHA added it.

So if you’re going conventional, check with your bank. You may also be able to use this program.

Here’s what is most surprising about the Bridal Registry program: It’s been in effect since 1996. Yet no one talks about it, or informs couples that it’s available. Neither FHA nor the banks advertise it – and few loan officers have ever heard of it.

Credit Scores: Your Right to Know

Wednesday, July 6th, 2011

On July 21 a new rule will go into effect that requires lenders to tell you your credit score if they deny you credit. Prior to this rule, only mortgage applicants have been entitled to know the credit scores which led to a credit decision.

Now the rule will extend to credit cards, auto loans, student loans, etc. – but only if you are turned down for credit or approved at less than the best rates. In this case,  the credit issuer must provide you with a free copy of the credit score used as a basis for the decision.

You’re also entitled to a free score if your credit issuer decides to raise your interest rate or reduce your credit line based on your credit scores.

In addition, if you’re turned down for tenancy or required to pay several months rent in advance, your landlord must provide you with the score they used – but only if they used scores that a lender could use to underwrite a loan or some form of credit.

Some scores don’t fall under the rule.

What other kinds of scores are there? Dozens, actually. Among them are “utility” scores used to determine whether you’ll pay a security deposit to your utility company. Another is the “insurance score” used to determine the rates you pay for coverage – or if you’ll even get coverage.

These companies are not required to reveal the scores they used in their decision making unless they use the FICO or VantageScore.

What are you entitled to know?

If you’re denied credit or issued credit at inferior terms, you’ll receive a free score through a notice from the lender.

This notice must include basic information such as the date the score was created, who provided the score, the major factors that are damaging your score, where you rank nationally, and the range of possible credit scores.

Providing the range is important in understanding your financial position, because a 750 score with FICO is good, while a 750 with VantageScore is not. FICO scores range from 300 to 850, while Vantage Scores range from 501 to 990.

Finally, the credit issuer must provide you with information on how to get a complete copy of your credit report.

This new rule could be important to you.

In the past, some unsavory car dealerships have used the excuse of poor credit scores to over-charge consumers on interest rates. Because they didn’t have to reveal the credit scores used, they were able to mislead thousands of consumers who paid the price because they needed the car.

Who is Looking at Your Credit Report?

Tuesday, July 5th, 2011

You probably know that lenders and credit card issuers want to look at your credit report. You might even know that car insurance companies are interested in your credit score, and negative items in your credit file can mean a higher insurance premium. However, you might be surprised at some of the others interested in looking at your credit report.

Potential Employers

More potential employers are interested in looking at your credit report. While they aren’t supposed to check your credit score, they can get a copy of your credit report with your permission. An employer may want to check your credit report if you are applying for a position of trust with money; credit problems might indicate that you are willing to embezzle to solve money woes. Similarly, some companies that deal with sensitive and proprietary information might want to peek at your credit report to make sure there is nothing in there that indicates that you might be susceptible to bribes.

Even if you don’t think that the position you are applying for is sensitive, some employers believe that your credit habits can provide insight into how you might perform on the job. It may not be fair, but your credit report is an increasingly popular indication of your general character.

Cell Phone and TV Service Providers

In some cases, your cell phone provider or TV service provider might be interested in checking your credit history. A service provider might look at your credit score, or check through your credit report. In some cases, if you have a very poor credit history, you might not be approved for a monthly plan for services. You may have to pay ahead of time, rather than paying after a month of services.


Another group interested in your credit habits is landlords. Some landlords are becoming quite picky about tenant, requiring a credit check before approving move-ins. Some landlords don’t want to worry about whether or not they will have to be after you constantly to pay rent as you should – or worry about you skipping out. You might not be allowed to rent in an area that you prefer, or you may have to pay a larger security deposit to help protect the landlord from what you might do.

Bottom Line

Your credit report is increasingly becoming a way for others to assess what sort of financial risk you might present to service providers. Your credit habits can be an indicator of how you might deal with credit, or how responsible you might be with money, in the future. This means that your employer, landlord or cell phone service provider has an interest in knowing how likely you are to miss payments or be late with your obligations. It may not be fair, especially if you are trying to rebuild your credit, but that is the way matters are headed. As a result, it is vital that you improve your credit report by making on time payments and reducing your debt.

Pinyo is the owner of Moolanomy Personal Finance and has written for online publications, including American Express Currency and U.S. News Money. You can follow him on Facebook and Twitter.

Maxing out the Federal Credit Card

Tuesday, July 5th, 2011

I freely admit to not knowing the gory details of how federal government appropriations and spending go, but the claim that not increasing the debt ceiling will mean “default” seems to me to be pure demagoguery. The argument being made most often is that without being able to borrow more we won’t be able to have the resources we need to pay interest and principal on existing debt.  But is that really true?

Not being able to borrow any more does not mean that the income (or wealth) isn’t there to pay interest on existing debt.  Think about a typical household for a moment.   Suppose you have several credit cards, all but one of which are at their maximums.  Now you max out the last one and none of the card providers is willing to increase your credit limit.  What does this mean for you?  One thing and one thing only:  you can’t borrow any additional money.  It does not, by itself, mean that you will default on that or the other credit cards.

What it does mean is that if you can’t borrow more and you have debt and interest payments you must make, then you must either a) find additional income; b) liquidate some assets; and/or c) reduce expenditures elsewhere to ensure you can make those payments.  Those are the options facing you.  The only way to argue that you will be in “default” and unable to pay your debts is you refuse to make a choice among those options.

The situation facing the federal government is analogous.  If the debt limit isn’t raised, Congress must pick one of those three options.  I want to focus on spending reductions because those are the one they can most easily control.  It’s true that there’s a federal budget they must live within, but why can’t funds that are allocated for specific expenditures be re-allocated toward principal and interest payments on the debt?  If our imagined household suddenly can’t borrow more, it could just take some money that it was planning to use to buy that LCD TV and use it to pay the credit card minimums.

There’s no non-political reason that the government can’t do the same by taking funds from budget allocations and re-route them to pay interest and principal. As far as I know there’s no legal reason Congress couldn’t say “we don’t need those new bombers we were going to buy, so let’s shift those funds to interest payments?”

Doing so may not be politically easy, but to say that not raising the debt limit will lead to default is just another way of saying that politicians refuse to make the difficult choices that households make all the time.  And turning that into claims of financial apocalypse is indeed pure demagoguery.


Steven Horwitz

Charles A. Dana Professor of Economics

St. Lawrence University

Disclaimer: This information has been compiled and provided by as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.