Tag Archives: mortgage

Bad Credit/Good Credit

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OppLoans quoted me in Bad Credit Loan Coming Attractions! It opens,

Everyone is talking about bad credit loans these days, and Hollywood seems to be taking notice. (Editor’s note: They’re not.) All the newest films are about bad credit lenders! (Editor’s note: They’re really not.)

With so many people wondering what their loan options are, we thought you might enjoy hearing about the hottest upcoming films that deal with bad credit loans, which we may or may not have made up entirely (Editor’s note: We did).

If you have a not-so-hot credit score and you’re worried about getting a loan, these upcoming blockbusters might help you figure out which bad credit loan works best for you.

THE INTEREST RATE DECEIT

Tammy is just an everyday woman who needs a loan for some car repairs. Unfortunately, her credit is quite low. She sees some advertisements for bad credit loans, and figures the safest choice would be to pick the one with the lowest interest rate.

But, spoiler alert, there’s a big twist! The loan she chose had so many fees, it ended up being more expensive than the loans that had higher interest rates. If only Tammy had made sure to compare the loans using their APR, or annual percentage rate—she might have met a better fate. The APR tells you the full cost of a loan, including interest and fees, so it’s the best way to avoid an unpleasant twist in your story.

David Reiss, a law professor and editor of REFinBLOG.com (@REFinBlog), gave us an example of why APR is so important: “It would help a potential borrower compare the cost of credit between one loan with a 5 percent interest rate and one with a 4 percent interest rate that charges a point at origination.”

In other words, a loan that charges a fee when you take it out could actually be just as expensive or more expensive than a loan with higher interest rates and no fees.

Impact on Consumers of Dodd-Frank Repeal

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TheStreet.com quoted me in What Would a Repeal of Dodd-Frank Mean to Consumers? It reads, in part,

With the political atmosphere unsettled at best, much of the current talk out of Washington, D.C. centers on unraveling the Dodd-Frank Act.

But what would such a move mean to the normal Main Street consumer?

“Consumers should not get too freaked out in the short term,” said David Reiss, a professor of law at the Brooklyn Law School. “The rollback is not going to happen overnight and we don’t yet know how far it will go.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010, as a response to the financial crisis the country saw in 2007 and 2008. However, with a new administration in the White House, some now see it as too restrictive to banks.

“Consumers should focus on the fundamentals — what are their short- and medium-term goals and how can they best achieve them?” Reiss said.

Reiss said homebuyers, for instance, should stay focused on identifying a home that is affordable for the long-term, and educate themselves about how mortgages work. And homeowners should evaluate whether their current mortgage is right for them — or should they refinancing with a mortgage that has a lower interest rate?

Repealing the act could affect more than mortgages, with many pointing to the credit card industry as being impacted the most. Ben Woolsey, president of CreditCardForum.com, said many of the protections afforded in Dodd-Frank were intended to roll back abusive practices by the financial services industry, often triggered when consumers occasionally strayed — such as by paying their card late or exceeding their credit limits. These consumer errors resulted in interest rate hikes and penalty fees.

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The good news likely is consumers still have time to prepare.
“People have plenty of time to act, but they should also not be putting off until tomorrow the things they should be doing today,” Reiss said. “We don’t know where interest rates are heading, so it makes sense to be on top of things while rates are still at historically low levels, notwithstanding the bump we saw after the election.”

Dodd-Frank Repeal Unappealing for Homeowners

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photo by Gage Skidmore

Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

Consumer Protection in Trouble under Trump

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photo by www.cafecredit.com

The Dallas News quoted me in Agency That Protects Consumers from Financial Scammers in Trouble under Trump. It reads, in part,

Last week I asked 100 people in an audience, “How many of you have heard of the U.S. Consumer Financial Protection Bureau?”

Only five people raised their hands.

I’m surprised. In the 240-year history of our nation, we never had a truly pro-consumer federal agency until five years ago. It’s working, but now we’re in danger of losing it.

If you use money or credit, take out loans, buy cars or pay on a mortgage, this bureau in Washington, D.C. is changing the way financial companies do business with you.

We might lose the bureau because big and small banks and other financial institutions hate it. They’re fighting it in court with lawsuits and with campaign contributions to members of Congress who will decide.

We might lose it because an area congressman, Rep. Jeb Hensarling, R-Dallas, is closer to achieving his goal of watering down the nation’s financial regulatory system — nicknamed Dodd-Frank.

Hensarling leads the House committee that gives thumbs up or down to financial bills. With that power in hand, he received more campaign donations from banks, insurance companies and the securities and investment industry than any other member of Congress, the nonpartisan Center for Responsive Politics says.

And we might lose the bureau because we have a president who, unlike the previous president, will not veto Hensarling’s pro-Wall Street bill – The Financial Choice Act — that would rip Dodd-Frank apart.

Remember that Dodd-Frank and the bureau came about after the 2008 financial meltdown. The bureau is part of the master plan to make sure it never happens again.

Accomplishments

If you haven’t heard of the U.S. Consumer Financial Protection Bureau, I’ll take part of the blame. Maybe The Watchdog hasn’t placed a big enough spotlight on it.

It was the bureau that revealed how Wells Fargo employees created two million fraudulent customer accounts. The bureau fined Wells Fargo $100 million.

The bureau worked to get $120 million in refunds for military families by policing improper practices with mortgages, credit cards, student loans and other financial products aimed at the military.

The bureau created rules that prevented lenders from approving risky home mortgage loans and charging hidden fees to home buyers.

The bureau forced credit card issuers to pay hundreds of millions of dollars back to consumers because of illegal practices, unfair billing and deceptive marketing.

The bureau went after crooked bill collectors, check cashers and credit repair services.

The bureau forced the three major credit bureaus to make it easier to submit corrections to inaccurate information on your credit report.

In sum, the scoreboard shows the bureau’s big number at $12 billion. That’s how much the bureau claims it has refunded to consumers or zeroed out when their invalid debts were canceled.

No wonder Wall Street, its golden boy Hensarling and the corps of dark-suited lobbyists want this darn thing rubbed out. Quickly.

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Back to Bad Loans?

One who has studied government regulation tells me that financial institutions have adapted to the new order. The rules tamed the craziness that led to financial ruin nine years ago, says David Reiss, a professor at Brooklyn Law School.

Eliminating the bureau would force “a return to the dark old days when lenders could get away” with shadowy marketing practices, Reiss says.

“If the Trump administration were to get rid of the Consumer Financial Protection Bureau, consumers would have to be far more cautious when dealing with lenders,” he says. “There definitely would be a return to some of the predatory and abusive behavior. No one would be looking over the lender’s shoulder.”

Housing Booms and Busts

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photo by Alex Brogan

Patricia McCoy and Susan Wachter have posted Why Cyclicality Matter to Access to Mortgage Credit to SSRN. The paper is now particularly relevant because of President Trump’s plan to roll back Dodd-Frank’s regulation of the financial markets, including the mortgage market. While McCoy and Wachter do not claim that Dodd-Frank solves the problem of cyclicality in the mortgage market, they do highlight how it reduces some of the worst excesses in that market. They make a persuasive case that more work needs to be done to reduce mortgage market cyclicality.

The abstract reads,

Virtually no attention has been paid to the problem of cyclicality in debates over access to mortgage credit, despite its importance as a driver of tight credit. Housing markets are prone to booms accompanied by bubbles in mortgage credit in which lenders cut underwriting standards, leading to elevated loan defaults. During downturns, these cycles artificially impede access to mortgage credit for underserved communities. During upswings, these cycles make homeownership unnecessarily precarious for many who attain it. This volatility exacerbates wealth and income disparities by ethnicity and race.

The boom-bust cycle must be addressed in order to assure healthy and sustainable access to credit for creditworthy borrowers. While the inherent cyclicality of the housing finance market cannot be fully eliminated, it can be mitigated to some extent. Mitigation is possible because housing market cycles are financed by and fueled by debt. Policymakers have begun to develop a suite of countercyclical tools to help iron out the peaks and troughs of the residential mortgage market. In this article, we discuss why access to credit is intrinsically linked to cyclicality and canvass possible techniques to modulate the extremes in those cycles.

McCoy and Wachter’s conclusions are worth heeding:

If homeownership is to attain solid footing, mitigating the cyclicality in the housing finance system will be imperative. That will require rooting out procyclical practices and requirements that fuel booms and busts. In their place, countercyclical measures must be instituted to modulate the highs and lows in the lending cycle. In the process, the goal is not to maximize homeownership per se; rather, it is to ensure that residential mortgages are made on safe and affordable terms.

*     *     *

Taming procyclicality in industry practices in housing finance is much farther behind and will require significantly more work. There is no easy fix for the procyclical effect of mortgage appraisals because appraisals are based on neighboring comparables. Similarly, procyclicality will require serious attention if the private-label securitization market returns. While the Dodd-Frank Act made modest reforms designed at curbing inflation of credit ratings, the issuer-pays system that drives grade inflation remains in place. Similarly, underpricing the risk of MBS and CDS will continue to be a problem in the absence of an effective short-selling mechanism and the effective identification of market-wide leverage. (34-35)

McCoy and Wachter offer a thoughtful overview of the risks that mortgage market cyclicality poses, but I am not optimistic that it will get a hearing in today’s Washington.  Maybe it will after the next bust.

No-Credit-Check Loan Red Flags

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photo by Rutger van Waveren

OppLoan quoted me in 6 No Credit Check Loan Red Flags. It opens,

Welp. A kid just threw a baseball through your window and ran away before you could get his parents’ information. Now you need a loan to fix it. But what if your credit score isn’t exactly a home run? What are you going to do now?

It’s a fact of modern life: a “good” credit score (a FICO score of 680 or higher) can make little financial emergencies like these much more bearable. Unfortunately, just over half of American consumers have weak or bad credit. According to credit expert David Hosterman of Castle and Cooke Mortgage (@CastleandCooke), “Customers with bad credit can have trouble financing a home, renting a home, obtaining credit cards, car loans, student loans, and more.” And it’s not a problem that goes away overnight. Hosterman says rebuilding credit can “sometimes take years to complete.”

So how can people with bad credit get a loan if an urgent need arises? One option is a “no credit check” loan. And if these loans sound too good to be true, it’s because they often are. Many “no credit check” loans are nothing more than financial traps designed to suck away as much of your paycheck as possible. Keep an eye out for these red flags before you end up in a very bad situation.

1. They Don’t Care About Your Income

Lenders see a bad credit rating and take it as a sign that a potential borrower might never pay them back. That’s why a good “no credit check” lender will make sure that you have a source of income—so they know they’ll get their money back eventually.

But not every “no credit check” lender will check your income. So how do they know you’ll pay it back? They don’t. In fact, it’s worse than that. They’re expecting you not to. Because if you can’t pay your loan in time, you’ll be forced to roll it over and pay an additional fee to extend it. These predatory practices are often associated with payday lenders, because you could end up having to turn over your paycheck as soon as you get it to pay back the loan. That doesn’t leave much money for luxuries like rent, so you could find yourself having to take out another loan or pay to extend the first one. This can easily trap you in a dangerous cycle, having to continually rollover your loan without any hope of paying it off. You want to avoid this situation at all costs.

2. Short Payment Terms

Any good lender wants you to have a real shot at actually paying back your loan in full. A bad lender, on the other hand, wants you to be trapped into rolling over your loans so that you can give them money forever. They’ll require you to pay back the entire loan, with interest, after only a few weeks—and sometimes less!

Instead, find a lender that will offer you an installment loan. David Bakke (@YourFinances101), a finance expert at MoneyCrashers.com, says that one of the main benefits of installment loans is that they “usually come with fixed interest rates, meaning that you know what your monthly payment is going to be.” A good “no credit check” lender will be certain that you have a source of income and then work with you to create a repayment plan that you can handle.

3. They Talk About Interest Rates Instead of APR

APR stands for Annual Percentage Rate. According to David Reiss (@REFinBlog), a law professor and editor of REFinBlog.com, the APR number shows the total cost of a loan, including fees and interest. Reiss points out that APRs allow potential borrowers to make an “apples-to-apples” comparison between loans. It gives you a full and clear picture of how expensive a loan really is. In other words, it’s a number that many “no credit check” lenders would prefer you never see.

They’d rather show you a basic interest rate, even though federal law requires APRs be used in most cases. Not only can that hide all sorts of fees, but it forces you to do some pretty complex math if you want to actually know how much you’ll be expected to pay. Friends never make friends do complex math problems, so if a lender isn’t talking in terms of APR, they’re likely not your friend.

Whither FHA Premiums?

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Various NBC News affiliates quoted me in What You Need To Know About Trump’s Reversal of the FHA Mortgage Insurance Rate Cut. It opens,

On his first day in office, President Donald Trump issued an executive order to undo a quarter-point decrease in Federal Housing Administration (FHA) mortgage insurance premiums. The rate decrease had been announced by the Obama administration shortly before Trump’s inauguration. Many congressional Republicans, including incoming Department of Housing and Urban Development Secretary Ben Carson, opposed the Obama administration’s rate cut because they worried that the FHA would not be able to maintain adequate cash reserves.

What does this mean for potential homebuyers going forward? We’ll explain in this post.

How FHA mortgage insurance premiums work

FHA-backed mortgages are popular among first-time homebuyers because borrowers can get a loan with as little as 3.5% down. However, in exchange for a lower down payment, borrowers are required to pay mortgage insurance premiums. Lower mortgage insurance premiums can make FHA mortgages more affordable, and help incentivize more first-time homebuyers to enter the housing market.

On January 9, 2016, outgoing HUD Secretary Julian Castro announced that the administration would reduce the annual mortgage insurance premiums borrowers pay when taking out FHA-backed home loans.

For most borrowers, the rate reduction would have meant mortgage insurance premiums decrease from 0.85% of the loan amount to 0.60%. The FHA estimated that the reduction, a quarter of one percentage point, would save homeowners an average of $500 per year.

To see how the numbers would compare, we ran two scenarios through an FHA Loan Calculator — once with the reduced MIP, and again with the higher rates.

Using the December 2016 median price for an existing home in the U.S. of $232,200 and assuming a 30-year loan, a down payment of 3.5%, and an interest rate of 3.750%, the difference in the monthly payment under the new and old rates would be as follows:

Monthly payment under the existing MIP rate: $1,213.27

Monthly payment with the reduced MIP rate: $1,166.98

Annual savings: $555.48

What the rate cut reversal means for consumers

This could be bad news for people who went under contract to buy a house using an FHA loan during the week of Trump’s inauguration. Those buyers could find that their estimated monthly payment has gone up.

Heather McRae, a loan officer at Chicago Financial Services, says Trump’s move was unfortunate. “A lower premium provides for a lower overall monthly payment,” she says. “For those homebuyers who are on the bubble, it could be the deciding factor in determining whether or not the person qualifies to purchase a new home.”

David Reiss, a law professor at the Center for Urban Business Entrepreneurship at Brooklyn Law School, says the change will have only a “modest negative impact” on a potential borrower’s ability to qualify for a loan.

To be clear, the fluctuating mortgage insurance premiums do not affect homeowners with existing loans. They do affect buyers in the process of buying a home using an FHA-backed loan, and anyone buying or refinancing with an FHA-backed mortgage loan in the future. Had the rate cut remained in effect, Mortgagee Letter 2017-01 would have applied to federally-backed mortgages with closing/disbursement dates of January 27, 2017, and later.

Reiss does not believe the rate reversal will have an impact on the housing market. “Given that the Obama premium cut had not yet taken effect,” he says, “it is unlikely that Trump’s action had much of an impact on home sales.”