Remember that one-bedroom pre-WWII house with 500 square feet of floor space on a small lot in Compton, CA that sold for $340,000 in 2007? It’s now on the market for $69,900, a price that somebody who doesn’t have enough money to move straight outta Compton might conceivably be able to afford.
A dump in Compton
Fortunately, the Obama Administration has promised to announce on Wednesday a comprehensive program to prevent housing prices from falling to affordable levels like this. Bubble Forever!
There is a great article on Harvard Business Review highlighting the rise in peer-to-peer lending. It is well worth a read in full:
With consumer credit still tight, peer-to-peer lending is on the rise. Why? For one thing, human society naturally evolves to create pools of capital with which to fund ideas and absorb risk. Roman legionnaires insured one another by swearing to care for the families of comrades lost in battle. The creation of the shared stock corporation allowed for bigger and bigger risks to be taken. Whenever people come together to create a pool of capital, the potential for wealth creation blossoms. For another, peer-to-peer lending is cheaper than consumer credit. Lending Club’s rate for the best credit risks is 7.88%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less.
Why now? First, the internet and social networks enable peer-to-peer interaction on an unprecedented scale. Second, electronic mechanisms for assessing potential customers are emerging. Lending Club starts with traditional credit scoring and adds a proprietary assessment of customers’ reputations within their social networks. You may think of Facebook as fun and games, but important underwriting information is hidden in there for those who know how to look. So what? A profound secondary effect of the down market will be an increase in the availability of peer-to-peer finance and its convergence with traditional lending. My bet is that mainstream investors and banks will cherry-pick the best investors in Lending Club and other systems – reducing risk by tapping their superior credit-assessment capabilities – and fund them to grant more and bigger loans. Moreover, within five years every major bank will probably have its own peer-to-peer lending network.
To read more, which I thoroughly recommend, click here.
A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. Credit worthiness is typically defined as the likelihood that an individual is going to pay their accounts, preferably on time. So lower your score, the more risk you pose to a lender, the more likely you are going to get a less favorable interest rate on a loan.
A credit score is primarily based on credit report information, sourced from credit bureaus (Experian, Transunion, and Equifax). While there are different ways of calculating a credit score, the most widely accepted method was developed by the Fair Isaac Corporation. If you plan on buying a home, you should be most interested in the FICO score. The three major credit bureaus also have their own scoring model that they have developed which are called Score Power, Plus Score, and Vantage Score. Since the bureaus have their own scoring model, your credit score varies somewhat across all three bureaus. They also tend to differ on what information they have on your report. For example, an error might show up on two reports but not the third. If a mortgage broker chooses to view these scores, they will always choose to base your rate on the middle of the three scores.
Did you know that as an American citizen, you are entitled to a free annual credit report by law?
The three credit bureaus run a website called www.annualcreditreport.com where you can obtain the report but not your score. This allows you access to your financial identity that lenders use to set interest rates. This free access to your report is not based on a FICO score.
Not buying a home? Your credit score follows you to other places too!
Your credit score is used in some of the most unlikely places. Your score is not just used for credit cards, auto loans, and home mortgages. If you want a mobile phone, good insurance rates and even a job, it would benefit you greatly to have a favorable credit score.
Credit Score Breakdown:
35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. The score is affected by how many accounts have been paid late, how many were sent out for collection and any bankruptcies. When this activity occurs also comes into play when defining credit history. The more recent the negative activity, the worse it will be for your overall score.
A great way to establish good credit history going forward is to setup autopay or automatic withdraw. Most places that bill you offer services that will automatically pull the amount due from a credit card or bank account. Just remember that if you use a credit card for autopay that you also setup autopay on your credit card account too to make sure that nothing is being paid late.
30 percent of the score is based on outstanding debt. If you currently own a home, car, and have credit cards, you most likely have some debt. Never max out credit cards or leave them open with no activity. The rule of thumb is to keep your card balances at 25 percent or less of their limits. A great way to see immediate raises in your credit score is to take care of credit cards first. Choose to pay down the credit card with the highest interest rate or the cards that you are late on payments. Another great financial tactic is to pay one extra house payment a year to your lender. On a typical 30 year loan, you will shave 8 years off the total and end up paying your home off in 22 rather than 30.
15 percent of the score is based on the length of time you’ve had credit. If you’ve just graduated from college, you most likely have a short credit history and are more risky to loan money. The longer you have established credit, the more likely a lender will loan you the money you need. This is based on open accounts and your credit score will not be able to take in account for anything that has been closed. Just remember that while you may have a longer credit history, if that history was full of negative things like late payments and collections it won’t matter how long of a credit history you have.
10 percent of the score is based on new credit. Typically your score will go down for awhile after you have opened up a new line of credit. The major factor of this percentage comes from inquiries. There are two types of inquiries; soft and hard. A soft inquiry does not affect the credit score and usually involves a quick glance at your score. A hard inquiry does lower your credit score and typically is a result of actions initiated by you in an effort to obtain credit. If you open 2 new credit card accounts, take out a private bank loan, and attempt to buy a new car, your score will go down…the good thing is that your score will rebound from these inquiries.
10 percent of the score is based on the types of credit you currently have. This category consists of 4 types of accounts:
Some types of accounts can really help you score as long as you are paying them on time such as a student loan, car loan, mortgage, and credit cards. If you have ever had a public records such as a bankruptcy, tax lien, or a collection, your credit score is going to be negatively affected. Beware of companies that claim that they can remove a bankruptcy or a collection off your credit report. These items will eventually not be detrimental to your credit score so time often is the best answer for dealing with these actions in your credit history.
A variety of evidence has long pointed toward minorities accounting for a disproportionate fraction of the defaulted subprime mortgage losses that set off the economic crash. This would hardly be surprising since the government pushed hard to increase lending to minorities of marginal creditworthiness in the name of increasing minority homeownership.
Of course, if you want to search for Bargain Network Homes it is currently free for a 7-day trial plus you get a $25 Wal-Mart gift card just for trying.
There is more at Steve Sailer’s blog
Scott Krager, a social lending enthusiast from Seattle, WA has created Uncrunch a pretty good suggestion for Uncrunching the credit crunch. He writes as follows:
The credit crunch currently crippling America’s economy is not due to a lack of available funds. It is caused by dysfunctioning credit markets and by the banks having adopted an overly conservative credit policy in the wake of the subprime meltdown. After very permissive lending practices for many years, the pendulum has now swung the other way.
But the money has not disappeared. The money is still there, with roughly $6 trillion currently sitting in deposits, CDs and savings accounts earning interest at 3% and not being lent out by the banks. This is enough money to get small businesses through the credit crisis, offer student loans to everyone who needs it and refinance half of all mortgages in America.
Our idea is simple: unlock these resources, enable the people who have the money to lend it directly to creditworthy people who need the money through a new (yet tested over the last couple of years) mechanism called social lending: people lending money to each other at fair interest rates. With this aim in mind, we have created Uncrunch America (www.uncrunch.org), to give us a chance to help each other out.
Several companies have already joined us in putting together the banking infrastructure necessary to make it happen (credit reporting, authentication, funds transfer, bank account verification, regulatory framework including lending licenses and SEC clearance, etc.) and have already committed to lend $1MM through Uncrunch America.
Our initial goal is to get 1 million people to participate (a small fraction of those watching the inauguration speech!) and our hope is that the US Government will help by matching funds lent by individuals through Uncrunch America. We believe this is a more efficient way to use the bailout funds because this directly encourages lending, and will help restart the credit markets — from the bottom up.
The scheme is supported by Lending Club where you can borrow up to $25,000. with rates as low as 7.88%.
According to Steve Sailer’s website, the top ten states with the highest average consumer credit ratings are found among the people of:
South Dakota 710
Minnesota 707
North Dakota 706
Vermont 706
Massachusetts 703
New Hampshire 703
Montana 701
Iowa 700
Wisconsin 699
Maine 699
In contrast, the ten populations with the worst average consumer credit scores are:
Texas 651
Nevada 655
Arizona 659
New Mexico 663
Louisiana 663
South Carolina 665
Oklahoma 666
North Carolina 667
Arkansas 668
Mississippi 668
California (672) and Florida (673) are closer to the bottom than than the top.
Texas largely escaped the mortgage meltdown due to low land prices and high oil prices, but this suggests there might be trouble in Texas ahead if oil stays around $40 per barrel.
A $200 dress? Or a relatively minor bump for your 401(k)? A years worth of Starbucks? Or £1,000 in your savings account? That is the question… There’s a bit of a debate brewing about the structure of Obama’s planned $825bn stimulus. Nobel-prize winning and ex-World Bank economist Joseph Stiglitz argues in today’s FT for instance that he is not a fan of the plan’s proposed tax cuts:
What is clear is that tax cuts will not help much. When Barack Obama, president-elect, last week proposed to use nearly 40 per cent of the stimulus for tax cuts, he was rightly told this would be less effective than, say, spending on infrastructure. It has been surprising, then, to see President George W. Bush’s former economic advisers, including Greg Mankiw, argue that tax cuts are the way forward. Mr Mankiw cites a recent study by Christina Romer and David Romer, economists at the University of California, Berkeley, who found that each dollar of tax cuts raises GDP by about $3 (€2.30). Such studies, based on past data, may have little to say about the situation the world now faces. Americans confronted with debt, shrinking retirement accounts, houses worth less than mortgages and a tough credit environment will save more of their money than in the past…
This, however, seems intuitively uncomfortable. If much of the current credit crisis was caused by over-leveraged consumers, then is spending really the right way out of it? The US savings rate was hovering around zero in recent years — even managing to go negative after Hurricane Katrina wrecked havoc in 2005. Stiglitz is clearly leaning towards a short-term economic boost — but he’s not unaware of America’s structural problems. From the transcript of his FT.com Video interview:
In the long run, we will have to address the problem of debt. In the short run, we have to get our economy going. If we don’t, the deficit will rise because tax revenues are going to fall. We are, to use that expression, between a rock and a hard place. We don’t spend the money, we have a big deficit. If we do spend the money, we have a big deficit. But if we do spend the money and it works and we spend it well, at least then there will be jobs and people will not face the hardship that they will face if we don’t spend the money.…… it will be many months before we see the light at the end of the tunnel. Almost surely at the end of 2009 GDP will be lower than it is now. Unemployment will be higher than it is now. So things may have turned around, but they will not have recovered. What worries me and what worries an increasing number of economists is, what happens in 2011? Do we emerge into a Japanese style malaise, or do we have a robust recovery? There’s every reason to believe that unless we don’t address some of the more fundamental problems facing the global economy and the American economy, it will be a Japanese style malaise. Because remember, what has sustained the American economy for the last five years? It’s been a consumption bubble sustained by a housing bubble. What we’re talking now is solving the problem of the credit crunch, but even after we solve that, we have the question, what will replace the housing bubble? Maybe another bubble, like we have the tech bubble, but that’s not a good answer.
New research shows borrowers with a weaker credit rating may now have to choose between six personal loans with rates of between 14 and 24 per cent and five loans charging between 50 and 70 per cent interest. Hugo Shaw, of the independent financial advisers Bestinvest, advised borrowers to protect their credit ratings. “If you need to borrow some money and you have anything other than a near perfect credit history it’s going to be expensive,” he said.
“The disparity between the direction of base rates and interest rates on unsecured loans makes clear companies are preying on those people whose finances are not in tip top condition. “
But before you apply for a mortgage, credit card or personal loan there are steps you can take to improve your credit status and encourage lenders to look more favourably at your application. Even those who consider that they have a good credit history should request a copy of their credit file to ensure that all information held on you is both accurate and up to date. Credit files are available for free from the credit agency Equifax, and should be checked regularly. There is another reason why borrowers should check their credit file regularly: to ensure that their details are not being used by a third party for identity theft. If you do spot discrepancies, alert the lenders concerned at the earliest opportunity.
The following tips should help.
In the United States, a credit score is a number based on a statistical analysis of a person’s credit files, that represents the creditworthiness of that person, which is the likelihood that the person will pay their bills. A Credit Score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax.
There are different methods of calculating credit scores. FICO, the most widely known type of credit score, is a credit score developed by Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. The credit bureaus all have their own credit scores: Equifax’s ScorePower, Experian’s PLUS score, and TransUnion’s credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models.
Americans are entitled to one free credit report within a 12-month period from each of the three credit bureaus but are not entitled to receive a free credit score. The three credit bureaus run their own sites, where users can get each of their free credit reports. Credit scores are available as an add-on feature of the report for a fee. Obtaining a free credit report or buying a credit score from the agencies has some disadvantages relative to alternative ways to obtain your report or score. If the consumer disputes an item on a credit report pulled using the free system, the credit bureaus, under the Fair Credit Reporting Act (FCRA) now have 45 days to investigate, rather than 30.
Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their FICO score directly from Credit Score 360. Credit scores (including FICO scores) are also made available for “free” through subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores for free one must use their credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge.
Under the FCRA, a consumer is entitled to a free credit report within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit rating. The FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.
Diane Shackle found it gut-wrenching to walk away from a mortgage she took out in times that were better for both her and the U.S. economy. But the reality was undeniable: While she was keeping up with the monthly payments, she said she could no longer afford to buy food for herself or even kitty litter for her two cats. So the 44-year-old cocktail waitress walked away from her two-bedroom condo in Southern California last July, turning her back on a debt of nearly $200,000.
“It ripped me up to do it, but I was tired of worrying and I had no food in the house,” said Shackle. “I decided, you know what, I’m not living like this. I’ve got to quit before I kill myself.”
Walking away from a mortgage has always been a homeowner’s last resort —- it flies in the face of the American dream. And experts say it should remain a worst-case scenario. But with the deepening economic crisis fast adding to the 12 million mortgages already “underwater” —- the term for when a home’s debt exceeds its market value —- it’s an option more are likely to consider as home prices continue to fall.
Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations. “You have to make the best decision for yourself, business-wise, which could be walking away from the house,” said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.
Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices. The practice also is known as “jingle mail,” referring to the borrower mailing the keys to the lender and surrendering the house. Bank of America Corp. brought the practice to light a year ago, reporting that a growing number of people who defaulted on their mortgages were current on their credit cards. This suggested that at least some saw bailing out on their houses as a way to gain control of their finances. Though statistics aren’t readily available on the number of mortgage walkers, a year later, Bank of America spokesman Terry Francisco acknowledges that the problem still exists and said it has been exacerbated by the housing market’s further decline.
“The billion-dollar question is, is it going to increase?” said Guy Cecala, publisher of the trade publication Inside Mortgage Finance, in Bethesda, Md. “We really don’t know the answer.”
Speculators who bought houses for investment purposes rather than to live in are the likeliest to do it, he suggested. Shackle doesn’t fit that category. The single, first-time home buyer bought a two-bedroom condo in Calimesa, Calif., in 2006 for $191,000. She wasn’t required to put any money down despite her limited income as a waitress, thanks to a lofty credit score of 788.
The financing consisted of two interest-only loans with initial rates of about 7 percent and 10 percent. Her monthly payment, including an escrow account for property taxes and insurance, was about $1,400 a month. That was manageable until she had serious problems with asthma and missed a lot of work.
Shackle was never late with a payment, she said. But after paying the bills she had no money left over to buy groceries, and lost nearly 50 pounds. Despite her pleas, she said she couldn’t get the lenders to refinance once the collapse of the housing market had slashed the home’s value to about $150,000. Suddenly it was no longer about an investment or the tax advantages of homeownership, it was about trying to survive the crush of bills.
“When you’re a homeowner you think, ‘OK, I’m going to go ahead and try to pay this off,’ ” she said. “But when I tried to get refinanced and everybody pretty much shut their door on me, I felt like I had no alternative.”
Rather than stop paying and wait to be foreclosed on, she sought help from You Walk Away, one of the companies that has emerged to address the growing number of underwater homeowners. The San Diego-based business counsels the homeowners to, as its Web site says, “take control of their financial future” by making a strategic decision to default if necessary.
Jon Maddux, principal and co-founder of You Walk Away, which charges $995 for consultations about a person’s rights regarding foreclosure, says his company doesn’t advocate jingle mail per se, but rather staying in the home as long as legally allowable until the bank takes it back. Underwater homeowners should exercise caution when signing up for any service that offers assistance, because consumer advocates say much of the advice can be found online or through non-profit agencies. Shackle moved out of the condo in July and rented an apartment for $750 a month. Foreclosure still hasn’t taken place. But without the burden of a mortgage gone bad, “I sleep a lot better,” she says.
About 1 in 6 of the nation’s 75 million homeowners are underwater, according to Moody’s Economy.com, and the total has doubled in a year. Their mortgage debt exceeds home equity by an average of $40,000. Half of these negative-equity homeowners owe more than 120 percent of their home’s value. Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.
“These anti-deficiency laws make a huge impact on foreclosure rates because they are basically ‘get out of jail free’ cards,” said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who’s writing a book on consumer bankruptcy and consumer credit.
This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways. The full list includes Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.
Donald Lampe, a Charlotte-based mortgage lending attorney with Womble Carlyle Sandridge & Rice, said the statutes generally prohibit or limit a lender’s ability to go after the borrower’s assets to satisfy the unpaid mortgage debt. “There are some folks suggesting that state anti-deficiency laws should be expanded around the country as a response to the “mortgage meltdown,” Lampe said. However, he noted, “It is difficult to see how these laws could be made to apply to loans already on the books.”
© 2010 A DebtAdvizor LLP Production. All Rights Reserved.