Bankruptcy Questions Answered

Better Consumer Protections for Mortgage Borrowers on the Horizon?

A recent report from CreditBloggers indicates that the Consumer Financial Protection Bureau (CFPB), the new government body created by the Obama administration to improve consumer protections in the United States, plans to create an easy-to-understand tool that will allow potential homeowners to compare the terms of various mortgage loans with greater ease.

Here’s a look at some of the details.

Easier-to-Understand Mortgage Documents and More

• More transparency in lending: According to a press release from the CFPB, the organization plans to join forces with state enforcers and banks to improve transparency in lending tools such as mortgage documents, student loans and payday loans. The goal of this partnership is to better equip consumers with the tools needed to understand loans before they take on such burdens.
• Clarification of mortgage options: One of the CFPB’s specific goals is to provide consumers with an easy-to-understand comparison sheet for mortgage loans. The current forms, apparently, include too much legal and technical jargon and provide little illumination for the average consumer.

So what might this mean for consumers, once the CFPB produces documents to facilitate various borrowing experiences?

Improved Understanding of Consumer Risk

The goal, it seems, is to put consumers in a position of power when they’re making decisions about their finances. Ultimately, services from the CFPB might include:

• Better disclosures on student lending forms: Most student loans are not dischargeable in bankruptcy, but students continue to regularly take on tens and even hundreds of thousands of dollars in debt in order to get a bachelor’s degree. Improved disclosures, explanations and estimates post-graduation earnings could help young students make more reasonable borrowing decisions.
• Tighter restrictions (or clearer terms) at payday loan stores: While some state laws have banned or greatly restricted the practice of payday lending, in much of the country payday lenders still thrive. The CFPB has announced that it plans to play a role in changing the face of payday lending so that it is less alluring and expensive for already struggling consumers.
• Clearer comparisons of mortgage offers: As stated above, more direct methods of explaining and comparing mortgages could potentially save consumers from taking on toxic debt.

Because the financial turmoil we’ve been dealing with for the last few years has had unarguably negative effects on the lives and livelihoods of millions of citizens, it’s refreshing to see the potential for some good (in the form of increased consumer protections) to come out of the bad.

The CFPB is still a fairly new organization; as it matures and extends its reach, it should be making important changes for consumers across the country.

Posted in Bankruptcy and Predatory Lending, Consumer Protection, Financial Literacy, Mortgages, Student Loans, payday loans | Comments Off

SEC Proposes Tighter Regulation of Asset-Backed Securities

The Securities and Exchange Commission (SEC) announced that it has proposed new rules to govern the field of bonds backed by consumer loans, perhaps best known in its incarnation of mortgage-backed securities sold during the subprime housing boom.

Background: What They Are, How They Work

So, what might this mean for borrowers and investors? Here’s a little background on asset-backed securities and what they do.

• Consumer loans: When you and other ordinary Americans take out mortgages and other loans, you go through a bank or other lender. When the loan is originated, that lender "holds your debt."
• Loan bundling: It has become common practice to "bundle" consumer loans (especially mortgages), which means to lump them together to sell off to investors. But, rather than selling off easy-to-trace sections of the bundle, many banks sell off sections composed of various loans. These sections are the securities.
• Asset backed securities: Because the securities theoretically earn money when consumers make payments on their loans, they’re known as "asset-backed securities."
• Bond ratings: During the subprime boom, credit agencies gave various asset-backed securities risk evaluations to help guide investors: high-risk securities had the potential to yield more money, but with a greater risk of consumers not paying. Lower-risk securities offered a lower earning potential, but with more security for investors.

Naturally, the system works well assuming everyone does what they’re supposed to: banks issue loans consumers can afford, credit agencies give honest ratings, consumers make regular payments, etc.

But, as we know from the collapse of the subprime market, that’s not necessarily how the system works in practice.

The Proposed Rules

The SEC’s proposed changes would essentially take out the role of the credit agencies. Rather than have credit agencies rate loans, bond issuers themselves would be required to:

• Keep larger portions of loans on their books, thus giving them an increased stake
• Provide regular reports on the exact loans that compose a bond
• Guarantee the risk level of their products

If these changes pass, it’s expected that they’ll help prevent a repeat of many of the problems that caused the subprime bubble to expand and burst.

Additional Resources

SEC Proposal on Asset-Backed Securities (PDF)

Posted in Credit and Bankruptcy, Mortgages, SEC, securities, subprime lending | Comments Off

Stricter Mortgage Lending Regulations Implemented

As many people now know, the current recession was touched off by the collapse of the real estate market, which ballooned out of control in the mid-2000s.

Now, according to CBS News, mortgage lenders have learned a tough lesson and are changing the way they do business. Here’s a look at some notable changes and why they’re cropping up.

Big-Time Losses

During the subprime lending boom, many lenders (including big players like Fannie Mae and Freddie Mac) offered high- or variable-interest loans, no-down-payment loans, and other types of loans that people were unlikely to pay off easily.

Now, many of those loans have gone bad, meaning that the borrowers were unable to make payments and the houses in question have gone into foreclosure. Lenders are thus writing off (that is, accepting as lost) billions of dollars in bad debts – and they have to do something about it.

• Credit score requirement: In the era of subprime lending, people with low credit scores were often specifically targeted for high-interest loans. Now, according to sources, Fannie Mae will not issue loans to anyone whose FICO credit score is below 620.
• Equity requirement: If you’re looking to refinance your current home loan, lenders now require you to have some equity (that is, some amount of the principal paid off) in your original loan.
• Down payment a must: In the olden days, buying a house without a down payment was unheard of; the subprime lending "innovations," though, introduced loans with no down payment required. Major lenders, it seems, are returning to the traditional wisdom that you must pay a significant amount of money up front.
• Debt-to-income ratio consideration: Fannie Mae has also reportedly announced that it will not lend to anyone whose debt-to-income ratio rises beyond 45 percent – that is, in order to get a loan, you must not pay more than 45 percent of your monthly income on all debt payments (including car, credit card, student loan, etc.) combined.

So what does this mean for people thinking about buying a home? Basically, it means you need to be at the top of your game financially. You should be checking your credit report regularly and making sure you’re an attractive candidate to home lenders – and if you aren’t right now, it’s time to take steps to become one.

Additional Resources

Home Buying Brochure

Posted in Foreclosure, Mortgage Foreclosure, Mortgages, lending | Comments Off

One in Four Mortgages Underwater

Nearly one in four home mortgages are burdening borrowers with negative equity, an article by the Wall Street Journal reports.

Underwater mortgages find homeowners with declining home values to the point that they owe more on their mortgages than the home is worth.

The situation has hit new homeowners in the past few years, especially those who were paying interest-only mortgages as their home values declined.

However, this is no longer the case, as a whopping 23% of all home mortgages—10.7 million households— are underwater, according to real estate information company First American CoreLogic.

5.3 million of those homes are tied to mortgages worth least 20% more than the home's value.

The hardest hit states include Florida, Arizona and Nevada, where 65% of mortgages have negative equity—nearly three times the national average.

Negative equity can become a financial disaster for homeowners, especially if it means turning down a promotion or job transfer because they cannot sell their home.

The underwater crisis is intimately tied to foreclosures (a category also led by Nevada), as rising foreclosure rates can cause neighboring homes to lose value, and as some homeowners choose to simply stop paying on underwater mortgages, known as strategic default.

An estimated 588,000 borrowers defaulted on mortgages last year even though they could afford to pay, double the amount from 2007.

Posted in Foreclosure, Mortgage Foreclosure, Mortgages, Nevada, equity | Comments Off