In an historic development the willingness of the United States government to fulfill financial obligations has been called into question by a major ratings agency due to “political risks” and a “rising debt burden.”

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” said the S&P in a statement. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options.”

A lower credit rating could impact mortgage loans, auto financing, and the cost and ability of the federal government to borrow money.

Standard & Poors Drops US Credit Rating is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, credit, financing, loan, mortgage, rating, Standard & Poors, tax

The usual answer is a fat “no” after which comes a discussion of foreclosures, diving credit scores, ugly credit reports, deficiency judgments, loan denials and higher interest costs for mortgage loans and automobile financing.

And yet there’s a strange and somewhat logical theory floating around that not paying a mortgage could be a plus. The “excess liquidity theory” works like this: If you don’t pay your mortgage you’ll be foreclosed, but for a few months at least you’ll have lots more cash — money that can be used to live better and pay off other debts, such as credit cards and auto loans.

Mortgage lenders aren’t thrilled with the excess liquidity theory — and in no case should anyone expect a lower mortgage quote, a better credit score or think that foreclosure is a joy — but there may actually be some truth to the idea of better personal cashflow.

Timing

The foreclosure process has slowed to a crawl. RealtyTrac reports that nationwide it now takes an average of 400 days to process a foreclosure from initial default to the loss of a home — and better than 900 days in New York and New Jersey.

In other words, home loan borrowers might have months if not several years to live without mortgage payments before they’re tossed out on the street. During that time they’ll still want to have a car and use a credit card so those payments will be made.

New Study

Now, a new study by TransUnion finds that auto and credit card delinquencies are less likely among those who are paying all of their bills except for their mortgage.

Looking at this information, TransUnion says:

The study did not find any strong evidence supporting the widely accepted “excess liquidity theory,” which suggests consumers who stopped paying their mortgage loans during the recent recession had an increased cash flow in the short term, and therefore could repay other debts. In fact, consumers in the foreclosure process performed similarly, if not better, on certain accounts when they opened them further in the foreclosure process.

“There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit. “This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.”

Additional evidence suggesting the “excess liquidity theory” was not in effect during the recession was witnessed when comparing consumers who were 120 days past due on their mortgages, but opened new auto loans at various times after their delinquency. The percentage of consumers delinquent on those auto loans decreased as more time passed.

A Different View

I disagree. Looking at the same chart it seems very clear that people in the midst of a mortgage default are more likely to make other payments, thus proving the excess liquidity theory. This is NOT to recommend a mortgage default, merely to consider how people behave in such circumstances.

What do you think?

Is it good not to pay your mortgage loan? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, credit, credit card, credit report, credit score, default, excess liquidity theory, foreclosure, loan, mortgage, payment, skip

FICO Labs, part of Fair Isaac, the company closely associated with development of the credit score concept, says it has created a mathematical model which has “the ability to identify borrowers who are over 100 times more likely to default strategically than others.”

“FICO Labs researchers,” says the company, “have found that, as a group, strategic defaulters tend to be more savvy managers of their credit than the general population, with higher FICO Scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This indicates that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.”

Forgive me, but does this not also sound like the decisions of someone with sane financial practices? And don’t people who handle credit well, by definition, handle credit differently than distressed borrowers, people who have lost their jobs, gotten divorced, had an auto accident or faced a health emergency?

Among current borrowers — those not delinquent on any loans — FICO says:

• “The riskiest borrowers were found to be 110 times more likely to commit a strategic default than the least risky borrowers.
• “The riskiest 20 percent of borrowers included 67 percent of those who later committed strategic default. In other words, a servicer could reach two-thirds of those who would commit strategic default by targeting just 20 percent of its borrowers.”

According to TransUnion, “the percentage of consumers current on their credit card payments and delinquent on their mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008 (Q1 2008). Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once the recession had concluded, this has not been the case.”

“The reversal of the traditional payment hierarchy was driven in large part by home value depreciation and rising unemployment, both of which speak to consumer willingness and ability to pay their mortgages versus their credit cards. Home value concerns and stubbornly high unemployment continue to drive this dynamic, though the decline in the number of consumers delinquent on mortgages and current on credit cards may be a sign that the divergence in the payment hierarchy has peaked,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit.

Consequences

None of this amazing.

Think of the consequences associated with various types of non-payment.

1. You don’t make an auto payment and in the middle of the night a large person from the finance company hot-wires your car and you can’t get to work the next day.
2. You don’t make a credit card payment and your credit is cut off. Suddenly you can’t get food.
3. You don’t make your mortgage payment, and, well, in many cases nothing happens for months.

Hawaii

To understand why imagine that you live in Hawaii. You don’t pay your mortgage for three months. The lender files to foreclose. Do you instantly lose your home? Not hardly. According to RealtyTrac the typical Hawaiian foreclosure takes 11 months. That’s 14 months of mortgage-free living.

Soon however, Hawaii foreclosures will take longer. Why? The state House has approved HB 894, a bill that would extend the foreclosure process by five months — and the vote was 50 to 1.

The argument here is NOT that anyone should purposely or willfully default on their mortgage, rather it’s the observation that one should hardly be surprised that a growing number of homeowners are changing their financial attitudes. You just don’t need a mathematical model to see that.

Consumers with bad credit have a tough time getting loans and now, perhaps, people with good credit will also have a tough time because a large number of walk-away homeowners also have good credit. This is like saying we should be suspicious of people who drink milk because — statistically — as children a majority of bank robbers drank the stuff.

Can We Predict Mortgage Loan Walk-Aways? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, credit, credit card, Fair Isaac, loan, mortgage, payment, strategic, walk-away

The government is now trying to stop this problem by requiring lenders to get necessary paperwork up front. This is a smart idea — and it also leads to an important point: Borrowers always want to know what paperwork they’ll need for a loan application so here’s a quick and handy list.

Consumer Debts

You plainly need a list with account numbers, current balances and required monthly payments for all debts, including but not limited to student debts, car loans, credit cards and other outstanding obligations.

Assets

You must show all assets including but not limited to savings accounts, mutual funds, stock, partnership interests, real estate and other assets.

Income

Below is the income documentation list that HUD is requiring for borrowers who are seeking to avoid foreclosure through the government’s making Home Affordable program. While the requirements below may not work for every lender, the list is an excellent start and shows what lenders are likely to require when you apply for a mortgage.

Employment Income

Copies of two recent pay stubs, not more than 90 days old at time of submission, indicating year-to-date earnings.

a. Servicers may accept pay stubs that are not consecutive if, in the business judgment of the servicer, it is evident that the borrower’s income has been accurately established.

b. When two pay stubs indicate different periodic income, servicers may use year-to-date earnings to determine the average periodic income, and account for any nonperiodic income reflected in either of the pay stubs.

c. When verifying annualized income based on the year-to-date earnings reflected on pay stubs, servicers may, in their business judgment, make adjustments when it is likely that sources of additional income (bonus, commissions, etc.) are not likely to continue.

Self-employment Income

The most recent quarterly or year-to-date profit and loss statement for each self-employed borrower. Audited financial statements are not required.

Other earned income (e.g., bonus, commission, fee, housing allowance, tips, overtime)

Reliable third party documentation describing the nature of the income (e.g. an employment contract or printouts documenting tip income).

Benefit Income (e.g., social security, disability, death benefits, pension, public assistance, adoption assistance.

Evidence of:

(i) the amount and frequency of the benefits such as letters, exhibits, a disability policy or benefits statement from the provider, and

(ii) receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If a benefits statement is not available, servicers may rely only on receipt of payment evidence, if it is clear that the borrower is entitlement is ongoing.

Unemployment Benefits

Evidence of the amount, frequency and duration of the benefits (usually obtained through a monetary determination letter). The unemployment income must continue for at least nine months from the date of the application. The duration of benefit eligibility — including federal and state extensions — may be evidenced by a screenshot or printout from the Department of Labor UI benefit tool, which is available at http://www.ows.doleta.gov/unemploy/ben_entitle.asp.

Rental income

Rental income is generally documented through the Schedule E –Supplemental Income and Loss, for the most recent tax year.

a. When Schedule E is not available to document rental income because the property was not previously rented, servicers may accept a current lease agreement and bank statements or cancelled rent checks.

b. If the borrower is using income from the rental of a portion of the borrower’s principal residence, the income may be calculated at 75 percent of the monthly gross rental income, with the remaining 25 percent considered vacancy loss and maintenance expense.

c. If the borrower is using rental income from properties other than the borrower’s principal residence, the income to be calculated for HAMP purposes should be 75 percent of the monthly gross rental income, reduced by the monthly debt service on the property (i.e., principal, interest, taxes, insurance, including mortgage insurance, and association fees, if applicable.

Alimony, Separation Maintenance, and Child Support Income

Borrowers are not required to use alimony, separation maintenance or child support income to qualify for HAMP. However, if the borrower chooses to provide this income, it should be documented with:

(i) copies of the divorce decree, separation agreement or other legal written agreement filed with a court, or a court decree that provides for the payment of alimony or child support and states the amount of the award and the period of time over which it will be received, and

(ii) evidence of receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If the borrower voluntarily provides such income, and that income renders the borrower ineligible for a HAMP offer, the servicer is allowed to remove that income from consideration and re-evaluate the borrower for HAMP eligibility.

20% Threshold for Passive and Non-Wage Income

Notwithstanding the foregoing, passive and non-wage income (including rental, part-time employment, bonus/tip, investment and benefit income) does not have to be documented if the borrower declares such income and it constitutes less than 20% of the borrower’s total income.

Non-Borrower Income

Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if, in the servicer’s business judgment, that the income reasonably can continue to be relied upon to support the mortgage payment. Non-borrower household income included in the monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower’s income.

Association Fees

If a borrower has indicated that there are association fees, but has not been able to provide written documentation to verify the fees, the servicer may rely on the information provided by the borrower if the servicer has made reasonable efforts to obtain the association fee information in writing.

What Paperwork Do You Need To Get A Mortgage? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, assets, auto, car, credit cards, debts, documentation, foreclosure, HUD, income, loans, Making Home Affordable, mortgage, paperwork, payments, stock, student

Consider the streets of Rome, many of which are old, narrow and filled with motor scooters, motorcycles, and tiny cars powered by gasoline at $9.90 a gallon.

By “small” cars I do not mean what we in the U.S. think of as compacts. Think smaller. Much smaller. How about a car that’s less than nine feet long overall, seats two — and gets 60 miles per gallon in town and 75 on the highway?

I suspect the first reaction to such cars is that while the gas mileage is great, they’re simply too small for U.S. roads. It’s not true. In Italy you routinely see tiny cars on the Autostrada, the equivalent of our interstate highways, and while small vehicles are surely not the fastest cars on the road, they’re fast enough and get where they’re going, fast enough to breach most U.S. speed limits. As to safety, you wouldn’t want to get hit by a truck in a small car — but then you wouldn’t want to get hit by a truck in an SUV, either.

Look at how you use your car. How many trips to the mall require a six-passenger vehicle? How many commutes are made by individual drivers? How will your lifestyle change when gas tops $50 a barrel?

The inevitable fact is that limited oil production, transportation and refining capacity will cause gasoline prices to rise. As higher prices become the norm, consumers will look for ways to avoid massive gas bills. Small cars will be coming to your town — and it’s a good thing because the case for small cars is overwhelming.

• Being small, they’re cheap to buy.
• Getting great gas mileage, they’re cheap to own.
• Small cars come in two-seat and four-seat models and even as mini station wagons. There are also three-wheel trucks for city deliveries. With three wheels you can park just about anywhere.

In terms of real estate, with small cars a garage can hold a vehicle (and maybe two in a space measuring 12 x 22 feet) and still have room for tons of storage. It will be easier to buy a home because less income will go for transportation and car debt. Many households will inevitably have a “fleet” of cars — small ones for everyday driving and a big one for trips or major hauling. Builders, in turn, will change home designs to accommodate small vehicles. The cost to heat and air condition houses in some areas will decline because there will be reduced oil demand.

No less important, we are soon to get small cars for the very simple reason that such vehicles are in the national interest. If our domestic car fleet got 35 miles per gallon, oil prices would plunge with reduced demand, less money would go overseas (thus protecting the value of the dollar) and we would be less dependent on oil-producing nations — some of which are politically unstable, grossly undemocratic and utterly hostile.

The need for smaller cars is hardly new. Go to a historic auto rally and you can see that today’s vehicles are minuscule when compared with the behemoths we produced in the 1960s. We’ve shrunk vehicles before and we can do it again.

Jimmy Carter said in 1977 that higher energy costs were the “moral equivalent of war.” The tragedy of Carter’s statement is that it was largely ignored. We went small, but not small enough. We downsized, but then vans and SUVs came into the picture. With the price of oil now rising, small is no longer an option, it’s inevitable and it will change the way we drive — and the way we live.

————————
Published originally by Realty Times on August 24, 2004 and posted with permission.

Looking Toward A Smaller Future is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, car, garage, gas, mortgage, oil, price, pump, real estate, Rome, small, smaller

Answer: Yes.

You MUST tell lenders about all outstanding debt and payments. In the case of an auto loan or other installment debt, some loan programs will not count the debt against qualifying ratios if there are only six to ten payments remaining.

Please speak with lenders for details.

Can Mortgage Lenders Ignore My Monthly Auto Costs? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, car, exception, months, mortgage, payments, qualification

You MUST, of course, report auto debt and all debts when making a mortgage application. The decision regarding how to count such debt depends on the qualification standards for individual loan programs.

Speak with lenders for details.

Can Car Payments Reduce My Home Buying Ability? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, auto, car, mortgage, payments, qualification, qualify