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

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Nope, I’m not selling anything. And please, don’t send any money. Instead, consider spending $25 or so with your checking account. Here’s why:

How Credit Scores Work

Your credit score is a reflection of the way you handle debt. It is NOT a measure of your income — rich people often have lousy credit and the poor can have great credit.

Fair Isaac, a major credit score developer, says on its MyFico site that there are five major considerations which go into determining a credit score.

1. Payment history — 35 percent
2. Amounts owed — 30 percent
3. Length of credit history — 15 percent
4. New credit — 10 percent
5. Types of credit used — 10 percent

The list above is like a credit scoring road map. It tells you that the greatest good comes from paying bills on time and in full. You get points for having credit that you don’t use — that is, if you have $10,000 in credit and use $3,000 that’s good, if you have $10,000 in credit and use $9,800 that’s bad. The longer you have accounts the better.

Credit Reports

An important point about credit scoring is that it reflects only the items shown on your credit report. For this reason it’s important to check your credit report to assure that all entries are factually correct and not out of date. Generally, items stay on a credit report for seven years but some items — such as a bankruptcy — stays on a credit report for 10 years.

You can get three copies of your credit report every 12 months, FREE, and without the need to purchase any kind of add-on service by going to AnnualCreditReport.com. If you go to this site every four months you will be able to check your credit status easily and without charge by using a different credit reporting service each time. This site has been, er, encouraged by the Federal Trade Commission and is worth looking at for credit report information.

The Real World

Credit scoring and credit reports reflect factual events — what you owe, when you pay, etc. The catch is that you are not always the master of your financial universe and the credit system does not reflect how credit events occur, especially negative ones.

Imagine that you pay bills with checks. You pay bills knowing that there’s a given balance in your checking account. But suppose one of your deposits bounces. As a result several of your checks are returned. You now have bank fees to pay AND you may have missed due dates for several bills. Those missed due dates can set off a separate bunch of late fees and charges, especially with credit cards.

In terms of credit reports this is not generally an problem. Why? Because credit reports only show items which are at least 30 days late. However, if the bounced check was big enough and remains unpaid for enough time it could impact your account for days if not weeks — and perhaps trigger a 30-day late.

A Credit Strategy

So, what to do? The answer works like this: Go to wherever you maintain your checking account — your bank, credit union or S&L — and get overdraft protection. This is essentially a line of credit attached to your checking account.

It will likely cost some money, say $25 a year, and the amount you can get will vary depending on your credit status and relationship with the depository institution.

If you then have a situation where a deposit to you bounces or a payment is delayed, any unexpected shortage in the account up to the limit of the line of credit will be instantly and automatically covered. This means no late charges for credit cards or mortgage payments, no bounced check fees from the bank, etc. You pay back the line of credit with interest as soon as the bounced check is covered or a payment to you is received. Because the line of credit advance is only outstanding a short time the interest cost is likely to be minimal.

Equally important, once you get a line of credit for your checking account be sure to never use it. Think of it as a life raft, something needed only if you’re drowning.

The result of having a line of credit for your checks is that you now have a new credit account — and you have credit that you’re not using. That should be very good for your credit score over time.

How To Raise Your Credit Score For $25 is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Credit & Underwriting Standards Tighten for VA Borrowers is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: credit, credit score, loan, mortgage, Notice of Value, NOV, underwriting, VA

Many of the items in the measure relate to mortgage loan financing. The summary below tells us part of the story — it does not tell us what was left out of the legislation and it says nothing about the specific exceptions and benefits buried in the text. (The last revision of the bill was 1,616 pages in length so you can bet there are plenty of goodies for various special interests. We’ll know more when the final text is published.)

Below is a list of inclusions in the bill, as reported by the Financial Services Committee.

Mortgage Reform

• Require Lenders Ensure a Borrower’s Ability to Repay: Establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Establishes
  Penalties for Irresponsible Lending: Lenders and mortgage brokers who don’t comply with new standards will be held accountable by consumers for as high as three-years of interest payments and damages plus attorney’s fees (if any). Protects borrowers against foreclosure for violations of these standards.
• Expands Consumer Protections for High-Cost Mortgages: Expands the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
• Requires Additional Disclosures for Consumers on Mortgages: Lenders must disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.

Related Changes

• Establishes a Consumer Financial Protection Bureau.
• Monitor Personal Financial Rating: Allows consumers free access to their credit score if their score negatively affects them in a financial transaction or a hiring decision. Gives consumers access to credit score disclosures as part of an adverse action and risk-based pricing notice.

New Mortgage Loan Protections Outlined in Wall Street Reform is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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New rules from the Federal Reserve will make it more difficult for lenders to charge overdraft fees — you’ll now have to opt-in to pay over-the-limit fees. This means lenders will have to get your agreement to charge you each time you overdraw your account.

OR

You can elect not to opt-in in which case you will simply not be able to borrow above your credit limit. This means if you go to a store, buy stuff, and don’t have enough credit you will be unable to complete your purchase.

This, after all, is the way it should be. If you have $20 in your wallet you can’t buy things worth $30.

Some lenders charge multiple over-draft fees and some charge fees which are many times the value of the overcharge — say a $39 fee for a $5 overcharge, or a string of four fees per day for each day the account is overdrawn.

The Bank of America has elected to drop the overdraft fees entirely and to simply say that your credit limit is your credit limit. Fair enough and good for BOA.

Mortgage Applications

The implications for mortgage applications are important. If there’s no ability to overdraw your credit card account you cannot face overdraft fees. No less important, you cannot have a negative item on credit reports as a result of an over-draft — and that means credit scores for many people might actually rise.

Two cautions: First, check your credit limit each month to assure that you will not be embarrassed at the check-out counter or in a restaurant.

Second, the Bank of America decision is a voluntary move — one that could be reversed in the future. Other lenders still seek to have you pay through the nose. For this reason it’s important to assure clarity in the credit system and that can be done most effectively by outlawing overdraft fees altogether.

Mortgage Qualifying Improved With Credit Card Change is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Answer: Credit scores can be seen as pictures which show your credit standing at one point in time. At any other point in time the picture may be different.

Actually, it would be amazing if credit scores did not change — that would suggest a total lack of financial activities, an unlikely situation.

What have you bought in the past month that would increase your credit debt? Have you missed a payment? Been at least 30 days late?

Or, by any chance has your credit card company reduced your credit limit? This could reduce your credit score. For instance, imagine that you owe $3,000 on a credit card with a $10,000 limit. You are using 30 percent of your available credit on that card. If the limit is reduced to $5,000 you are now using 60% of your available credit, and that higher percentage could lower your credit score.

If you’re buying a home, have a mortgage locked in and are waiting for settlement, do nothing that would change your financial picture. Why? Because just before closing the lender will again look at your credit report. If something has changed a red flag may go up. Thus, put off credit purchases until closing is finishing and the transfer of title has been added to local records.

Syndicated originally by Content That Works and posted with permission.

Credit Scores: Why Do The Numbers Change? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: change, Closing, credit score, late, lender, limit, mortgage

Given a higher score, it may be possible to borrow more, borrow with less down, borrow faster, or borrow with fewer paperwork requirements.

Credit scoring is relatively new and assumes that an individual’s credit information is correct. To get the best possible score, review credit reports several months before mortgage hunting to assure that all information is correct and timely. Once credit reports are checked (and corrected if necessary), avoid opening new credit accounts or taking on new debt until settlement is completed.

Free credit reports are available at AnnualCreditReport.com.

For additional information concerning credit scores, go to: MyFICO.com

What is credit scoring? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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