“The inventory of new homes for sale is at a record low and there are many areas of the country that are approaching a housing shortage. Tight credit conditions are preventing builders from meeting this emerging demand, putting workers back on the job and helping the economy move forward.” according to the NAHB.

Really? So, for example, we should have higher loan limits for FHA loans? That would do a lot for housing demand. Only .75 percent of all FHA loans were for more than $500,000 as of mid-September. Even fewer borrowers need or want loans above $625,500, the new single-family loan limit.

“Further exacerbating the situation is today’s pervasive anti-housing climate in Washington,” said NAHB Chairman Bob Nielsen.

Is that so? Name 10 “anti-housing” Republican congressional representatives and 10 “anti-housing” Democratic House members. If these folks are against housing do you mean they want people to live on the streets?

“Leaders in Washington must stop scaring consumers by talking about eliminating the mortgage interest deduction, ending a federal backstop for housing and calling for a minimum 20 percent downpayment on home loans,” said Nielsen. “This is counterproductive and harms consumer confidence, the housing market and the nation’s economy.”

Who, exactly, is talking about eliminating the mortgage interest deduction? Where is the scare? Where is the legislation which says — like Canada — that home mortgage interest will no longer be deductible for any reason by anyone?

Or, is the worry that rich folks will get less of a deduction? And if that’s the case, why is that bad for someone making $50,000 a year? Or someone without a job?

And about ending the “federal backstop” for housing? If that’s a problem speak to the special interests over at the Mortgage Bankers Association. They’re concerned — get this — “that the FHA programs will be over-utilized.” Where oh where would borrowers get their mortgages if FHA insurance was less available?

And no one is calling for a 20-percent minimum downpayment for ALL mortgage loans, no matter how often such a claim is repeated.

Under Wall Street reform — the Dodd–Frank Wall Street Reform and Consumer Protection Act — VA mortgages, FHA loans, and conventional loans sold to Fannie Mae and Freddie Mac are all within the definition of a qualified residential mortgage or QRM. Today you can generally get FHA financing with 3.5 percent down, nothing down with a VA loan and 5 percent down with conventional mortgages.

What the new rules say is that if lenders want to pump risky loans into the market such as option ARMs, interest-only mortgages or financing based on no-doc loan applications then they should have more skin in the game. That means a 5-percent reserve under the new rules for lenders who want to originate high-risk loans and 20 percent down for borrowers. The idea is to prevent lenders from again coming back to taxpayers asking for a bailout.

If home builders want to help the housing sector here’s a place to start: Make mortgage subsidiaries and other controlled lending entities illegal for home builders. Make sure no builder — directly or indirectly — receives compensation or a thing of value from any loan to any home buyer.

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The alleged culprit in this matter is the Dodd-Frank Wall Street Reform and Consumer Protection Act. Having failed to prevent its passage, the lending industry is now trying to undo it piece by piece.

So what’s the big deal?

Wall Street reform establishes conditions under which lenders can be sued by borrowers. However, the law also says if lenders play by the rules they are protected against such suits if they make loans inside the safe harbor specifically created by the new rules.

The Safe Harbor

Loans inside the safe harbor are called qualified residential mortgages or QRMs. Despite claims that borrowers will soon only be able to finance with at least 20 percent down, the QRM rules say exactly the opposite.

To understand why you need to know which mortgages are inside the safe harbor. These loans include:

1. FHA loans with 3.5 percent down.
2. VA loans with as little as nothing down.
3. Conventional loans with as little as 5 percent down; that is, loans sold to Fannie Mae and Freddie Mac.
4. Portfolio loans, mortgages originated and held by lenders.

Not only will there be some loans available with little down under Wall Street reform, MOST loans — about 80 percent — will be available with little down. How do we know? Laurie Goodman with the Amherst Securities Group has testified before Congress that in total our mortgages are worth $10.6 trillion. Of these, $5.4 trillion are insured by Fannie Mae, Freddie Mac or Ginnie Mae and another $3 trillion are in lender portfolios.

Lender Reserves

The problem for lenders concerns the 20 percent of all loans outside the safe harbor. When high-risk loans are made outside the safe harbor lenders must set aside 5 percent of the loan amount as a reserve. Money in a reserve generates less income then would otherwise be possible, and that’s a huge issue for lenders.

In essence, lenders want the right to make high-risk, high-profit loans with little or no reserve set-aside. That requires changing the rules under Wall Street reform so that more financing will be available without the possibility of borrower suits or that irritating 5 percent set-aside. This can be done by gutting Wall Street reform or by changing the definition of a QRM to the point where virtually all mortgages are within the safe harbor, including whatever high-cost financial swill lenders can dream up.

So the next time someone wails and moans about the “new” 20-percent down requirement for mortgages you can safely say there’s good news: Such fears are unjustified because huge numbers of loans with little down are available under Wall Street reform. You might also mention that the real issue is lender profits and the right to make high-risk mortgages.

You know, like the toxic mortgages at the heart of the financial meltdown, lower home values and massive numbers of foreclosures. Loans that for the moment do not meet QRM standards. The very loans that generated vast profits for big banks and brokerages and huge executive bonuses for top corporate leaders. And for you, what did you get?

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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?

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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.

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Don’t believe it? According to the nonpartisan Congressional Research Service, “If
all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years.”

How It Works

Social Security is a regressive tax. That means the more you make the less you pay. Social Security is funded with taxes paid on the payments of wages for services performed as an employee — but not all wages and certainly not all income.

For 2011 the rates look like this:

If you look at the table above you can see the source of Social Security funding problems — and the gross unfairness of the system. Simply put: The households with the most money pay the lowest Social Security taxes relative to income.

Earnings

The term “earnings” for Social Security purposes does not mean all the money someone earns. It means the wages received for labor but generally not dividends, interest, rent, royalties or capital gains.

Why is this important? Imagine you’re a self-employed real estate broker, computer programmer, carpenter, plumber or attorney. You have a net taxable income of $100,000. Of this amount you must pay $10,400 for Social Security. (The self-employed pay 10.4 percent because there’s no employer to pay a portion of the tax.)

Now imagine that the Johnsons receive $100,000 in dividends, interest, rent, royalties or capital gains. Their Social Security tax on such income is zero, so the Johnsons have $10,400 more than someone who sells, programs, saws, plumbs, sues or whatever because monied interests have better lobbyists on Capitol Hill than workers.

Percentages

The table shows that in 2011 the Social Security tax is applied to the first $106,800 in income. For most workers this means the Social Security tax applies to 100 percent of their income. According to the Census Bureau, in 2009 — the latest year for which we have statistics — the median household income was $49,777. And remember that in a “household” we can have more than one wage earner.

Imagine that Smith makes, oh, $50,000 a year as a self-employed daycare operator. The Social Security tax is $50,000 x 10.4 percent or $5,200.

Now imagine that Jones makes $250,000 as a consultant. Jones pays 10.4 percent x $106,800 or a total of $11,107 in Social Security taxes.

Jones plainly pays more in cash than Smith — but then Jones has five times as much income and will receive a vastly larger Social Security pension when he retires. His effective Social Security rate is 4.4 percent — less than the rate paid by his maid or the person who mows his lawn.

But Isn’t Social Security Broke?

Social Security is not broke now and it will not be broke for decades. This year, 2011, it’s expected to produce $121.3 billion in net interest.

“The Social Security Trust Fund currently holds approximately $2.6 trillion and can pay full benefits through 2037,” says Rep. Xavier Becerra (D-CA), ranking member on the House Subcommittee on Social Security.

What About The Deficit?

Federal spending, deficits and surplus figures do not include money paid into the Social Security.

“By law,” says Rep. Becerra, “Social Security can only spend what it has: the contributions workers make from their paychecks, the bonds purchased with those contributions, and the interest earned on those bonds. By law, Social Security cannot contribute to the federal deficit (Chapter 7, Subchapter II, Section 401(h) of the Social Security Act).”

Why Not Privatize Social Security?

If Social Security were privatized big Wall Street banks and brokerages would be able to extract billions of dollars in fees and charges from the retirement accounts of all Americans — meaning there would be an expense where now there is none. More important, unlike Social Security and its guaranteed payments, putting retirement money in the stock market is hardly a sure thing.

According to the Federal Reserve corporate equities were worth $9.643 trillion in 2006 — and $8.514 trillion in the fourth quarter of 2010, a loss of more than a trillion dollars.

How Much Will I Get?

You can estimate your benefits by using the government’s Social Security calculator, but until you look at the numbers don’t make a down payment on a yacht just yet. The typical monthly check is paltry: According to the Pension Rights Center in 2009 the average annual benefit for retired workers was just $13,836 while the typical benefit for couples was $22,512.

What If All Wages Were Taxed?

The Congressional Research Service points out that if the Social Security tax was applied to incomes above $106,800 the actual rate could be reduced.

“Raising the taxable earnings base would lead to an increase in total federal revenues. The Joint Committee on Taxation has estimated that raising the wage base to 90% of earnings, to $186,000 in 2008, would generate $221 billion in additional revenue over the five-year budget window of 2008-2012. Over 10 years, the policy would generate more than $524 billion.”

The obvious point is that if all wage income is taxed and benefits were limited to a reasonable maximum there would be no need to reduce Social Security benefits. Indeed, so much money could be generated the actual tax rate could be lowered for everyone.

“If the base was completely eliminated for both employers and employees so that all earnings were taxed, but those earnings did not count toward benefits, solvency would be restored to Social Security. The increased revenue would eliminate 115% of the projected shortfall and the program would have a projected surplus equal to .28% of taxable payroll. Under this scenario, the payroll tax rate could be immediately lowered from 12.40% to 12.12% and the system would remain solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.”

Notice that we’re still talking about a payroll tax — no one is being asked to pay Social Security taxes on their dividends, interest or capital gains. The rich will still have an advantage, but merely less of an advantage.

An Entitlement Program For The Rich

What’s being discussed here will be described by critics as, oh my, a tax increase. What’s being ignored, what will not be mentioned, is the imputed government subsidy now being paid to upper-income households in the form of lower Social Security rates and no Social Security rates. In effect, the tax not paid or underpaid is an entitlement program for the rich.

The issue, as I have said on Patrick.net, is not the rich versus everyone else, but rather a mindset which says there can never be enough personal wealth even if other people are impoverished and hurt. With such thinking it’s okay to reduce Social Security benefits if only to keep taxes low. The term “reduce Social Security benefits” is a polite way to say that some are willing to have elderly people live out their last years deciding whether their few dollars should be spent on food or rent.

Alternatively, many who are rich would readily accept higher taxes — think of Bill Gates and Warren Buffett — because they understand that higher taxes are cheap when compared with the cost of social anarchy.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Even the King of Saudi Arabia gets this concept. According to Human Rights Watch he recently increased benefits to Saudi citizens with a “$35 billion package of financial assistance to the unemployed and support for first-time home buyers,” meaning he has $35 billion less but, he hopes, also less social discontent. It’s just a guess, but the betting here is that he will not miss a meal — or close a palace.

Paying For The Benefits of America

There is — and there must be — a cost for those who want access to the vast American marketplace and the security of American society. If you’ve traveled overseas you know that the cost to be an American is entirely worthwhile, especially if you have been to poor or nondemocratic countries.

But the cost to operate our national government is now being paid disproportionately by the poor and the middle class, an arrangement which will inevitably corrode if people don’t feel they’re vested in the system — or doubt that the system is vested in them.

You can already see this. Consider the erosion of social and financial norms represented by the large number of people walking away from their homes and their mortgages, people who do not fear bankruptcy or foreclosure.

“Leaving aside the ethical question of deliberately defaulting, not making mortgage payments has left more money in the pockets of Americans,” says Barron’s. (See: Foreclosures Boost Incomes? March 30, 2011)

Whoever heard of such a thing 10 years ago? As Kenneth Lewis, a former CEO with the Bank of America, explained to the Wall Street Journal, “we’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.” (See: Now, Even Borrowers With Good Credit Pose Risks, December 19, 2007)

If Mr. Lewis were on the other end of the financial spectrum perhaps he would be less amazed. Or, he might consider the words of a former President:

“My position as regards the monied interests can be put in a few words,” said Teddy Roosevelt. “In every civilized society property rights must be carefully safeguarded; ordinarily and in the great majority of cases, human rights and property rights are fundamentally and in the long run, identical; but when it clearly appears that there is a real conflict between them, human rights must have the upper hand; for property belongs to man and not man to property.”
—————————————–
Copyright 2011 Peter G. Miller, All Rights Reserved. For permission to re-print or re-post this commentary in whole or in part send email to OurBroker.

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According to the Federal Trade Commission, the government has sought to ban more than a dozen marketers from selling mortgage relief and foreclosure relief services, in one instance seeking $11.4 million for contempt.

The release from the FTC follows:

As part of the agency

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Relief

In the usual case, disaster relief from mortgage investors falls into six possible categories:

1. Suspend mortgage payments for several months.
2. Reduce the payments for several months.
3. Waive penalties and late fees against borrowers with disaster-damaged homes.
4. Quickly releasing insurance money to help borrowers repair homes.
5. Create longer loan modification plans in severe situations.
6. Temporarily discontinue reporting delinquencies caused by the storm to credit reporting agencies.

While these are the forms of relief which Fannie Mae and Freddie Mac will be offering, relief is not automatic. You must apply to your loan servicer — the company that collects the monthly mortgage payment — for assistance. Also, generally, you must live in or near the spill zone, which generally means homeowners in Louisiana, Mississippi, Texas, Florida and Alabama.

Freddie Mac

Under the Freddie Mac forbearance program, mortgage servicers can suspend mortgage payments for up to three months or reduce payments for up to six months. Servicers may recommend to Freddie Mac forbearance for up to twelve months in situations which are especially difficult and drawn out..

In addition, Freddie Mac says servicers “must not accrue or collect late charges from the borrower during a short-term forbearance or any subsequent repayment plan period if the borrower is paying according to the forbearance agreement.”

Fannie Mae

Fannie Mae says “servicers may immediately suspend or reduce mortgage payments for borrowers whose properties or income are negatively impacted by the Gulf oil spill.” Notice the term “may” — there is no “must” in the policy.

Under its “Special Relief Measures” policy, Fannie Mae servicers “may suspend or reduce a borrower’s payments for up to 90 days while the servicer determines the nature and extent of the impact the disaster is having on the condition of the property or on the borrower’s financial condition. At the conclusion of that assessment, servicers have additional flexibilities to evaluate the appropriate loss mitigation alternative based on a case-by-case determination, including an additional three months of forbearance, a loan modification or other customized solution.”

As with Freddie Mac, relief is not automatic. You must contact your servicer if you have been impacted by the BP oil spill.

Other Lenders

Most borrowers do not know who owns their loan, in part because loans are frequently bought and sold. If your loan is not owned by Fannie Mae or Freddie, or if you do not know who owns your loan, contact your servicer anyway. Other loan owners may also have forbearance programs in place.

As an example, CitiMortgage has “announced a foreclosure suspension program for CitiMortgage-owned mortgages in coastal areas hard-hit by the oil spill in the Gulf of Mexico. The aim of this program is to allow distressed homeowners to remain in their homes during these uncertain times as the Gulf communities respond to the oil spill and its economic repercussions. During the three-month suspension, effective June 17 through September 17, 2010, borrowers with first mortgage loans owned by CitiMortgage and who meet certain other criteria will not be subject to foreclosure sales or foreclosure notifications. While CitiMortgage does not own all of the loans it services, the company hopes to help as many borrowers as possible with this initiative.”

“CitiMortgage

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Let me explain:

I have a mortgage which is set up like this: Payment is due on the 1st of the month. However, there’s a grace period. If the lender gets my payment by the 15th of the month there’s no late fee. In addition, there’s no credit ding. Why? Because only items which are at least 30 days late are included on credit reports.

In other words, this mortgage is exactly like millions of other mortgages, there’s a due date and there’s a built-in grace period. If payment is not received within the grace period then borrowers can be hit with a penalty, perhaps 5 percent of the payment amount.

A Contract Is Not A Contract

Now my lender is trying to modify my mortgage. Apparently a contract is not a contract when a lender doesn’t like the terms of the deal. This seems odd since the lender underwrote my loan after looking at roughly 20,000 pieces of paper and because the mortgage is in the “lender’s usual form” — an expression which means the loan terms are written by the lender’s lawyers to favor, well, the lender.

In the past few days, however, I have received several calls from individuals who say they are my lender. The drill goes like this: The phone rings. It’s 8:30 at night. A pleasant automated voice says I should hold. For whom am I holding? Ah, that turns out to be an alleged “representative” of my bank.

“We see you haven’t paid your mortgage yet,” says a voice on the phone. “If you’re having financial difficulties you may be eligible for help through the federal government.”

“Nope,” I say, “I’m fine.”

“Well, your payment is due on the 1st and has not been received. We can charge your checking account with an electronic transfer right now for a $20 fee and you can avoid a late payment fee.”

So what’s wrong with this call?

First, I can avoid a late fee without help from my bank. I do this by making full and timely payments every month, without exception.

Second, why am I being called? My mortgage says I can make my payment as late as the 15th of the month without any fee or penalty. It’s now the 12th.

Buried in the smooth script and the fake concern regarding my financial situation is a more troublesome issue: Someone I don’t know has called me.

If I authorize them to electronically withdraw money from my checking account I must provide certain information I know and they don’t. And once such information becomes free-range data, how can I be sure they won’t empty the entire account? I don’t actually know the caller. I hear what they’re saying but I have no way of knowing if I’m being contacted by a lender or a con artist. It’s not easy to tell the difference.

Assuming this is a call from my lender, the real effort here is to speed up my payment before it’s actually required. If the lender can scare enough people to flush out more early payments it will then have a few days of extra cash on hand to earn some additional float dollars, money which can be used to fund executive bonuses or help credit card borrowers in need of financing at 29.99 percent.

I’m sure in some sense that any payment made after the 1st is “late” but it doesn’t matter: my lender — and probably your lender — has agreed in writing not to take any action or charge any fee if my payment is received during the grace period. And after all, it was the lender who wrote the loan terms.

So check your loan documents. If you need help, speak with an attorney or legal clinic. Know your rights. If your mortgage allows a grace period then that’s the deal. Always meet the terms of your mortgage with full and timely payments. And if your lender calls early to ask where’s the payment, tell ‘em where they can look for it.

(Peter G. Miller is the author of The Quick & Dirty Guide To Successful Mortgage Modifications. Posted originally with the Huffington Post.)

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A new study by TransUnion, the big credit reporting agency, says there is now a new payment hierarchy where consumers pay their credit cards before their mortgages.

“The percentage of consumers current on credit cards and delinquent on mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008,” says TransUnion. “This ‘flip’ is representative of the change in the conventional wisdom around the payment hierarchy, or which debt obligations consumers would choose to pay first.”

“The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations,” said Ezra Becker, director of consulting and strategy in TransUnion’s financial services business unit. “The insight gained through this analysis reveals a lot about changing consumer preferences. The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies.”

Consumer Logic

Traditional thinking said that consumers put credit card bills ahead of mortgage debt. Here’s why: If you don’t pay your mortgage you’ll lose your home. If you don’t pay your credit card bills you might get sued, your credit score will fall and you may be hounded by debt collectors.

But honestly, how is someone going to take back that trip to Bermuda?

Foreclosure States

TransUnion says “within California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5 percent in Q3/2007 to 10.2 percent in Q3/2009 (a 191 percent increase). In Florida, this same variable increased from 5.1 percent in Q3/2007 to 12.4 percent in Q3/2009 (a 143 percent increase). In this same timeframe, the United States experienced a 68 percent increase (from 4.0 percent in Q3/2007 to 6.6 percent in Q3/2009).

“In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in Q3/2007 to 2.7 percent in Q3/2009. In Florida, this variable declined from 5.0 percent in Q3/2007 to 3.9 percent in Q3/2009.”

It’s just a guess, but maybe people are making their credit card payments because they’re using credit to buy groceries and such when faced with a job loss or some other form of income reduction. Otherwise, it still seems logical to pay the mortgage and keep a roof over your head before paying credit card debt.

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According to the Federal Housing Finance Agency (FHFA), the headline is that “FANNIE MAE AND FREDDIE MAC LOAN MODIFICATIONS UP BY MORE THAN 50 PERCENT IN FIRST QUARTER, MONTHLY PAYMENTS REDUCED FOR HOMEOWNERS.”

We then learn that “Fannie Mae and Freddie Mac modified nearly 37,000 loans during the first quarter of 2009. It is an increase of 57 percent over the fourth quarter of 2008 and more than double the number of modifications in the first quarter of last year.”

Is 37,000 loans a lot? Is 37,000 loans a big number over a period of three months at a time when foreclosure filings are running at better than 300,000 per month nationwide? Is 37,000 loans impressive in the context of the 30.4 million loans held by Fannie Mae and Freddie Mac?

Notice that the headline discusses loan modifications, but modifications are not the only approach to help those facing foreclosure.

“Modifications represented 43 percent of all completed foreclosure prevention actions in the first quarter of 2009,” says FHFA. In other words, there were about 87,000 loan workouts in total for the quarter and most were not modifications.

Modifications Versus Workouts

“Modifications with more than 20 percent reduction in monthly payments rose from 2 percent in the first quarter of last year to 52 percent in the first quarter of this year.” Question: What about the other 68,000 distressed borrowers? How many of them saw no reduction in monthly costs? How many of them saw monthly costs actually rise, something which is entirely possible with repayment plans, a type of workout which differs from modifications.

The reason there are so few Fannie Mae and Freddie Mac foreclosure actions is very simple: The two companies are better run then anyone will admit, which means their takeover by the government is highly questionable. The average Fannie Mae or Freddie Mac borrower has a credit score of 725 and the typical loan has a loan-to-value ratio of 74 percent, meaning not a lot of loopy loans with toxic terms.

Few Bad Loans

As of March 31th, the percentage of Fannie Mae and Freddie Mac loans that were at least two payments past due (60 plus days delinquent) was 3.6 percent. This compares to 6.1 percent for VA loans, 10.2 percent for FHA loans and 9.2 percent for the industry average.

For all the yelling and screaming about Fannie Mae and Freddie Mac, the bottom-line reality is that their mortgage portfolios are sound and solid, a reality which contrasts with the quickie nationalization of the two companies in the summer of 2008.

The Untold Story Behind Fannie Mae & Freddie Mac is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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