Filed under: Banks, Borrowing, Debt, Real Estate, Ripoffs and Scams

While I can’t guarantee that there won’t be any exotic mortgages lurking out there in 2008, they will be rare and hard to find. You also will need to have stellar credit ratings to qualify for exotic mortgages, because investors have pretty much dried up. The risks of loss are just too high for most mortgage investors.

When exotic mortgages were at the top of their game in 2005, lenders made about $625 billion in subprime loans, and most of these fit into the category of exotic mortgages. Essentially any mortgage that can’t be sold to Fannie Mae and Freddie Mac because it doesn’t meet their prime lending terms gets categorized as subprime, even if the borrower is also a candidate for a prime loan. In 2005, about $625 billion of subprime loans were funded. In 2007, that number will drop to about $50 billion, or just about 2% of the mortgage market.

Don’t expect to find option ARMs, 0% down mortgage loans (especially if it’s an investment property and not your primary home), and ridiculously low teaser rates that jump dramatically in two to three years. Also, many of the balloon loans will be shut out except for those with strong credit histories.

The folks who likely will be hardest hit with this change in market conditions are people who are self-employed and have a difficult time proving income. No doc loans will be hard to find, and probably the rules for getting approval will be very stiff.

Many exotic loans helped to introduce the term upside-down mortgage, which used to be solely for automobiles when the vehicle was worth less than the loan amount due. With people putting 0% down, and in some cases not even paying all the interest due, mortgages quickly became upside-down as the real estate market weakened.

Good riddance to exotic mortgages, and I hope for the sake of American consumers they never come back.

This post was written as part of a series on on 2007 departures. Read about more products, companies and people you won’t see in 2008.

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Filed under: Banks, Debt, Home

Economists and financial analysts watch the housing market carefully for clues about how the American economy as a whole is faring. The latest headlines are about falling home prices, and the hysteria is building. Yes, it’s the 23rd month in a row that home prices either fell or didn’t increase enough to please analysts. That’s bad, right?

Well the housing market does give us some signals about our economy, and these numbers may be sign of weakness for Americans. (I don’t think it’s as serious as the media would have you think, but that’s another article on another day.)

I like to look for the silver lining in this cloud. What a great time for bargain hunters to get a great deal on a home! Sure, falling home prices are bad for sellers who might end up upside down on mortgages or who might not profit the way they’d hoped. But it’s a great time for those who have been saving and planning for a home purchase to cash in. There are great deals to be had, and buyers have many choices in the marketplace. Happy house hunting!

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Record-keeping, and is the author of Essentials of Corporate Fraud.

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Filed under: Borrowing, Debt, Real Estate

Reverse mortgages have long been thought of a creative way for retirees to generate income: By slowly giving up equity in their homes over time, they could generate cash for their living expenses. When they no longer needed the home, it could be sold and the bank could be paid back with the proceeds. The AARP has quite a bit of information about reverse mortgages.

But according (subscription required) to the Wall Street Journal, reverse mortgages are gaining favor among those seeking to avoid foreclosure. Some home owners are trying to obtain reverse mortgages on their homes, then offering their lenders the proceeds in an attempt to stave off foreclosure.

This strategy will only work for homeowners who have substantial equity in their homes — often retirees who took out home equity loans and are having trouble making the payments.

With a complex product like a reverse mortgage, be sure to consult with a fee-only financial adviser before you do anything. Don’t listen to a salesmen — their job is to sell you a mortgage, whether you like it or not.

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Filed under: Borrowing, Cards, Debt, Entrepreneurship, Extracurriculars, Wealth

Have you racked up some serious doubt — more money than you earn in a year perhaps? Are you, like Tina Fey in Mean Girls, in a situation where the only man who calls your home is “Randy from Chase Visa”?

A piece in this weekend’s Wall Street Journal talks about the success some people struggling to emerge from debt bondage have had with blogging about it: the accountability that comes from reporting on your ups and downs to the world and the emotional support that comes from readers.

If you’re in debt and you’re looking to blog your way out, email me at ZBissonnette@gmail.com. We’re looking for a few brave souls willing to write about their financial woes WalletPop, and what they’re doing to repair them.

Plus: We’ll pay you!

Photo from Flickr: http://www.flickr.com/photo_zoom.gne?id=2058416937&size=s

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Filed under: Banks, Debt, Home

Economists and financial analysts watch the housing market carefully for clues about how the American economy as a whole is faring. The latest headlines are about falling home prices, and the hysteria is building. Yes, it’s the 23rd month in a row that home prices either fell or didn’t increase enough to please analysts. That’s bad, right?

Well the housing market does give us some signals about our economy, and these numbers might be sign of weakness for Americans. (I don’t think it’s as serious as the media would have you think, but that’s another article on another day.)

I like to look for the silver lining in this cloud. What a great time for bargain hunters to get a great deal on a home! Sure, falling home prices are bad for sellers who might end up upside down on mortgages or who might not profit the way they’d hoped. But it’s a great time for those who have been saving and planning for a home purchase to cash in. There are great deals to be had, and buyers have many choices in the marketplace. Happy home hunting!

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Bookkeeping, and is the author of Essentials of Corporate Fraud.

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Filed under: Debt

Fair Isaac Corp, the company that created FICO credit scores, is changing its calculations in 2008 (subscription required). The company states that the new scores will be better at predicting the likelihood of defaults on debts. They state the new system will reduce default rates by 5% to 15%.

The new credit scores, called FICO 08, will supposedly be impacted less by rare credit mistakes by consumers. But those who repeatedly make credit blunders will be treated more harshly. The scoring system will still analyze payment histories, available credit, length of credit histories, and the number of inquiries and new accounts.

Delinquencies on accounts will now be analyzed a tiny differently. In the past, a delinquency was a delinquency. Under the new system, major and minor delinquencies being looked at more carefully and scored accordingly. Consumers with multiple delinquencies will also be treated more harshly than those with only one or two.

Fair Isaac says that 90% of the largest banks use the FICO score in their lending process. The scores are also used by companies offering insurance, utilities, and cellphone service. The new credit scores will be put into play by spring.

Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Accounting. The Association of Certified Fraud Examiners honored Tracy as the 2007 winner of the prestigious Hubbard Award and her first book, Essentials of Corporate Fraud, will be on bookshelves in March 2008.

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Filed under: Borrowing, Cards, Debt, Entrepreneurship, Extracurriculars, Wealth

Have you racked up some serious doubt — more money than you earn in a year perhaps? Are you, like Tina Fey in Mean Girls, in a situation where the only man who calls your home is “Randy from Chase Visa”?

A piece in this weekend’s Wall Street Journal talks about the success some people struggling to emerge from debt bondage have had with blogging about it: the accountability that comes from reporting on your ups and downs to the world and the emotional support that comes from readers.

If you’re in debt and you’re looking to blog your way out, email me at ZBissonnette@gmail.com. We’re looking for a few brave souls willing to write about their financial woes WalletPop, and what they’re doing to repair them.

Plus: We’ll pay you!

Photo from Flickr: http://www.flickr.com/photo_zoom.gne?id=2058416937&size=s

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Filed under: Ask WalletPop, Borrowing, Debt, Home

A friend e-mailed me with a question about a home equity loan her family is considering. They’re going through a credit union, and weighing whether to get a loan at a 15-year term, with 6.75% or Prime minus 50 bps, or a 30-year term with 7.00% or Prime minus 25 bps. “But we’ll probably be selling the house in five years!” she stated. “What should we do?”

I explained to her that when she was selling really shouldn’t weigh into this decision; the terms of the home equity loan almost certainly indicate that it will be paid off whenever the house is sold (it’s a “material change” and you can’t use the equity of a home you don’t own anymore as collateral). Mortgages, home equity loans, and home equity lines of credit are rarely carried to the 10-, 15-, 30- or 40-year term on the contracts, as most homeowners sell their houses or refinance their debt every five years or so. As long as the payments for the 15-year term could fit in her budget, I stated, she should take that option; the interest rate was lower and that’s all that really matters in the medium-term outlook.

Then she explained the unusual terms of this credit union’s loans; the payment was calculated, not based on the term and interest rate, but based on the size of the loan. For $100,000, the payments were $1,200 a month no matter what. I did the math; on the 6.75% loan, the payoff amount would be more than $2,000 less than the 7.00% loan. Simple decision, and it’s my mantra: always pick the lowest interest rate.

There’s on caveat, of course, and that’s origination fees and other costs associated with signing the loan. In this scenario, the 15-year and 30-year loans had similar fees. But if you were to compare loans from different institutions, you’d want to add fees into your equation. If the 7.00% loan, for instance, had $2,500 less in origination fees (which would be unusual for a home equity loan like this), I would have advised my friend choose that option.

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Filed under: Debt

Fair Isaac Corp, the company that created FICO credit scores, is changing its calculations in 2008 (subscription required). The company states that the new scores will be superior at predicting the likelihood of defaults on debts. They state the new system will reduce default rates by 5% to 15%.

The new credit scores, called FICO 08, will supposedly be impacted less by rare credit mistakes by consumers. But those who repeatedly make credit blunders will be treated more harshly. The scoring system will still analyze payment histories, available credit, length of credit histories, and the number of inquiries and new accounts.

Delinquencies on accounts will now be examined a little differently. In the past, a delinquency was a delinquency. Under the new system, major and minor delinquencies being looked at more carefully and scored accordingly. Consumers with multiple delinquencies will also be treated more harshly than those with only one or two.

Fair Isaac says that 90% of the largest banks use the FICO score in their lending process. The scores are also used by companies offering insurance, utilities, and cellphone service. The new credit scores will be put into play by spring.

Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Record-keeping. The Association of Certified Fraud Examiners honored Tracy as the 2007 winner of the prestigious Hubbard Award and her first book, Essentials of Corporate Fraud, will be on bookshelves in March 2008.

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Filed under: Ask WalletPop, Borrowing, Debt, Home

A friend e-mailed me with a question about a home equity loan her family is considering. They’re going through a credit union, and weighing whether to get a loan at a 15-year term, with 6.75% or Prime minus 50 bps, or a 30-year term with 7.00% or Prime minus 25 bps. “But we’ll probably be selling the house in five years!” she stated. “What should we do?”

I explained to her that when she was selling really shouldn’t weigh into this decision; the terms of the home equity loan nearly certainly indicate that it will be paid off whenever the house is sold (it’s a “material change” and you can’t use the equity of a home you don’t own anymore as collateral). Mortgages, home equity loans, and home equity lines of credit are rarely carried to the 10-, 15-, 30- or 40-year term on the contracts, as most homeowners sell their houses or refinance their debt each five years or so. As long as the payments for the 15-year term could fit in her budget, I said, she should take that option; the interest rate was lower and that’s all that really matters in the medium-term outlook.

Then she explained the uncommon terms of this credit union’s loans; the payment was calculated, not based on the term and interest rate, but based on the size of the loan. For $100,000, the payments were $1,200 a month no matter what. I did the math; on the 6.75% loan, the payoff amount would be more than $2,000 less than the 7.00% loan. Simple decision, and it’s my mantra: always pick the lowest interest rate.

There’s on caveat, of course, and that’s origination fees and other costs associated with signing the loan. In this scenario, the 15-year and 30-year loans had similar fees. But if you were to compare loans from different institutions, you’d want to add fees into your equation. If the 7.00% loan, for instance, had $2,500 less in origination fees (which would be unusual for a home equity loan like this), I would have advised my friend select that option.

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