Once upon a time long, long ago I sat across the desk from a banker and listened to the clock tick as he scanned my loan application for my first house. As the vest buttons of his three piece suit strained, he looked over his reading glasses at me and with the experience of having looked at hundreds, maybe more, of these applications he said,
"You did not borrow any of this down payment, did you? We'll be able to find out if you did not save it yourself?"
"Oh, no sir. All twenty percent of the down payment is mine."
"Well, you're pushing it with your monthly payment being 27% of your gross income. We prefer the payment to be no more than 25% of your net income. We may be able to do something but I can not guarantee it. . "
Fast forward to today and we are quick to blame the sub-prime crises we face now on the plethora of people that can not discriminate themselves financially or the predatory lenders that have created mortgage banking products that are, at best, questionable in nature.
But, how did this situation develop in the first place?
First, look back to the Supreme Court decision in 1978 that allowed usury credit card interest rates to be exported from North Dakota. Soon, other states joined the bandwagon and, adjusted for inflation, from 1968 to 2000 credit card debt increased by 6,000%. That's right, I needed a comma. One more time; A six thousand per cent increase. Now, 20% of all twelve year olds in this country carry a credit card.
Is it the personal responsibility of the consumer to cease and desist using credit cards and going further into debt? Sure. Absolutely. Is there corporate responsibility for banks to scale back on the two billion mail solicitations a year for credit cards to American consumers and ask themselves is it morally right to require credit card agreements to have thirty pages of terms which allow more and more creative ways to trap The customer into defect debt? Agreements which Harvard Law School professors that teach contract law can not read? I think the answer has to be 'yes' in both cases.
But, what does this have to do with sub-prime mortgage loans? Well, in a word, everything.
Sub-prime loans just like the out of control credit card industry are the direct result of banking de-regulation, and after two decades of this de-regulation, home owners of today are three and one half times more likely to lose their homes to Foreclosure than their counterparts a generation ago. With home loan payments that are 40% to 50% of a family's gross monthly income, with more available credit, more complex credit and more expensive credit we suddenly find ourselves in a mess of foreclosures and bankruptcies. And, we are now surprised?
Sub-prime loans are not the problem, they are a symptom of the problem and the problem is that, "Just a generation ago, the average family simply could not get into the kind of financial hole that has become so familiar today. Reason was straightforward: A middle-class family could not borrow very much money. High-limit, all-purpose credit cards did not exist for those with average means. There were no mortgages available for 125 percent of the home's value and no offers In the daily mail for second and third home equity loans. There were no "payday lenders," no "live checks," no "instant money," and certainly no offers to "consolidate" all that debt by moving it from one credit card To another. ", Because it would have been against the law to do so, according to Elizabeth Warren of Harvard Law School who recently testified to Congressional hearings.
So, what is, or, maybe the better question: is there a solution? To me there is, and it is two fold.
First, some banking regulation is absolutely necessary. It is no accident that Congress is
Investigating credit cards which charge what would have been usury interest rates prior to de-regulation with incomprehensible terms, trick billing cycles and 'traps' to squeeze ever more profit and fees out of the consumer. It sees $ 29 Billion in revenues were not enough for the banking industry in 2005, so interest and penalty fee revenues were increased using these predatory tactics to attain $ 79 Billion in revenues. There is no reason to believe that revenues went down since these numbers were reported.
So, when this is combined with predatory fees, interest rates and deceiptive practices used by credit cards companies, the consumer is getting steered, squeezed, mislead and their economic liability drained. Two decades of deregulation has taught us that market forces left to themselves, simply are incapable of finding within their structure the morality to do what is right. With more and more regularity, when describing the dire circumstances of debtors, we are discussing and addressing the person next door in suburbia. It is no longer a low income problem.
Without a change in the laws, it is my opinion that combined consumer and lender based action is needed for short term and a long term strategy to positively impact those most affected by all predatory lending.
At first blush the solution I recommend looks counter intuitive. However, if an abundance of credit is here at least for the foreseeable future and possibly forever, and if the laws in place are soon to be changed, then credit re-establishment to improve credit scores in particular seems to me to be the means to Move "higher risk" borrowers away from predatory sub-prime loans of all kinds to main stream or "A" category loans with much lower interest rates.
Such action is based on a moral understanding that economics is the core of "Family Values", that divorce due to financial strains, missed child support payments due to bankruptcy and families without economic independence destroys the vitality of the
Family and the ability of families to care for their children.
Such action is suggested with the knowledge that debt free lifestyle is preferred, admirable and some suggest very attainable. While I certainly do not discredit or disagree with this goal, the facts are, that most workers will not attempt to achieve a debt free life.
So, the reality for most consumers is that the best option available at this time is to secure the lowest possible cost of credit available to them. And do so, as soon as possible while targeting the overall goal of debt reduction.
The very first thing asked of a borrower now, is their credit score number. With credit scores taking over as the major determining factor for establishing the interest rate which a consumer must pay, and with cash purchases of automobiles, appliances and other large ticket items being out of the reach of most middle to lower middle income buyers, it is Effective to improve their credit or they will continue to be enslaved in usury interest rates for years to come.
If some of these usury rate loans were at normal interest rates, even with job layoff or any other life emergency, the consumer has a much better chance of not defaulting on a mortgage payment. And, with credit scores closer to the national average of 679 which qualify for better loans, the cost of credit is lowered resulting in better debt to income ratios.
To accomplish credit re-establishment, I recommend addressing the three major problematic areas of someone being steered into sub-prime rates.
The first area is creating consistent payment history, establishing new credit and producing permanent positive marks with "paid in full" status. To do so, the lending product or vehicle of choice is secured loans. Typically, these kinds of loans fall into
Another type of predatory lending as they want significant fees up front and / or deposits that are never returned in exchange for providing secured credit card accounts. Banks, if they have a secured loan program in place, are incredibly difficult to find and often all will not work with potential customers who do not posses significant amounts of capital with which to secure the loans.
However, with the backing of a consumer friendly lender that is willing to work with customers to raise their scores, the chances of success suddenly skyrocket. Payment history is consistent, timely and complete. New credit has been created responsibly as is the type of credit. At the end of the secured loan term, the borrower has improved their credit score by completing repayment of a secured loan with a final status of "Paid in Full". With diligence, perseverance, and commitment, the effort pays off handsomely. In fact, a twelve month process is capable of adding triple digits to a credit score with minimum expense.
With the security and confidence one banners when a lender figuratively puts their arm around a shoulder and helps establish a positive credit history without an exorbitant cost associated with it, one can see hope and encouragement exacting a positive impact in a ripple effect spreading much more than The immediate recipient.
The second area addresses inaccurate items listed on credit reports. The credit challenged often is seduced by and sold a dream. They just want someone else take away all the bad from their record so that they do not have to deal with it and then, magically hope and expect their credit scores will shoot skyward. Sometimes, someone whispers in their ear exactly what they want to hear.
Very often, in the hard, cold, light of dawn that kind of pillow talk turns out to be an illusion. However, the sizzle that sells the steak of such promises is that the credit reporting agencies can be intimidating, the reports confusing, the companies themselves reflected to protect their corporate interests and not that of the consumers, are much more knowledgeable than their rights than most Consumers, and typically are operating from a position of superior knowledge. Not to mention, they profit from negative items remaining on consumer credit reports. It is no wonder people do not want to face down what they consider to be a man-eating troll hiding under the credit reporting bridge. To the uneducated or unsophisticated, it can be an impossible task.
But, with applied knowledge comes power. Inaccurate information can be removed and there is nothing wrong, illegal or immoral with requesting inaccurate items being investigated and if unable to be verified, to have each one of them deleted. Such protection for the consumer and requirements on the credit reporting agencies is afforded all of us under United States federal law and specifically, the Fair Credit Reporting Act.
When a credit report does not look like a foreign language, it becomes clear why some estimates place the number of reports containing errors at 70% (probably more). And, if an item contains an error and is inaccurate, it has to be removed.
The final component is education, guidance and encouragement for making better decisions about credit, goal setting and having a positive attitude. To say there is no social stigma or psychological scars attached to filing bankruptcy anymore is simply not true. The fact is, it is hard to overcome any obstacle if you are despent, but with the right tools, one can make some positive changes.
Credit re-establishment is the application of all three components to figuratively create a three legged stool. With each of them in place and working, a person's credit scores can increase by as much as 100 to 200 points or more in a calendar year, goals can materialize when none existed before and financial stability can be attained.
Poor credit does not have to remain an economic death sentence, or needlessly a mandatory seven year sentence of servitude while in credit solitary confinement. Nor is it reason to expect or accept second class citizenship status.
The truth is, there is no stopping someone that chooses achievement and then works to implement it in their life. And, when willing to apply knowledge, exert some effort and follow a plan, there is no need to live a "sub-prime" position in life now or ever.