Subprime Rescue Plans - Who Isn't Being Helped

There are several plans around now purporting to ease the pain of subprime borrowers. The concrete plan is that announced by HUD for expanding the role of FHA.  Even HUD's estimate is that the current plan will only help a small fraction of the estimated 2 million who face foreclosure.

However, Congress is currently considering legislation that would expand the role of FHA, increasing loan limits, for example. It is too early to predict what will result when conferees in the House and Senate get together to work out differences between their bills, but it likely to expand FHA’s ability to do more loans and move well past the 80,000 homeowners that are currently the target.

The plan that has received more publicity is that proposed by Secretary of the Treasury Paulson, a voluntary plan that has nominally been agreed to by industry leaders. Discounting the effects of government influence on the process, the plan is still a market based solution.

When you read what people in power are saying, however, you get a very different take on the situation that does not correlate with what I, as a mortgage loan originator, see happening.

For example, there seems to be a virtually universal assumption that people with good credit can be helped by the mortgage lenders under current lending rules.  I think that the people making those assumptions don't have mortgage experience. There are several groups of homeowners who those folks probably think can be helped but aren't going to be.

For example, how about the guy who had good credit when he bought the home, who COULD HAVE gotten an A-paper loan but went to the wrong lender and got a toxic loan instead. Now that his Pre-Payment Penalty is up, he wants to refinance into a good loan. But if property values have dropped in his area, he might find that his loan balance is higher than the appraised value of his home. With no equity, he isn't going to get an A-paper loan today.

I also have sympathy for the guy who had credit problems, who bought a home with a subprime loan, and who then spent two years building a good credit history, AS HE WAS TOLD TO DO. He now has good credit, documentable income, good qualifying ratios, but with values dropping, he now finds himself with no equity and is shut out of the market.

We are a long way from being out of the woods on the credit problems that have been created by profligate lending. We need to minimize the effects of foreclosure on our economy. In these two groups are the very best of the homeowners who might be headed for trouble. Rather than booting them out on the street when their payment jumps, the best solution would be to start by taking care of them first, and only then start worrying about those who are fundamentally greater credit risks.

Taking Out a Car Loan for a Child: An Accident Waiting to Happen

With times getting tougher and the holiday bills about to come pouring in, those of us who are better-heeled may be more pressed and more tempted than usual to help out loved ones with money troubles. I talk about ways to help with … and more often, without money … when the problems are over-spending, financial infidelity, poor budgeting, not enough income, student loans, and credit card bills in “How to Deal with Family Debts,” which was recently posted on Credit.com,. (I hope you'll check it out, and  let us know what you think!)

When it comes to lending money, unless you can truly afford to never get the money back, I advise you not to lend it. There’s too much risk of family strife. That same advice holds true for borrowing. Don’t take out a loan for someone else unless you are prepared to make the payments.

I just came across a good example of how quickly things can go wrong when you borrow for someone else. It's in the current issue an ezine I recommend to all: The Dollar Stretcher. Donna, a reader, took out a six-year car loan for her son. After four months, Junior can no longer afford the payments, and Donna, who has her own car payments to worry about, can’t afford them either. Her question is, “How do I get out of the loan?”

Gary Foreman, Dollar Stretcher’s editor, who advises against taking out a car loan for a child, calls this “a financial accident waiting to happen.” I agree. As he points out, Donna doesn’t have great options at this point. She might be best off finding someone to take over the loan in exchange for the car. But a car that’s four months old won’t be attractive to new car buyers, and used car buyers want more of a bargain.

Donna could go for a voluntary repossession, giving the car to the lender to sell. She’d have to come up with the difference between the loan’s balance and the amount the lender gets for the car. “She can expect that to be about 25% of the purchase price of the car,” explains Gary, a former financial planner. “If she doesn't have the money and can't work out a payment plan, she'll face a damaged credit score and perhaps even bankruptcy.”

Maybe Donna would have better luck selling her car. If she could pay off that loan, she’d just have one car and loan to worry about. “Granted, it's not the car she wanted and would commit her for nearly six years, but it does have the advantage of protecting her credit score … .”

Gary thinks her best option is: “Tell Junior to suck it up and act like an adult. He obviously wanted this car. He agreed to make payments to Mom for the next six years so that he could get it. Now it's time to live up to his promise. To do anything else would be irresponsible.”

Junior will probably need to change his lifestyle and get a job or two. While that will be painful for him, Gary believes that if Donna lets him off the hook, he’ll soon have other debt problems. “In a way, Donna is faced with an opportunity,” according to Gary. “She can help her son become a responsible adult by expecting him to live up to his commitments.”

I agree that Donna is faced with an opportunity, but I’m inclined to look at the situation a little differently. Junior’s not the only one who made a mistake. Donna chose to sign for a loan that she should have known her son couldn’t afford. To me, it’s not very different from the subprime mortgage mess, where bank let people take on more debt than they could handle. Both parties are at fault.

So my advice to Donna would be less “tough love” for Junior and more “we’re in this together.” Sure sounds like the whole family might benefit from some money management advice. A quick phone call to 211 or a quick click should tell them where to turn locally for some budgeting help.

Maybe I’m a softie, but I’d help Junior find that part-time job and I’d cut back on some family expenses to help with the payments (for example, the cable bill and meals out), until we could sell the car, pay off the loan, and get Junior a reliable used car that he can afford. 

What would you do? Have you had any good or bad experiences helping a family member with money troubles? Please let us know how you made out!

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Tips for Redeeming Some of That $60 Million in Gift Cards

After a sluggish holiday shopping season, retailers are hoping for a bright New Year in the form of gift card redemptions. An estimated $60 million is waiting to be spent through gift cards in the next seven days. And Americans are expected to spend $26.3 billion on the cards in total.  Here are our tips for cashing in those cards:

• Spend Early - Post holiday sales are a great time to get the most value out of your gift cards. Especially this year, when retailers are especially motivated to move their merchandise.
• Don't Overspend - Retailers love gift cards because they know recipients are likely to spend more than the value of the card when they redeem. It's best to spend just a little more than the card's worth - so you're sure to redeem the full value - and avoid using a gift card as a reason to bust your budget.
• Remember to Redeem - Each year, about $8 billion in gift card value goes unspent. Don't let your gift go to waste in 2008. If there isn't a store or restaurant nearby where you can redeem the card, look to see if you can use it online. You might also give or sell the card to someone who can use it.
• Read the Fine Print - If you don't plan to use your gift card right away, it's worth taking a few minutes to check for hidden fees or expiration dates that could reduce the value of the card or render them useless. Many states have now banned these practices for gift card issuers.
• Don't Lose the Cards - Unlike credit cards, most gift cards don't come with any protections against loss or theft. If you do encounter a problem with your gift card there isn't much you can do to recover the value. Some merchants provide loss/theft protections for consumers who register their card online.

What's your favorite gift card to give? To receive? Share your feedback and tips in the comments section below.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

The Federal Reserve Announces Measures to Reign in Abusive Lending

We all know about locking the barn door after the horses have already left and it's happening in this case. Under Alan Greenspan, the Fed took the stance that its powers did not extend to doing exactly what it is now doing. You wonder what kind of world we would have today had they been bold and done it anyway and waited for someone to tell them they had over-stepped their regulatory powers.

First, the rules apply only to subprime lending and, in general, do not affect the loans made to borrowers with good credit. But that market has already been dried up anyway. There is no secondary market to tell those loans into, the securities firms won't facilitate sales, the rating agencies won't rate them, and the investors won't buy them, so what is the point?

What they are attempting to do is to regulate an industry that does not exist any more. That's not a joke. According to the Implode-O-Meter, 207 lenders have now bitten the dust. I can remember when I first saw this site perhaps six months ago and the number stood at 26. An entire industry has vanished and here comes the Fed on a white horse attempting to save the poor consumers.

I suppose that one piece of good news in the package is that there are proposed rules affecting Yield Spread Premiums, YSPs for short. In my experience, borrowers ask a lot of questions about checks that they have to write, but don't ask questions about fees if it "appears" that someone else is paying them, as in the case of YSPs. These fees have not been transparent, borrowers do not understand what they are, do not know how to read the paperwork to discover one's existence, and do not know how to negotiate it away.

The other sad history of YSPs is that the borrower shows up to sign loan docs and finds that he is paying a higher rate than promised. At that late date, however, it is impossible to negotiate with the lender. YSPs aren't forbidden, but lenders and borrowers must acknowledge the existence of a YSP and agree in advance about the fee.

So there certainly are some good steps being taken here and perhaps when Congress gets through diddling around, maybe they will have some more ideas. In the meantime, though, consumers and others who wish to comment have 90 days in which to do so.

That still does not address enforcement. As I mentioned in my last article there are too many regulatory agencies now and virtually none have any effective enforcement powers. So what is the value of a bunch of new rules?

Click here to read a summary of the changes to Regulation Z.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com. 

CreditBloggers in the News: Fox Business Channel

CreditBloggers.com editor, Emily Davidson, appeared on the Fox Business show Money for Breakfast program this morning to discuss Discover Cards. Click on the screen below to watch the clip:

Scam Alert for Homeowners at Risk of Foreclosure

There’s a growing number of scam artists offering to "rescue" homeowners who have fallen behind on their mortgages, according to the National Foundation for Credit Counseling (NFCC).

These scam artists say they’ll help to "save your home," but in reality, they’ll make some fast money without helping you at all. "Scam artists can evict a family from their own home and then sell it on the open market before the homeowner has any idea of what is going on," reports the NFCC’s Gail Cunningham.   

The come-on is sure enticing. Homeowners are promised that they can stay in their homes, get a "fresh start," keep their credit ratings, and/or receive instant cash. The “rescuers” say they’ll take care of all the details and tell their victims to stop all contact with lenders, lawyers, and credit counselors – which cuts homeowners in trouble off from people who can actually help them. Usually, the scammers are in it to make a quick buck – but sometimes, they get homeowners to sign over their houses.

Red Flags
Watch out for people and businesses that:

• Call themselves "mortgage consultants" or "foreclosure services." They might knock on the door, call, or send you an email. You might also be tempted by ads and flyers that promise instant cash with "no strings attached."
• Offer to lease your home, “so you can buy it back over time,” or require you to transfer ownership to them. “I just need the deed temporarily.”
• Want to be paid a fee before they do anything to actually help you.
• Tell you to stop talking to your lender and others who might help.
• Require that your mortgage payments be made out to them … as opposed to your lender.
• Want you to move out of your house, say, “for remodeling” (or for any other reason).
• Guarantee that they’ll find a buyer within a certain number of days.

Where to Go for Help
The NFCC has a new Web site, HousingHelpNow, which has more information on foreclosure scams, makes it easy to connect with legitimate housing counselors, and offers a tool called the “Mortgage Reality Check,” where you can assess your foreclosure risk.

If you think you’re in danger of losing your home, I urge you to also read “How to Save Your Home from Foreclosure,” by Gerri Detweiler. Ignore all offers that sound too good to be true – but please, let us know of any that you receive! It couldn’t hurt to put a little coal in the stockings of a few scammers, right?

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Hostility!

There has been a lot of press over the subprime mess since the first news wave broke on the shore some 6 months ago.  It has taken a long time for a response from our leadership, way too long in my opinion, but there are reasons for that too. But we finally have some concrete proposals on the table, the expansion-of-FHA plan and the plan brokered by Treasury Secretary Paulson with the country's biggest lenders.

What I had not expected was the hostility that has been voiced by the citizenry. The first was from a man who had voluntarily refinanced his subprime loan when the pre-payment period ended. He got a market rate and my reaction was, "Good for you!" But he was angry at the prospect of having other borrowers, perhaps ones less qualified than he, getting a better deal without having to pay for it.  "I’ll sue my bank if they do that."

Next was the response from a person who is not yet a homeowner.  He feels that unqualified buyers were extended credit that fueled the demand that drove up the price of housing.  That bubble, as he sees it made it harder from him to buy a home. He wants them all to get the boot and the glut of homes that would then come on the market would force prices back down and make it affordable for him to buy.

A third person has a strong sense of personal responsibility and sees all those unqualified borrowers having made poor decisions.  Those folks feel that borrowers should have to pay the piper for their errors, not be rewarded for their stupid decisions by a bail out.

I'm not going to argue with these folks because I understand how they come by those feelings. What I see more clearly, however, is that each of these groups misses one important fact: What are the consequences of the alternative?  It's not like the problem goes away if we ignore it.

In addition, not solving this problem has minimal repercussions if applied to one borrower. What's the big deal if one guy loses his home through foreclosure?

But when you multiply this by a million or more, the consequences are significantly different in character. One foreclosed home coming on the market is just another home on the inventory. But when it's a million homes, they ARE the inventory and they come on the market at a time when there are already a record number of homes already listed for sale.

In those cases, we are talking about a disaster of far-reaching potential. Significant job losses, reductions in sales in a local economy leading to failures of businesses, loss of sales and property tax revenues by state and local governments, and more that I can’t even contemplate.

We already have a crippled secondary market in mortgages, one that is invisible to consumers. It currently affects the Jumbo market but both FannieMae and FreddieMac have suffered losses and are not immune.  Add more bad news and the effects could be devastating.

If we are to preserve the fabric of our communities, it is imperative that every potential homeowner who will stay in the home be given a reasonable plan to help him make payments at an affordable rate.

There are so many different types of borrowers who are affected by this crisis that it is impossible to achieve equality. Some will be helped and others won't but that is no reason for hostility. It is important to remember that there is very little demonstration in the course of history that one can advance himself by pushing someone else down.

We are in this together and I hope we can find the good will to get out of it together.

Reader Question: Re-Establishing Credit with a Secured Card

We often receive emails from our readers along the same lines as Stephanie's recent question below:

I have been working towards improving my credit. I have paid off all old outstanding debts but have only 2 positive things on my credit report at this time (a car loan that has been paid on time for over 1 year and a small utility company). My banker suggested that to further increase my credit rating, I obtain one credit card. Her suggestion is to use the credit card each month for paying recurring bills (utilities, etc.) that I would normally be paying. Then pay off the card within a week of receiving the bill.

This sounds like a good plan to me, however my credit will not allow me to obtain a good deal on a credit card without it being secured or paying enormous fees just to activate. What are your suggestions?

First off, it's a good idea to pay down your debt balances as part of improving your credit. However, it is a bad idea to close the accounts after you're debt-free. In Stephanie's case, it sounds like closing those old credit cards has accidentally lowered her credit score. If she had asked us first, we would have told her it was better to leave the accounts open with no balance.

Now that she's stuck in this situation, opening a new credit card is an important step to rebuild. A secured credit card is probably the most affordable and easy way to start. With a secured credit card, you make a deposit into a savings account to "secure" your credit limit. For example, a $500 deposit will set you up with a $500 credit limit. You get the deposit back with interest when the account is closed or transferred to unsecured status (usually after a year of responsible use). Subprime unsecured credit cards can end up costing you hundreds of dollars in fees, an amount that you will not get back in the future.

Just like any credit card, it is best for your credit to only use up to 10% of the credit limit.  If you have a $500 credit limit, that means you should only spend $50 a month. Paying the debt off in full as soon as you get the statement ensures that you get credit for the on-time payment on your credit report, avoid finance charges and don't start to rack-up larger balances.

With a year or so of positive credit hard history reporting to the credit bureaus, Stephanie should start to see her credit score improve and offers for better credit cards arriving in the mail.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Funny Money Friday: Economic Cartoons

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

There's always one upside to any political or national crisis: the jokes get better. The recent economic troubles have provided ample fodder for political cartoonists. For Funny Money Friday this week, we're highlighting some of our favorite cartoons. You can click on each to expand:

You can browse through more economic political cartoons online here. Happy Friday!

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Give a Gift that Keeps on Giving: Toy Safety

Over 25 million toys have been recalled this year, many because of lead paint. But there have been other awful culprits as well – including a chemical that can form GBH, the date rape drug, when swallowed. According to Consumers Union (CU), the publisher of Consumer Reports, “2007 has been the Year of the Recall, but it can also be the Year of Reform.”

There’s a bill that CU and other consumer advocates want the U.S. Senate to pass this week, called the “Consumer Product Safety Reform Act of 2007,” and known in bureaucratese as “S. 2045.” This bill will give the Consumer Product Safety Commission (CPSC) the resources it needs to protect us from dangerous products.

S. 2045 calls for:

• Independent testing of children's toys and products for lead and other safety hazards.
• Lowering the level of lead allowed in these products. Increasing inspectors and inspections. According to Consumers Union, the CPSC currently has a total of 15 inspectors at U.S. ports, and it has only half the staff it had when it opened in 1973.
• Protecting whistle-blowers.
• Raising the fines the CPSC can collect – from $1.83 million to $100 million.
• Improving the agency's ability to disclose important safety info.

In getting out the word about S. 2045, Consumers Union put together a very cute cartoon on this problem that I plan on sharing with my nine grandkids. I know they’ll enjoy the cartoon and agree that toy safety is really important. I’ll show them the form letter I filled out, courtesy of CU, to send my Senators about S. 2045. They’ll no doubt want to do likewise, so we’ll personalize their letters to make their ages clear to the old folks in the Senate.

I love it – an easy way to have a serious conversation with young people about the importance of consumer advocacy and whistle-blowers, about getting what you pay for and what to do when there’s a problem, and most importantly, about the gifts that really matter – all while they sharpen their computer skills.

Making sure the toys and other products that come into this country are lead-free and safer seems like a no-brainer to me. Thanks for leading the charge, Consumers Union!

Will you join me in supporting CU’s child safety efforts? If so, you can see the cartoon and write to your Senators by clicking here. It won’t take more than a couple of minutes and the kids you save may be your own.

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Student Loans Create Credit Report Nightmare

Jordan asks:

I had a student loan in 1998 which was in 2 parts; one being $300-400 the other $2500-2600. When I received the student loan I was not aware that it would generate as 2 loans. I got behind on repayment and eventually my income tax was attached and it was paid in full; paid off early 2005.

The loans were through a bank but managed by Sallie Mae Servicing, guaranteed by the Texas Guaranteed Student Loan Corporation.  The problem is that I have this listed on my credit report 3 times for each part of the loan.  That makes a total of 6 negative entries on my credit report for this Loan. Negative listings twice by Sallie Mae and once by TGSLC, I have tried to dispute that it is listed 6 times for the same thing but can not get the credit bureau to do anything. How can a creditor legally list something on a credit report numerous times for the same thing and how do I resolve this?

Also, creditors put a negative entry on my credit report; then sell it to a collection agency.  Why can they list the original creditor entry and also the collection agency entry on my credit report for the exact same credit item? This does not seem fair or right that they can stack your credit report with negative entries and I have tried addressing this with the creditor and the credit bureau with no resolution. All they do is keep telling me that the entry will remain for a ridiculous amount of time.

An item has been on my credit for 6-7 years and it is sold to another collector; basically they say that it can then remain on my credit report for another 7 years.  I try to be financially responsible but most of my credit issues are due to a divorce and getting laid-off from work 3 times (3 different companies) since 1995.

A. This is extremely frustrating, I realize. As our resident credit scoring guru John Ulzheimer points out,
"Student loans are a unique animal in the credit world." Let's see if I can help clarify things for you.

It is very typical for what seems like one student loan to turn out to be multiple loans. Each of these loans can be reported for up to seven years (for negative information) or indefinitely if the information about the account is positive or neutral.

Even if you had consolidated your two loans into one, the two original loans would have remained on your credit reports for the time frame I just described. But any previous loans should show zero balances and only the new loans should list any outstanding balances.

I contacted Sallie Mae about your predicament and they gave me the standard credit advice: "Consumers may submit a dispute for any loan that is reflected on their credit report by contacting the particular credit bureau. The credit bureau will then forward an Automated Credit Dispute Verification (ACDV) to the organization in question. It is the credit bureau's responsibility to respond to the consumer. Sallie Mae's policy is to review disputes and respond promptly to the credit bureau; however, our customers are welcome to contact us at any time, and we will assist them."

I haven't seen your credit report, but it sounds from your letter that you fell behind on the first two loans, and they then were sole to TSLGC. I am not sure why Sallie Mae would be reporting the same loans twice unless you consolidated (which should result in one new loan, not two). So perhaps you need to try to contact them once more through their Customer Advocate Unit and ask them to explain why the duplicate accounts are appearing. 

You are also concerned about some other collection accounts on your credit report. If your account is delinquent and turned over to collection agency, the rule is that both the original account and the new collection account can each be reported. I know it seems very unfair that two accounts can be reported for the same debt, but that's generally considered accurate and acceptable. As I said earlier, though, the first account should reflect a zero balance. If any of the information about either of those accounts is inaccurate or incomplete, you have the right to dispute them. If the credit reporting agency cannot verify the information with the source reporting it, it must be removed.

Finally, with regard to the other collection items on your report, it sounds like the debt collector has given you wrong information. Collection accounts can only be reported for up to seven and half years from the date you first fell behind with the original creditor. That's true whether they are paid or unpaid. The collection agency cannot extend that period.

Making a false statement is illegal under the Fair Debt Collection Practices Act. I would suggest you talk to a consumer law attorney and/or your state attorney general's office about the agency that has misled you.

For more credit advice, I suggest you visit Credit.com's Learning Center.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

Subprime credit card holders in the DC, VA and MD area, I need your help!!

If you use a credit card (not a retail store card) with a very high interest rate (25% plus) or have a card issued by any of the high-risk credit card issuers then I'd like to talk to you for a story I'm working on with The Washington Post.

So, if your credit card has an interest rate higher than 25% or was issued by a subprime lender (Providian, CompuCredit, some CapOne cards) and you live in the DC, MD or VA area and don't mind chatting about your experience then please let me know.

We're not out to bash any company. We just want to talk to you about your experience.

You can contact me directly at AskJohn@credit.com

Overseas Travelers: Does the Credit Card Industry Owe you Money?

Michael is going to get a check for about $90 related to credit card purchases he made between Feb 1996 to Nov 2006 while traveling overseas. I am due to get $25. How much will you get?

If you traveled outside the US  between February 1, 1996 and November 8, 2006 and used a Visa, MasterCard or Diner's Club credit, charge or debit/ATM card, you are eligible to participate in the Currency Conversion Fee (CCF) class action settlement.

The lawsuit is about the price cardholders of Visa, MasterCard, or Diners Club cards were charged to make transactions in a foreign currency, or with a foreign merchant, between February 1, 1996 and November 8, 2006. Among other things, cardholders alleged that the credit card companies and their member banks conspired to conceal "currency conversion fees" -- typically of 1-3% of foreign transactions  -- and that Visa and MasterCard inflated their base exchange rates before applying these fees.

Michael and I first corresponded about this lawsuit more than two years ago, when it looked like the settlement had been finalized. But more legal wrangling led to a long postponement of the final deal. In the meantime, Michael saved his credit card statements from that time period, showing how much he spent on his cards during his foreign travels. With overseas charges totaling $4900, he's eligible for the bigger refund.

I know I have my credit card statements from that time period somewhere in a box, but since my overseas travel wasn't nearly as extensive (and my spending more limited), I am going for the easy refund, which is a flat $25.

Michael and I both received our notices by mail. But if you don't receive one, and you think you should be eligible, you can check out the settlement details and filing instructions online at www.ccfsettlment.com.

Oh, and one more caveat -- the notice says "if the volume of claims is unexpectedly high, it may be necessary to adjust refund amounts." The settlement website warns that getting paid "could take several months, or, if appeals are filed, several years."

Guess we better not spend that money yet Michael!

Disclaimer: The Defendants include Visa, MasterCard, Diners Club, Bank of America, Bank One/First USA, Chase, Citibank, MBNA, HSBC/Household, and Washington Mutual/Providian. They deny the Plaintiffs' claims and say they have done nothing wrong, improper, or unlawful.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

A Path Out of the Woods

The agreement brokered by Treasury Secretary Paulson sounds as if it an excellent one, meaning everyone is equally unhappy.  Kidding aside, it also will make a lot of people happy too and get us, as a nation, to a better place. I think that this is vitally important because of the significant effect that the housing industry has on the health of the economy.

Another important feature of the program is that it is a "market based" program, with government providing the impetus for the industry to solve the problem rather than imposing something mandatory on lenders. Those involved, it is claimed, represent 84% of the subprime loans outstanding.

For those who are interested in the press release, follow this link.
http://www.whitehouse.gov/news/releases/2007/12/20071206-7.html

How critical is this?  The forecasters at UCLA see a slowdown but no recession whereas those at another well regarded research is not as optimistic and sees the possibility of this causing a recession. The difference may be due to the difference in their view of how the housing and credit market woes would have on the economy in general.

The proposal seems to me to be a fair one in that those who will be offered relief in the form of an extended lower payment rate would be those who are able to make the payment at the current rate, likely to be the teaser rate, but who cannot afford a higher payment rate after the loan resets. Absent this intervention, foreclosure would be likely at higher cost to the lenders, pain to the borrowers, and additional drag on the real estate markets that would result from more foreclosures. 

The requirements are not unrealistic. They have to occupy the home and have a good payment record on their mortgage although there is a kicker. Their FICO scores must be below 660, the presumption being that if it is above 660, they can get a standard A-paper loan from any number of normal sources. For borrowers who meet the criteria, this is an opportunity to stay in the home that they have worked for. It gives them five years to rebuild credit so that some time in the process they can get a better loan.

Part of the impetus for this effort is that there is a supposition here that many of these borrowers got into these now toxic loans due to some level of malfeasance by their lenders. I would agree that there were so many lenders and loan officers who were making so much money deceiving people that this presumption is realistic. The failure of our regulatory system to reign in these people did have consequences and this will certainly help us get through this.

I can detect backlash from other borrowers who see some homeowners who made a poor choice getting a free ride whereas they had to spend money getting out of their bad loan. 

I also see stories where what appears on the surface isn't representative of what is really going on. On the 6 o'clock news last night a widow, practically in tears, told the camera that she wasn't going to be able to afford the payment when her loan reset. They showed picture of her recently deceased husband and the son she also lost. That tugs at your heart strings doesn't it?

The facts support a different conclusion. A little digging shows that they bought her home in 1979 for $14,000. Even if she and her husband had taken out some home improvement loans to fix it up, you’d think that in 28 years they would have it paid off by now. Not so. In 2003 she took out a loan for $213,750. Then she refinanced into a $350,000 loan in 2005. That is the one that is about to reset. She also took out a 2nd this year for $22,500.

The way I see it, she has taken at least $350,000 in equity out of her home and, theoretically, it ought to be sitting in the bank. If I had taken $350,000 out of my house, I'd be able to make payments on the loan for a long time just with the loan proceeds. Does she deserve relief from reset? I don't think so.  How about you?

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Funny Money Friday: Lost Mortgage Assistance Plan Drafts

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

The Bush Administration created quite a stir yesterday with announcing their mortgage rate freeze plan. Critics and supporters of the plan abound, but the stock market certainly appreciated the news.

We know that the ARM freeze plan was generated after a series of meetings with real estate and mortgage industry leaders. What we don't know is what ideas may have been left on the cutting room floor. But that doesn't have to stop us from speculating for this week's Funny Money Friday post.

Lost Mortgage Assistance Plan Ideas:

• National NAR Day: A proposed federal holiday to give praise to the National Association of Realtors and the important work they've done in creating the current mortgage market.
• Hearts & minds: Passing out free "I ♥ Mortgage-Backed Securities" t-shirts on Wall Street.
• Lottery system: Pull a couple hundred thousand names out of a hat and pay off their mortgages.
• Suze Orman: Individual visits with every at risk borrower in the country.
• 200 free credit score points: Subprime borrowers can instantly improve to qualify for better rates.

Do you have a lost idea to share? Post it in the comments section below. Happy Friday!

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Save Your Family: Think Small this Holiday Season

I thought it was going to be impossible for me to write anything but a totally "Bah Humbug!" blog today. I don't recall a time when I've felt so pessimistic about the financial future most of us face.

Gloomy
The signs that people are having trouble making ends meet are everywhere. Consider the findings in the Center for American Progress's latest economic forecast:

• Wage growth is low.
• Benefits are disappearing.
• Family debt is on the rise.
• Home equity is declining.

Gloomier
These findings are confirmed in Demos's new report, "By a Thread: The New Experience of America’s Middle Class," which finds that two out of three middle class families are on shaky financial ground. According to Demos, middle-class families need to have:

"-- Financial assets sufficient to develop a safety net in case of job loss or serious illness, build a solid nest egg for a secure future and comfortable retirement, and help children get off to a good start toward economic security;
-- The education necessary to find a good job in today's competitive global economy;
-- Incomes that make it possible to afford quality housing and other essential living expenses; and
-- Comprehensive, high quality, affordable healthcare for all family members to ensure that care is available when needed and that financial stability is not eroded in case of serious illness."

Sounds like the pretty basic American Dream, doesn't it? Yet only 31% of families that would be considered middle-class are financially secure and more than half of these families have no net financial assets whatsoever.

Gloomiest
On top of that, every American owes around $30,000 as their share of the national debt!

And then I saw the results of an online survey from Junior Achievement, which shows that over half of teens may bust their budgets this holiday season. Believe it or not, this finding cheered me up! We can do something about it, while so many of the bigger problems are beyond our control.

Turns out that over eight out of ten teens who said they'd spend more, would do it when they know someone really wanted the gift. "Aha!," I thought. If we invest a little time, and talk with the teens in our lives about small but meaningful gifts … we can help them keep to their budgets. It can be much more challenging than going for bigger-ticket items, but the payoff can be big, too. In the process, we may be inspired to keep to our holiday budgets.

Then we can segue right on to New Year's Resolutions that will get our families on the right financial track. But for now, let's think small and about the teens in our lives! It's a place to begin.

Small but Meaningful Gifts
My favorite low-priced present is a can-opener. We used to have this really old, persnickety, hand-crank opener. Then one Christmas, a friend gave us a sturdier and more reliable model (also non-electric). It was so thoughtful, and as anyone who has ever been in our kitchen will tell you, we're still using it, 20 years later! In fact, it was recently invaluable when we were trying to coax a sick cat to eat. The mere sound of taking the "new" opener out of the drawer helped to get him interested in eating.

If my can-opener story won't get you anywhere with your teens, check out Gerri Detweiler's great article,"Seven Priceless Holiday Gifts That Won't Break Your Budget," on Credit.com. And please share your favorite low-priced presents with us. The teen ... and family ... you inspire may be your own!

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Credit.com Cautions Consumers against “Score Suicide”

President Bush announced a plan today to freeze interest rates for up to 1.2 million subprime ARM borrowers in an effort to aid the economy through the housing slump.  To qualify for a five-year rate freeze borrowers must:

• Be no more than 30 days late at the time of the freeze
• Have been no more than 60 days late on the mortgage in the last year
• Have less than 3% equity in their homes
• Have an ARM resetting in 2008 or later
• Be capable of making the lower payments and not capable of making the higher reset payments
• Have a credit score below 660

The credit score maximum included in this plan could incite consumers to commit "score suicide;" voluntarily destroying their credit in order to qualify for the rate freeze. Because credit scores carry negative records for 7+ years, it's possible that worried borrowers may cause lasting damage to their credit.

Credit.com cautions consumers against:

• Closing the oldest accounts on your credit report. This loss of "credit age" could be very hard to recover
• Making 90-day or longer late payments. These late payments will damage credit scores for 7 years
• Applying for credit in excess. You may end up burdened with accounts you don't really want
• Entering the world of collections, judgments or liens. These negative public records cause severe credit score damage for 7 or more years

And consumers shouldn't forget that lowering credit scores could also impact their ability to open new accounts, insurance rates and credit card rates.

What do you think of the ARM freeze program? Do you qualify for a freeze? Would you commit "Score Suicide" to lock in a low rate?  Share your opinions and feedback in the comments section below.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Another Site Joins the Peer-to-Peer Lending World

You may have heard about Prosper.com. With 500,000 members and $100 million in loans, this site is the leader in generating peer-to-peer financing. Sort of the eBay of lending, Prosper allows individual investors to fund consumer loan requests. It takes a few hundred investors to finance a loan in the $10,000 range.

The appeal to borrowers is either a lower rate on a loan or the chance of acceptance where traditional lenders have rejected their applications. To investors, it's a chance to earn 9% to 13% returns in an innovative way.

Earlier this year, LendingClub.com joined Prosper.com in the peer-to-peer market. Their unique pitch involves low rates for borrowers with good credit, a strategic relationship with Facebook and the option to use your social networking connections to gather investors.

And now UK-based, Zopa.com is entering the ring. Rates are still low, APY's are still high. It's difficult to see how this new service is much different than the other competitors aside from having partnerships with credit unions.

Are you a Prosper, Lending Club or Zopa customer? Investor or borrower? Which service do you like best? Share your feedback and experiences in the comments section below.

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

A True Tale of ATM Card Traveling Woes

I learned an important lesson while in Paris last week. Unfortunately, my friend was the one to learn it the hard way. Like a good credit consumer, she called her credit card issuers before leaving the country. The idea was to prevent the banks from blocking her card when they saw the international purchases.

All was fine for a few days, until her ATM card suddenly stopped working. A nuisance for anyone, but worse in this case because she only had a Discover Card as an alternative and virtual no one accepted it in Paris. Frustrating emailing and calling back and forth reveled the reason her ATM card was blocked:

She had tried to withdraw more (300 Euros) than the cash limit (200 Euros) from an ATM twice the day before. You're charged each time for the withdrawal and she was trying to make the most of it. The transactions were rejected and it triggered her bank to put the card into fraud-alert deep freeze.

If you're traveling abroad this holiday season, keep this story in mind. Don't try to withdraw more than the ATM limit or you could be stuck without cash for a few days. The process of calling internationally to re-activate your card is a huge hassle and can be expensive as well. This is also a good reminder to carry a "back-up" credit card in your suitcase in the event of a financial emergency.

Emily Davidson – Credit.com's Communication Director and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

More Subprime Executive Hanky Panky

The folks at NovaStar Financial (stock symbol NFI) have had a tough year. The stock was as high as $125 per share this year and had an all-time high of over $200 per share. It now trades at $1.24.  Ouch!  Not only that, the New York Stock Exchange has told the company it may de-list their stock. Here's the chart for the last year.

What was most interesting was what was going on with compensation of executives. In the 2006 annual report, it took over 20 pages to discuss compensation.

The proxy statement contained the following statement:

On June 8, 2004, the Company's 1996 Stock Option Plan (the "1996 Plan") was replaced by the 2004 Incentive Stock Plan ("the 2004 Plan"). The 2004 Plan provides for the grant of qualified incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), deferred stock, restricted stock, performance share awards, dividend equivalent rights ("DERs") and stock appreciation and limited stock appreciations awards ("SARs").

I must say here that those guys had figured out about every way they could to take money out of the company. What interested my most were that DERs, Dividend Equivalent Rights.

Let's back up a minute. Normally when stock options are granted, they "vest" at a certain rate. You can't exercise an option until it vests. Let's say you were given options 10,000 shares. They might vest at the rate of 20% per year so that each year you could exercise 2,000 shares. But to exercise the option, you'd have to come up with the money and buy it, right?

But DERs make it more fun. As the were explained to me, DERs give you the right to receive dividends on those shares, even though you don't actually own them. In our example, let's say after 3 years 6,000 shares had vested.  Even though you didn't own the shares, you could get paid the stock's $5.60 per share dividend, a total of $33,600.   

With the stock tanking, those options would ultimately become worthless, but if you had DERs, you could keep collecting dividend income at the expense of the other shareholders.

Now that's small potatoes to an executive making over $1,000,000 per year, but still, if you were a shareholder, you might wonder about this equity of this kind of plan.

I don't know the ultimate outcome of the NovaStar situation but the two top guys owned 2,000,000 shares. When the stock was $200 per share, they were worth $400 million. Today, those shares are worth a mere. $2,480,000.  And the DERs aren't worth anything as the company has suspended its dividend.

This is the final article about this topic. Makes me sick, frankly.  There are many more stories,including ones about FannieMae and FreddieMac where management was "cooking the books," over-stating income by billions so as to collect bigger bonuses.

What is clear is that when you see the hanky panky in the Executive Suite, you can understand why it was tolerated throughout the organization. That hanky panky is going to cost a lot to clean up. I was shocked to hear a report from Wall Street that estimates the total losses might be as high as $400 billion!! You will pay a portion of that somewhere along the line in your home's value or 401(k) or your job. 

What I would hope you would learn from this is that it IS important to understand the ethics of the company and individual you choose to do business with. Millions of borrowers did not exercise due diligence and they are paying the price. Make sure that this doesn't ever happen to you.