Judges Back Mortgage Legislation

Power to Modify Mortgages Sits Well With Judges

By AMIR EFRATI and JENNIFER S. FORSYTH

Federal bankruptcy judges say they are eager to have the power to restructure mortgages for struggling debtors because it could save hundreds of thousands of homeowners from foreclosure.
Top Senate Democrats are advancing legislation to let bankruptcy-court judges approve new repayment terms on first mortgages for primary residences for homeowners who have sought protection in a Chapter 13 filing. The proposal allowing so-called mortgage cramdowns, in which the principal amount of the loan is reduced, is one of several efforts Democrats are pushing to give homeowners relief as they wrestle with increasing debt levels and plummeting home values.
Reuters
Proposed changes to bankruptcy laws could save thousands of homeowners from foreclosure.
Judges overseeing bankruptcy cases already can approve modifications for credit-card debt and most other kinds of loans, including second-home mortgages. But they haven't been able to modify primary-home mortgages since 1979, when the U.S. bankruptcy code went into effect, said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. Before then, many states allowed judges to do some form of modification, he said.
Allowing a judge to modify loans gets around the problem that many mortgages have been turned into securities and sold to multiple investors. "The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged," Judge Bufford said. "There's nobody on the lender side to do the deal unless you [get permission] from investors, and that's impossible."
The measure is "a good idea," said Laurel Isicoff, a federal bankruptcy judge in Miami. Financial institutions have gotten help from the government, but the only way to fix the economy is through "a holistic approach" that also "solves the problem of people losing their homes."
Until last week, when Citigroup Inc., one of the nation's largest mortgage lenders, dropped its opposition, the banking industry had long fought modification of first mortgages in bankruptcy, fearing it would encourage more homeowners to file for Chapter 13 and that it would further destabilize the housing market. Representatives of the Mortgage Bankers Association said last week that they were still opposed to cramdowns. But Citigroup's support increases the chances of passing legislation that would allow judges to lower the interest rate, reduce the principal or alter the length of primary mortgages.

Opponents of the proposed law change, including the Securities Industry and Financial Markets Association, say it would have "serious and negative consequences," including increasing mortgage rates for consumers overall because investors who typically buy the loans might deem new mortgage contracts too risky.
A Chapter 13 filing is a plan in which debtors can retain assets and pay back their debt over three to five years. About two-thirds of Chapter 13 filers have a mortgage, but half of them aren't able to keep paying the mortgage as part of their reorganization, judges and lawyers say.
A. Jay Cristol, a federal bankruptcy judge in Miami, said that changing the bankruptcy law would be beneficial because "after foreclosure, families get broken up and lenders hold on to nonperforming assets that they sell at a loss."
Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.
She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the new law, her first mortgage on her home also could be modified.

Time To Step Up For Credit Score

A Higher Number Is Needed for Some Loans; How to Improve Your Chances

By MARY PILON

It used to be that a 720 credit score or higher would get you the best interest rates. With lenders suddenly focused on credit risk, that isn't necessarily the case anymore.
To lock in the best interest rate on a 30-year fixed-rate home mortgage, it now takes a 760 or above, according to data from Fair Isaac, developers of the FICO score. For a 15-year home-equity loan a 740 FICO score is sufficient to lock in the lowest interest rate now. And borrowers will need a 720 for the best interest rate on a 36-month auto loan.
Your credit, or FICO, score is a three-digit number, ranging from 300 to 850 that lenders use to try and gauge what you are going to be like as a borrower. Fair Isaac generates the score based on your credit report from one of the three credit-reporting agencies: Equifax, Experian or closely held TransUnion Corp. The FICO score is used by more than 90% of lenders.
But despite higher standards from lenders, the average credit score has stayed relatively flat at 690, according to John Ulzheimer, president of consumer education for Credit.com. This leaves a whole swath of good customers scrambling to boost their scores.
"It's a completely different credit world," Mr. Ulzheimer says. But there are still some tactics consumers can employ to boost their credit scores in an otherwise tough environment.
Look at your usage. Lenders recently have done two major things to crimp customer credit ratings: Cut back on credit limits and close dormant accounts. Even if consumers aren't maxing out their cards -- and they shouldn't -- having a high credit limit helps with the amounts-owed portion of the credit score. The higher your limit and the more responsibly you use it, the higher your score.
In the past, customers could call up their lenders and ask for their limits to be reinstated, or even increased. But many financial institutions are being less generous as they fight to offset huge losses. Harvey Rosenfield, founder of Consumer Watchdog, recommends asking to speak with a supervisor if you aren't satisfied with the response. "It's the squeaky-wheel principle," he says.
If that doesn't work, replace that credit line with a new credit card. Your credit score will take a temporary hit after applying for a new line of credit. But in the long run, having a higher credit limit should lift your score.
Pay on time, every time. Thirty-five percent of the FICO credit score is payment history, so paying off at least the minimum balance on time is crucial. The newest version of Fair Isaac's score, FICO 08, is set to unroll in 2009, and is even more sensitive to payment history.
Keep accounts open and active. Rather than closing unused lines of credit, keep them open. Call up the issuer to make sure the account isn't closed due to inactivity. If you are worried about overspending on the card, put it in a safe place in your home, to avoid the temptation of racking up unnecessary charges.
Piggyback, if eligible. One of the original provisions of FICO 08 was eliminating authorized user accounts, such as children or spouses, to cards. Due to uproar from consumers and the credit-reporting firms, that isn't the case any longer, a victory for benevolent borrowers trying to helped loved ones establish a credit history.
Order a copy of your credit report. Twenty-five percent of credit reports have an error that could result in a lower credit score, according to a 2004 study from the U.S. Public Interest Research Group.
You're legally entitled to one free from each of the credit reporting firms through annualcreditreport.com. Fair Isaac and the three credit reporting agencies charge for consumers to see their FICO credit score, but your credit report, the blueprint for your credit score, is free.
If you are applying for a loan from a specific lender, ask which of the three FICO scores (the Equifax, Experian or TransUnion scores) they will use. They aren't required to tell you, but it could save you the hassle of having to order all three scores.
If you are curious what your credit score is, but don't want to shell out the cash, there are several credit-score simulators available on Credit.com, CreditKarma.com as well as Bankrate.com. Although these are only simulators, they might help give a general sense of where your credit rating stands.