Bankruptcy Revisited

Here is another look at the B word, bankruptcy, and how your lender treats it. If you have gone through a BK recently or are considering it, you may want to take a look at this.

I am not going to attempt to give you advice or guidance on whether you should file for a bankruptcy or not. What I do want to do is let you know how a lender will treat your bankruptcy.
First of all, having a recent bankruptcy on your credit is not an insurmountable problem. There are a lot of borrowers out there refinancing that have a BK on their credit report. Here are some things to keep in mind when preparing to refinance.
·         You can refinance even if your BK was discharged less than a year ago
·         You can refinance before you BK has been discharged
·         Your score does not always dip under 500
The information I provide here will not be applicable to every lender, as each has its own guidelines, however lenders are surprisingly similar.
In all three of the places I worked, they allowed borrowers to refinance before a year had passed since the discharge date. There are some strict guidelines though, and you and your loan officer need to do some research before submitting a loan. One of the guidelines has to do with acceptable loan to value. Most lenders will only allow you to borrow 50 to 60 percent of the home’s value and that right there can kill a deal.
Many times borrowers are driven to bankruptcy due frequent refinancing that has eventually stripped all the equity out of the home making it impossible for just one more refi. Now the borrower is saddled with too much debt and a house note they can no longer afford. Unfortunately for the borrower this in this situation, there is usually not enough equity left to qualify for a refinance and they are stuck with the BK. Do your footwork, find out how much your home may be worth then start crunching the numbers. It’s a lot better to find out you don’t have enough equity before the loan is in process. If your bankruptcy is structured where you are making payments then you will need to get a bankruptcy rating, similar to a mortgage rating. Your bankruptcy is viewed as your last hope, so if you have had issues making your bankruptcy payments or are behind, most likely your lender will not want to refinance.
If you are unable to refinance prior to discharge, many lenders will refinance you even though it has been less than a year since discharge. If you or your lender is unsure of the discharge date look through your credit report and it is usually reported there. It is a good idea though to keep your discharge paperwork because that will also show the date of discharge. It will also list all of the debtors covered in the bankruptcy which can be a godsend if some of the companies on your credit report still show as active and not covered in the BK (Bankruptcy).
Lenders will look closely at your post BK credit history, and if that is rocky, your score may not have recovered enough to make a loan possible. Some lenders will still shy away from a borrower who has post BK dings even though his credit is above 500 because is leads the lender to believe nothing has changed with the borrowers spending habits. The lender will think that there is going to be another BK or a foreclosure in the near future.
So, while you can still refi right after a bankruptcy, the odds are pretty much stacked against you. You should keep in mind that your BK will stay on your report for at least seven years, if not ten. Clean up your act and show you have learned something through the BK. Keeping your post BK report squeaky clean will go along ways in demonstrating what you have learned.
If you have a perfect bankruptcy rating, enough equity, and a tri-merged score above 500 you may be a good candidate to refi out of the BK and that will be reflected well on your credit report. You may find your lender is going to be tighter with income guidelines, and you may need to be able to show all your income in the traditional way with W-2’s and pay stubs.
So good luck with the BK and happy searching for a loan.

How Second Mortgages Were Marketed as Home Equities and Captured America's Hearts and Minds

Over the last twenty years, financial companies have marketed second mortgages as home equity loans and lines and made it acceptable to borrow against your house. Consumers eagerly gobbled them up.

Have you taken out a home equity line or loan?  If so, you've joined millions of others who have borrowed against their home's values.  As the NY Times reports, over the last twenty years, home equity lines and loans have exploded in popularity:

"Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees."

Unfortunately, with home prices falling and the economy softening, all of this debt is hurting many households.

"The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt."

I worked at a large bank in the mid-2000s and remember the marketing maching that was put together to push these products out the door.  Banks consciously targeted consumers, changing the name of the product from second mortage to home equity to make it more palpatable to consumers.  There were television commercials, sophisticated direct mail programs, credit scoring, and all kinds of programs to sell and cross-sell home equities to as many customers as possible.

That being said, the banks never lied about the product.  Consumers knew what they were getting themselves into and really didn't care about the risks.  When the bank tried to provide customers with financial guidance and education on debt management, most consumers were only mildly interested .  Many of my friends eagerly opened home equity lines and loans, seeing it as found money.  So, who's to blame?  The banks who pushed the product, or the consumers who eagerly gobbled it up?

The Times article quotes Sendhil Mullainathan, an economist at Harvard who has studied persuasion in financial advertising as saying:

“It’s very difficult for one advertiser to come to you and change your perspective.  But as it becomes socially acceptable for everyone to accumulate debt, everyone does.”

I personally think that as the government racked up billion dollar deficits throughout the 80s and 90s, the concept of fiscal prudence and responsibility went out the door.  Home owners who were once accustomed to paying down their mortgage now saw it as a source of borrowing power and like the government, tapped that source.  Banks were only too eager to jump upon the bandwagon and fan the flames with some advertising lighter fluid.