Your Guide to Credit and Personal Finance

28.3.2007 - Home Credit & Finance Bank (“HCFB”) [Moody’s Ba3/NP/D- S&P B/C], one of the providers of consumer finance market in the Russian Federation, is pleased to announce the placement of its US$ 200 million Eurobond issue. This transaction represents the third dollar denominated placement for HCFB.

A bumpy road for the mortgage market
The subprime shakeout means some changes for homeowners and those looking to buy a home, especially if you have poor credit.

By Bridget Smith - Editor in Chief, Smart Borrower Center

There’s a shakeout going on right now in the subprime mortgage market. What does that mean to you, the average home owner? What if you’re getting ready to buy your first home? What if you don’t even know what subprime means? Do you need to know? Should you care?

More loans going bad; foreclosures up
First, a recap of what’s going on. Over the past few years, interest rates fell to historic lows, meaning that the cost to borrow money to buy a home became really cheap. At the same time, new loan options became available, and many lenders loosened their borrowing standards to expand home affordability. This created a housing boom that allowed folks who in the past couldn’t buy a home - either because of a spotty credit history or lack of a down payment - to become homeowners.

Problems arose when interest rates started rising. Some buyers had bought homes with loans that featured low introductory teaser rates. Based on their income, they could afford these initial low mortgage payments, but when their initial rates expired and their interest rates increased to normal levels, many were faced with drastic payment increases. In some areas of the country, homeowners who put down little or no money are facing higher payments and aren’t able to refinance, because falling home prices mean they now owe more on their mortgage than their home is worth. Many buyers are falling behind on payments and their loans are going bad. A lot of folks who stretched are now losing their homes.

Freddie Mac gets involved
In February, Freddie Mac (a quasi-government agency that provides funding to lenders) decided it needed to set tougher lending standards to reduce the risk of borrowers defaulting. Starting Sept. 1, the only subprime adjustable rate mortgages Freddie Mac will buy from lenders are loans that qualify buyers at the fully indexed and fully amortizing rate, rather than a low, introductory rate that may last only 6 months or a year.

The goal is to protect borrowers from the kind of payment shock that helped create the current mortgage situation. (Subprime simply means borrowers who have poor credit histories.) In addition to those changes, Freddie Mac also said it will limit no-documentation mortgages (mortgages in which borrowers do not have to document, or prove, their income) to ensure borrowers truly can afford their mortgage payments.

What it means to you
So what if people you don’t know are defaulting on their loans? Why would that matter to you?

Home buyers
The changes in lending standards affect future home buyers, because loan standards are changing. If you are considering buying a home in the near future:

• A substantial down payment and good credit will most likely be required.
• You will likely be required to document your income and your assets (and your co-borrower’s, if you have one), unless you have a very strong credit history.
• It may be more difficult to find flexible payment mortgages, where you have a choice of payments each month, unless you have a very strong credit history and your income can cover the highest payment.
• It’s always a risk to stretch to buy a home, but in the current environment, buy a home you can comfortably afford.

Current homeowners
Most homeowners don’t have to worry about the current mortgage mess, especially if you have a fixed-rate mortgage and good credit.

However, if you have an adjustable rate mortgage that’s set to adjust this year, you could be affected.

• If you have good credit and a fair amount of equity in your home, you should be able to refinance if your ARM payment jumps significantly, Refinancing to a fixed-rate loan with a competitive interest rate should help keep your payments affordable.
• If you have fair or poor credit and you’re facing a big increase in your mortgage payment, refinancing may be difficult. If you can’t afford higher payments, selling and moving to a less expensive home may help, as long as you can comfortably afford the payments and you can find a lender who will extend you credit.
• If your home has fallen in value since you bought it and you have little, if any equity, you may not be able to refinance to avoid a payment increase, because your loan amount is more than your home is worth. Your best option is to pay the higher payment and wait to build equity. However, if you can’t afford the higher payments, you should call your lender immediately to try to work out a payment schedule that you can afford. Other options are a short sale and foreclosure, neither of which are good options.

Takeaways for everyone

• Save! There are risks to homeownership, and having a savings cushion can help if trouble arises. Many homeowners got into trouble by dipping too far into their home equity, only to see their home values fall. Open a savings account and start socking away money so you don’t get stuck in that situation.
• Clean up your credit. Consumers with good credit pay less to borrow money. If you can’t pay your bills, you’re spending too much. Cut up your credit cards and figure out how to get out of debt.
• Don’t buy more home than you can afford. It’s easy to fall in love with a house and stretch to buy it - I know because my husband and I just went through the buying process. Don’t even look at houses out of your price range, and stick to a traditional 30-year-fixed mortgage.

Homeownership is a big commitment. Rather than getting a loan you don’t really understand, step back, research your options, and save your money a few months longer or get your credit in shape. In the long run, you’ll be happy you’re in a home you can afford, rather than in the poor house.

How to avoid real-life credit disasters
We’ve all heard horror stories of credit card fraud and runaway debt. Here are some tips on how to protect yourself.

Borrowing money wisely can help you accomplish goals you’d otherwise be unable to attain, such as owning a home or getting an education. But credit can also get you into trouble if you’re not aware of its potential dangers. Here are some examples drawn from real life, along with tips on how to make sure they don’t happen to you.

Fraud and scam artists
Tom received a call from a man who identified himself as a member of the anti-fraud department of his credit card issuer. “Did you recently purchase an item from XYZ Marketing for $450?” the man asked. When Tom said no, the caller continued: “That’s what we thought. This company is currently under investigation for fraud. We’ll process a refund immediately, but I need to verify the three-digit code on the back of your card.” Tom read the number, and the caller confirmed it was correct. A week later, Tom received his statement in the mail. It included a brand-new charge for $450.

Tom was the victim of a scam designed to trick people into revealing the verification code on their credit card. Many merchants cannot process transactions unless you provide this three-digit number, which ensures that you have the card in your possession. To protect yourself, never reveal your credit card information to someone who calls to request it, no matter what story they feed you. Most legitimate credit card companies do not do this with their customers, and if you suspect foul play, hang up and call your credit card issuer back to verify the call. Same goes for your bank account — never reveal your account details or PIN number. If you suspect you have been scammed, call you card issuer or bank immediately to report it.

Delinquent co-signers
Paula had been divorced for six months when she applied for a mortgage. When the lender checked her credit report, they declined her application because her line of credit was five months in arrears. Paula protested that her ex-husband had agreed to pay off the line of credit as part of their divorce settlement. The loans officer explained that while he was sorry, there was nothing he could do.

Paula discovered the hard way that divorce does not get you off the hook for credit accounts held jointly with a former spouse. Even though Paula’s husband agreed in writing to pay off the line of credit, the lender is not obliged to recognize that agreement — Paula was still legally responsible for the debt. If you are in the process of divorce, make sure that any joint credit accounts are closed and refinanced during the settlement. That way, if your ex doesn’t pay his or her share, you’re not responsible.

Mortgaging tomorrow to pay for today
Colin made a good salary and felt he deserved the finer things in life — a luxury SUV, a big house with a swimming pool and dinners at expensive restaurants. His philosophy was always “buy now, pay later.” He bought his home and vehicle with no money down and charged everything to his credit cards, making the minimum payment each month. Then Colin was downsized out of his job, leaving him $300,000 in debt with no way to pay it off. In the end, he was forced to declare bankruptcy.

Smart borrowers use credit with an eye to the future and are careful not to live way beyond their means. Colin spent years racking up high-interest debt to finance a lifestyle he could not afford. Even if you’re not a spendthrift, you may still end up in trouble if you never pay more than the minimum payment on your credit cards or if you’re constantly borrowing from one account to pay off another.

Already feeling over your head in debt? Talk to a credit counselor or financial planner who can walk you through some options for regaining control of your finances, including a debt consolidation loan.