Fair Isaac: Fair Or Unfair? By Bill Roberts
The Fair Isaac company rates everybody's credit.
They do it for the banks and mortgage companies.
It is called your FICO score. FICO stands for Fair Isaac COrporation.
Because of the turmoil in our economy many people are seeing their credit scores plummet.
Is that fair?
The banks can't manage their own affairs. A lot of them are BANKRUPT. Many more are in big trouble. They aren't credit worthy yet they have gotten over a TRILLION DOLLARS of credit from us. The U.S. Government (that's us) has bailed them out.
It is time for them (the banks) to ease up on credit requirements to get things going again.
Who are they to demand better credit from us in order to borrow money than they themselves have? Their credit stinks.
Such Arrogance
It is time that we demand Fair Isaac to shut down FICO.
If we are going to "forgive and forget" that the banks are not credit worthy, then they should do the same for us.
Our economy needs credit in order to function. We need to be able to buy cars, refrigerators, and houses. We need credit. We all need credit, not just those with 700 credit scores.
Those arrogant bastards will only lend to you if your credit is unblemished even though they themselves don't have unblemished credit.
America needs fairness in credit. We don't nee (or want) Fair Isaac.
Our credit mess wasn't caused by people buying houses without a good credit score.
Our credit mess is the result of our financial institutions behaving very badly and not taking into account what would happen if real estate prices fell.
Well, real estate prices did fall, and as they fell the housing speculators (the flippers) couldn't maintain their investments. They needed prices to go up in order for them to get back their purchase price, their holding costs, their transactions costs, and everything else that they paid.
When prices went down they couldn't get their money back. They bailed out of the market. Prices went down some more.
People who had bought on the upswing found themselves UPSIDE DOWN. They owed more than their house was worth.
As their adjustable rate mortgages (ARMs) reset or recast they found themselves unable (or unwilling) to make their payments. So they bailed out of their houses too.
Foreclosures were rampant. Prices were in FREE FALL.
Everybody has been affected by this situation.
See my posts:
Are Foreclosures Good For America? Part 4
Are Foreclosures Good For America? Part 3
Are Foreclosures Good For America? Part 2
Are Foreclosures Good For America?
Now it is the time to turn this around.
Easy Credit
What we need is EASY CREDIT, not tight credit.
If we can lend a TRILLION DOLLARS to the unworthy bankers without checking their credit, then they can lend to us without checking our credit.
Fair Is Fair
And to be fair we need to do away with FICO scores.
Fair Isaac is UNFAIR. They are paid by the lenders to rate our credit. These same lenders who can't keep their own credit good are asking us to have exemplary credit in order to borrow some of this money that we lent them IN SPITE of their credit.
Think about it, Is This Fair?
Our economy really needs to turn around. The manufacturing sector needs to go back to work. People need to buy cars, appliances, and other things. They need credit. They need EASY CREDIT.
The housing market needs to be stabilized. People need to be able to buy a house. They need mortgages. They need EASY MORTGAGES.
Wipe the Slate Clean
Let's start over. If the jobs come back then people can pay their mortgages. Give them a chance. Don't judge them by what has happened over the last three years.
Let's Look Ahead
Wouldn't it make more sense to let them buy a house without qualifying than it does to BULLDOZE that house because it has been foreclosed and there is nobody to sell it to? Talk about stupidity.
Everybody deserves a second chance. We gave the bankers a second chance. Now we need them to give us a second chance.
No more FICO scores. EASY CREDIT for everybody. Let's get America moving!
Bailout Reprise by Bill Roberts
This was inspired by my conversations with Jan Wood on her blog. You can read the run up to this here.
Duncan Hunter is MY Congressman. I live in his district. I am very disappointed in him. He is retiring this year. His son, also named Duncan Hunter is running for his seat. Early in the primary campaign Bill Cherry had a quiz on his blog that "matched" the respondent with the candidate that most closely reflected their values. Duncan Hunter was my closest match.
As a matter-of-fact 4 of the 5 Congress people in San Diego County voted against the bill. The only vote in favor was by the most liberal Democrat (Susan Davis) here. It is very demoralizing for me that I seem to be on the opposite side of this issue, but I believe that I am right.
I personally don't give a hoot what happens to the banks, but I do care what happens to us (all of us) and I think that the foreclosure problem needs to be dealt with summarily. If we applied some of the ideas that the conservatives advocated the banks would continue foreclosing on non-performing loans and continuing to fail as a consequence. Workouts would not be an option. Foreclosures are disastrous to our economy.
When I say I don't care about the banks I want to clarify that. I do care about the S&Ls. If the bill had passed the first time around WaMu and Wachovia might have survived. We need more thrifts not less. We need to decentralize mortgage financing. We don't need fewer financial center mega-banks controlling every aspect of our daily lives.
I just hope that the "protections" for homeowners written into the bill will cause Treasury to rewrite these non-performing loans so that more people can keep their homes. It isn't a question of "do they deserve to be helped." A foreclosed house hurts all of us.
Even though I believe in some libertarian ideas, I don't like Libertarians because they put consistency above common sense. Even a Christian Scientist needs to go to a doctor if they've had a traumatic injury. We need to be practical and pragmatic. Save the patient first, and then work on the philosophical things.
Most of the Republicans that voted for the rescue plan put "Country First." Even Newt Gingrich, who was initially against the bill, spoke in its favor because we had to do something quickly and this is what was available. Maybe if we had had the luxury of time we could have come up with something more agreeable.
I hope all is well with you. We will come through this.
Bill Roberts
Are Foreclosures Good For America? Part 4 by Bill Roberts
Everyday there are more mortgage defaults filed. The banks are suffering. Congress can't get their act together. A solution seems to be elusive.
The Secretary of the Treasury went up the hill to ask Congress for 700 Billion dollars to solve the problem.
Congress said NO.
But we still need a solution so here is my contribution to the discussion:
We need a new Resolution Trust Corporation, but this time with a different imprimatur: SAVE THE HOUSE, not sell the house.
It is clear Congress doesn't want to give the $700B to Hank Paulson but the crisis still needs to be dealt with.
It is also clear the people don't want to bail out Wall Street, which is how the media has characterized this rescue plan.
But buying mortgages from banks at 50 cents on the dollar is hardly a bailout. The banks have been duly chastised and punished. What more do you want?
If a new RTC gets your mortgage for 50 cents on the dollar then they could "restructure" the loan to more fully reflect the actual value of your house. They could "convert" your mortgage to a thirty year fixed at an attractive interest rate. Maybe then you would be willing to make the payments.
The RTC could also make all these loans FULLY ASSUMABLE. That would help you to be able to sell your house, if that is what you want to do.
All in all, a new RTC could bring stability to the housing market which would have a positive impact on the entire economy.
We Win!
When all is said and done and the final accounting of the cost of this program is determined, we will find that it actually paid us to do this rather than cost us.
Bank failures would stop or slow way down, foreclosures would almost disappear altogether, home values would stabilize, property tax revenues would return to normal, and Federal tax revenues would increase with a "rising tide" of economic activity.
And the new RTC would probably make a small profit.
See also "Are Foreclosures Good For America? Part 3"
Are Foreclosures Good For America? Part 3 by Bill Roberts
Until now banks had three options for under-performing loans:
I would be very interested to hear how successful homeowners have been in obtaining a loan modification. It seems that if they were in default the lender's customer service representative can't or won't talk to them. They will only accept "full" payments. By the time the Loss Mitigation Department gets involved, the borrower owes six payments or more and they can't really see a way out. On the other hand, if they aren't in default the lender has no incentive to modify their loan. Is this a catch-22 or what?
And I hear a lot of agents complaining that they can't get a short sale approved.
Foreclosures are at all time high with many more to come. It seems that this is the option of choice for most lenders.
It could be that there are very good reasons for the bank opting to foreclose rather than choosing to do a workout or approve a short sale:
Maybe you know a few more reasons.
New Rules
Well the rules have just been changed. The Federal Rescue Plan will move these loans out of the control of the banks and loan servicers and into the bailiwick of the Secretary of the Treasury. The program will require that a workout and/or a restructuring of the loan be performed. The emphasis will be keeping the homeowners in their homes and collecting money, not on foreclosing.
The terms of the act approved by Congress will require that the homeowners are treated fairly. Nobody benefits from a lot of foreclosures. In order to accomplish this the loan may need to be restructured to reflect a lower interest rate, a reduction in the amount owed, or forgiveness of payments missed. Maybe all of these will be necessary.
In the final analysis, most of these mortgages will be repaid, the neighborhoods will be more stable, real estate values will "heal," and the country will be better off. And Treasury will get our money back, maybe even a little more than we "advanced."
We Win
Maybe we "saved" the banks, but in reality we saved ourselves.
Are Foreclosures Good For America? Part 2 by Bill Roberts
The whole mortgage mess can be laid at the feet of Alan Greenspan and his zero interest rates which caused a huge run up in real estate prices, but it was swamped by the tidal wave of foreclosures brought on by accelerating price decreases when the rates went back up.
We all remember the Hay Days of the real estate market in 2002 through 2005. Interest rates were coming down on a daily basis. House prices were going up by the minute. Sellers were getting multiple offers on their homes with the lowest being the asking price. Home buyers were primarily concerned with how much they would have to pay each month, not the purchase price. As rates came down they could afford to pay higher prices.
Speculators saw what was happening. They realized that they could make an offer on anything and probably be able to sell it again even before it closed escrow. They could "flip" the house and make a fast, easy profit with no effort and no risk. Lenders facilitated this process by making 100% loans to these flippers. After all, there was no risk!
Then the party ended. The Fed began their program of raising interest rates. Home buyers could no longer pay higher prices for homes. The market leveled off.
Speculators could no longer buy something with any assurance of being able to sell it at a profit. They were now faced with trying to cover their transaction costs (both in and out) plus their holding costs (interest and maintenance) out of the difference between purchase price and sales price. With a flat market this just wasn't possible anymore.
The flippers bailed out of the market. This caused a surplus of inventory. It was just a matter of supply and demand. Prices had to come down. And down they came. Faster and faster they came down as more and more property was put on the market.
Unintended Consequences
Congress wanted easier loans to extend home ownership. It is Public Policy that everyone should be able to own their own home. Expanding home ownership was the goal, but they didn't take into account what would happen if these people saw their situation as hopeless and stupid when they found that they owed more than their house was worth. Some just walked away, some tried to "sell short," and others waited until they were foreclosed. The dream of home ownership was extinguished for many people and some will never get it back.
It's the flippers that shouldn't have been in the market, not the first-time home buyers. We sucked them in and then blamed them for buying what they couldn't afford. Many here have called them undeserving and say that they shouldn't have been allowed to buy a home anyway. What a bunch of arrogant crap.
Now we are all paying the price
Bank foreclosures are threatening to totally destroy our whole financial market. Banks that foreclose are finding themselves bankrupt because of the foreclosures.
What if there were no foreclosures?
If we look very hard at this issue we can see that foreclosing on somebody's home is destructive to all involved. We now have a homeless family, a vacant house, and a weakened bank.
First we need to deal with the homeless family. We don't want them living on the streets or in our parks, do we? If they couldn't make their mortgage payments they probably can't pay rent either. Maybe they can afford to pay rent but the landlords don't want to rent to them because the credit is not good. In any event we are going to need to step in and help them. Maybe we will have to put them into subsidized housing (section 8) or otherwise assist.
Secondly, we have the problem of the foreclosed house. It is an "attractive nuisance" that invites crime. Vandals come in and strip the house of everything of value. Other criminals come in to do drug deals or "shoot up." And then there are the squatters who move in. All of this activity has a tremendously negative impact on the neighborhood.
Finally, we are faced with the problem of the banks which are dropping like flies. Every foreclosure depletes some of their capital. Once enough capital is depleted the bank examiners are forced to declare the bank bankrupt and take it over. Who is next? Will it be your bank? Will you lose something if your bank is taken over? Are you getting the credit you need or want or has that credit dried up? Would your business be better if more people could get credit?
Something to Think About
Our irresponsible foreclosure policy has hurt everybody. And it hasn't done what it was designed to do. It has not protected those that provided the credit to purchase those homes.
If we had just left them in their home everything would have been better.
I hope we learn something by this. I hope that the foreclosure rules are changed before the next down market.
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I have been a real estate broker since 1975. I specialize in commercial real estate, business opportunities, and finance. I coach real estate investors and teach retirement strategies. DRE #00527512
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