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 2"

"Are Foreclosures Good For America?"

Are Foreclosures Good For America? Part 3 by Bill Roberts

Until now banks had three options for under-performing loans:

• Workout a modification
• Accept a short sale
• Foreclose

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:

• It is the "way we have always dealt" with defaulted loans
• Nobody wants to accept responsibility for accepting a short sale
• The Mortgage Insurance Company won't pay unless the loan is foreclosed
• The borrower wasn't insistent enough
• The servicing agent wasn't the owner of the mortgage
• It was easier for the servicing agent to foreclose
• Bankers are a bunch of arrogant jerks

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.

See also "Are Foreclosures Good For America? Part 2"

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.

Are Foreclosures Good For America? by Bill Roberts

A lot has been written about our financial crisis: How it started; Who is to blame; And how much has it cost us.

But I think that this entire discussion has missed the main point: Was it necessary?

Let's look at the foreclosure process: If you borrow money to buy something and then you don't repay, the lender can come and get what you bought. Their loan to you creates a lien on the purchased thing, whether a car, a couch, or a house.

If you stop making your car payments the bank will send someone out in the middle of the night to repossess your car. The bank doesn't really want your car; they just want to be repaid. If they repossess a few cars they don't get hurt too badly and it sends a message to the rest of us: DON'T MESS WITH THE BANK. Their bite is worse than their bark.

Well, this same principle applies to mortgages. If you don't make your house payments they will repossess (foreclose) your house. But here the comparison fails. We already know not to fool with the bank. We know what they can do.

But when the bank repossesses real estate that loan which was carried on their books as an asset becomes a charge against capital. If they repossess enough houses they will consume all their capital.

Bank examiners and the agencies they represent require banks to have "sufficient" capital in order to stay in business.

When a bank's capital falls below a certain point the examiners will declare that the bank has "failed" and they will take it over.

We've had a lot of bank failures during this crisis.

When banks insist on making so many foreclosures it is almost as if they are "biting off their nose to spite their face." Don't they realize that they are flirting with disaster?  The bank examiners aren't going to give them a pass.

They say it is their right and their obligation to repossess your house. OK, but is it working for them or against them"

Is it working for us?

What would our economy and our real estate market look like if we hadn't had any foreclosures?

If you live in a neighborhood that has suffered from many foreclosures, how do you feel?  Do you feel safe? Are there vandals out there stripping those houses while they sit vacant?  Has your property value declined because of these foreclosures?  Have more of your neighbors just given up because they owed more than their house was worth. Are these vacant houses nuisances? Are they attracting "homeless" people who squat there?  Has crime increased in your neighborhood?

If we had it to do over would we prefer NOT to allow the banks to foreclose?  We do have it to do over. Everything is cyclical and we shall see this again. Maybe not exactly the same but close enough.

 I have more to say about this subject but I would like to hear what you think before I go on.  Please feel free to disagree.

 See Are Foreclosures Good For America? Part 2

My Sincere Apologies by Bill Roberts

I have been MIA for about six months. Rather than bore you with the trite details I just want to say I'm sorry for my neglect of so many good friends here on ActiveRain. 

To those that called and left messages, thank you very much. I will call you back as soon as I can.

I see that there have been a few changes around here. It will undoubtedly take me a while to get back up to speed. Please feel free to offer your criticisms and advice.

We are now in the midst of a hotly disputed political campaign and in the middle of very interesting economic times. Opportunities are everywhere, both for investment and conversation.

I just posted a little political "viewpoint" and I'm working on an economic essay. Freddie and Fannie make for great discussions, don't you think?

I turned "65" while I was gone. My favorite subject of Baby Boomer Retirement Planning is squarely on my mind. I hope I can persuade a few of you to take up this banner. Most "Boomers" have a very simple retirement plan: work ‘til they drop. It doesn't have to be that way!

High Time For Change by Bill Roberts

It's high time for change in Washington and John McCain offers that change.

Don't fool yourself into thinking that Obama represents change. He really represents more of the same - TAX AND SPEND.

Our economy and our very existence are at stake.

What will Obama do for us, or should I say do to us?

• He will increase employee taxes. He says he won't raise taxes on the middle class but what do you think that will be? Social Security and Medicare taxes are already very high and he wants to make them higher. So much for a middle class tax cut.
• He will increase taxes on the job creators (small business owners and entrepreneurs).
• And if you are lucky enough to make more than $250,000 expect him to take a big chunk of it away from you.
• He doesn't want to drill for oil. He thinks that we will save enough oil by simply inflating our tires so we won't need it. If anything is simple, it is Obama. We need that oil and we need the money that we are currently sending to people that don't like us and want to hurt us.
• He thinks that erecting barriers to trade will protect jobs in the rust belt. Who is he trying to kid?  Those jobs are gone. We need new jobs, new skills, and greater participation by everybody. In stead of trade barriers we need trade incentives to sell our products all over the world. We need to fight the EU and Asia with their own tactics. Do you think Airbus could sell a single air plane if they weren't subsidized by the EU?
• Obama wants to talk to the extremists that are trying to kill us. The longer we talk the more time they have to get ready for their next strike. Haven't we talked enough already?

The more I see and hear about Obama the more I see the same old thing: tax and spend and surrender. After all, some faceless bureaucrat in Washington knows what is best for you.

Let's get real! We want and need REAL CHANGE.

John McCain offered real change when he selected Sarah Palin as his running mate. Thank God for the real people that make up our frontier. We do have a chance to survive.

A couple of months ago I wasn't so sure. Now I am full of HOPE. And I hope you are too.

Vote for change in Washington. Send McCain and Palin in there to clean things up.

Don't Go To Jail, Collect Your $200 by Bill Roberts

I received an email the other day from an ActiveRain member asking about using his Self-Directed IRA to buy a house that he could "rent" to his son.  I want to respond to this by saying that a Self-Directed IRA should be your very best investment vehicle for providing for your retirement BUT you need to follow the rules.

You may invest in just about anything from within your IRA but there are specific things that you CANNOT do:

Prohibited transaction.   A prohibited transaction is any direct or indirect:

1. Sale or exchange, or leasing of any property between a plan and a disqualified person; or a transfer of real or personal property by a disqualified person to a plan where the property is subject to a mortgage or similar lien placed on the property by the disqualified person within 10 years prior to the transfer, or the property transferred is subject to a mortgage or similar lien which the plan assumes.
2. Lending of money or other extension of credit between a plan and a disqualified person.
3. Furnishing of goods, services, or facilities between a plan and a disqualified person.
4. Transfer to, or use by or for the benefit of, a disqualified person of income or assets of a plan.
5. Act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in his or her own interest or account.
6. Receipt of any consideration for his or her own personal account by any disqualified person who is a fiduciary from any party dealing with the plan connected with a transaction involving the income or assets of the plan.

Exemptions.   See sections 4975(d), 4975(f)(6)(B)(ii), and 4975(f)(6)(B)(iii) for specific exemptions to prohibited transactions. Also see section 4975(c)(2) for certain other transactions or classes of transactions that may become exempt.

And just for the record, a Disqualified Person is:

Disqualified person.   A disqualified person is any person who is:

1. A fiduciary.
2. A person providing services to the plan.
3. An employer, any of whose employees are covered by the plan.
4. An employee organization, any of whose members are covered by the plan.
5. Any direct or indirect owner of 50% or more of:
1. The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation,
2. The capital interest or the profits interest of a partnership,
3. The beneficial interest of a trust or unincorporated enterprise in a, b, or c, which is an employer or an employee organization described in 3 or 4 above. A limited liability company should be treated as a corporation, or a partnership, depending on how the organization is treated for federal tax purposes.
6. A member of the family of any individual described in 1, 2, 3, or 5. A member of a family is the spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.
7. A corporation, partnership, or trust or estate of which (or in which) any direct or indirect owner holds 50% or more of the interest described in 5a, 5b, or 5c of such entity. For purposes of 7, the beneficial interest of the trust or estate is owned directly or indirectly, or held by persons described in 1 through 5.
8. An officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder or highly compensated employee (earning 10% or more of the yearly wages of an employer) of a person described in 3, 4, 5, or 7.
9. A 10% or more (in capital or profits) partner or joint venturer of a person described in 3, 4, 5, or 7.
10. Any disqualified person, as described in 1 through 9 above, who is a disqualified person with respect to any plan to which a section 501(c)(22) trust applies, that is permitted to make payments under section 4223 of the Employee Retirement Income Security Act (ERISA).

And if you fail to comply then the IRS has a special plan for you:

Line 16. Section 4965-Prohibited Tax Shelter Transactions.   For tax years ending after May 17, 2006, if an entity manager of a tax-exempt entity approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction during the year and knows or has reason to know that the transaction is a prohibited tax shelter transaction, then the entity manager must pay the excise tax under section 4965(b)(2).

  For purposes of section 4965, plan entities are:

• Qualified pension, profit-sharing, and stock bonus plans described in section 401(a);
• Annuity plans described in section 403(a);
• Annuity contracts described in section 403(b);
• Qualified tuition programs described in section 529;
• Retirement plans described in section 457(b) maintained by a governmental employer;
• Individual retirement accounts within the meaning of section 408(a);
• Individual retirement annuities within the meaning of section 408(b);
• Archer medical savings accounts (MSAs) within the meaning of section 220(d);
• Coverdell education savings accounts described in section 530; and
• Health savings accounts within the meaning of section 223(d).

  An entity manager is the person who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction.

  The excise tax under section 4965(a)(2) is $20,000 for each approval or other act causing the organization to be a party to a prohibited tax shelter transaction.

  A prohibited tax shelter transaction is:

1. A Listed transaction within the meaning of section 6707A(c)(2). Listed transactions are reportable transactions that are the same as, or substantially similar to, any transactions that have been specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.
2. A prohibited reportable transaction is:

If this is too much to deal with then you really need an "advisor" for your taxes and investments. Shift the responsibility to an "expert" so that you maximize your returns without jeopardizing your future. A good CPA or Attorney with specific tax knowledge is worth his (or her) weight in gold. And a good retirement investment advisor is also indispensable. 

Most of this information is directly from the IRS website. I hope you noticed the penalty for engaging in a prohibited transaction. They will assess you an "excise" tax of $20,000 per violation. You may read that as a fine in addition to disallowing the investment in your plan, which could have even more devastating consequences.

BE VERY CAREFUL WITH SELF-DIRECTED IRA INVESTMENTS.

Because if you are not you will not pass GO, you will not collect $200, and you may very well go directly to jail.

Timing the Market by Bill Roberts

Qualcomm is a local high tech company here in San Diego. Owning their stock has made quite few of their employees and other local people Millionaires. I figured that everybody could understand making money this way. You simply bought Qualcomm stock in the beginning and sold it after the price went up (way up).

Last Friday it closed at $42.39 per share. Back in March of '03 you could have bought some Qualcomm stock for around $15.00. Now my question to you is, "Would it really have mattered to you if you had paid $14.50 or even $15.50? Sure, you want to make as much as you can, but if you had tried to "time the market" to buy it at $14.50 you might have missed it completely and had to pay upwards of $20.00 per share if you wanted in.

My advice to you is to buy when you can. Don't worry about picking up every nickel off the table. Just get what you can. You would have gotten nearly 300% growth in the share price. Why be greedy?

The Real Estate Market 

Now here in San Diego we have a "soft" real estate market. Prices are off their highs by 30% or more in some areas. Some people think that there is a little more room for prices to drop.

If you want to invest in San Diego real estate now is a good time to get in. Because it is a "soft" market the buyer has an edge when negotiating with the seller. Good deals and good terms can be had. Maybe the market will fall another 15% before it starts back up. Then again, maybe not.

What is for sure is that ten years from now the prices are going to be considerably higher. How much higher is simply conjecture, but certain facts need to be reckoned with:

• More people will want to live here in ten years;
• The dollar will be worth considerably less in ten years; Room for growth will become more scarce;
• Labor and materials for construction will be more expensive;
• And there is no indication that government is going to make development in the region any easier.

All of these factors considered together make for a very complicated analysis, but a reasonable person could conclude that prices will be up 200% to 400% in the next ten years.

Now Is The Time 

Is it really going to matter if you pay 5% or 10% too much now? Trying to "time the market" could cost you the opportunity to get in at this "buy point." Ten years from now you will be glad you bought now.

Call Bill Roberts (619) 244-4610 for any real estate questions you may have.