Real Estate Blog - ANOTHER DRAG ON THE ECONOMY?? AN UNTOLD STORY. The Loss of Consumer Credit.

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ANOTHER DRAG ON THE ECONOMY?? AN UNTOLD STORY. The Loss of Consumer Credit.

WHAT'S WRONG WITH THIS?

The American consumers are offered an individual "WORK-OUT".

The Wall Street investment giants are offered a group "BAIL-OUT".

No matter what the cause of the American consumer's real estate financing problems, it will probably have a negative effect on their credit report and credit score. Many mortgage banks will not entertain a short sale for a property until the home owner was in arrears on their mortgage payment.

Fact: Foreclosure will be on a credit report for about 10 years.

Fact: Mortgage arrears: 30 days, 60 days, 90 days, 120 days, will be on a credit report for many years.

Fact: Bankruptcy will be on a credit report for 7-10 years.

Fact: The cost of automobile financing will be high. What's the interest rate on a "sub-prime auto loan?"

Fact: The loss of consumer credit will affect the economy and value of stocks, 401Ks, etc.

Fact: Many employers now review credit reports in the hiring process.

All of the above will result in a reduction of credit score.

WALL STREET vs. MAIN STREET. Once negative information is on a credit report, it often takes years, many years, for the negative information to work it's way off, even after the debt is paid.

A late mortgage payment is going to be on a consumer's credit report for years. When a Wall Street executive leaves a company, he gets a severance package of many $Millions of Dollars even if the company has lost $Billions under his leadership.

The consumer pays over and over for credit impairment. The Wall Street executive is PAID for his failure.

CREDIT SCORE 500? WHAT CAN A CONSUMER DO WITH THAT?? WHAT WILL THE CREDIT COST BE FOR THE CONSUMER?? How many years will it last?

LOST CREDIT. A secondary casualty of the mortgage mess. Little has been written about the lost credit and the lost opportunity for many American home owners for years to come.

LOST OPPORTUNITIES. What about the lost credit of so many American consumers?? Many of the "workout" schemes foisted on home owners won't even touch a home owner until they have effectively ruined their credit for many years.

This affects the consumer is so many ways.

They may not be able to get home owners insurance except in pools.
They may not be able to get automobile insurance except in pools.
They may not be able to get consumer credit except at usury rates or secured credit cards.
They may not be able to use credit to co-sign student loans.
They may not be able to get a Real Estate Broker license in some states. (MD requires a credit report).
They may not be able to get checking accounts at some banks. BankOfAmerica pulls credit report.

Most financial transactions in the U.S. require a credit review.

I wonder if Secretary Paulson pulled the credit report for the Wall Street Giants he wants to bail out.

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988. Real estate talk.

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 09/27/2008 12:59 AM

Comments (78)

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78 Comments on ANOTHER DRAG ON THE ECONOMY?? AN UNTOLD STORY. The Loss of Consumer Credit.

SEP

2008

Like I keep saying Lenn...they got the hands caught in the cookie jar and now they are just looking for the crumbs.

Lots of things a wrong with this. So we wont do a work out till you ruin your credit is a bad mistake. Never to return to the market mistake.

Not a word has been mentioned about all of this. Something needs to be done about all of this as well. Since the entire banking system as we know it is no more, then the whole concept of credit scores and how this works needs to be revamped as well. Good credit scores doesn't seem to have been such a good guidepost.

I don't think people fully understand the ramifications of low credit scores and payment history. You hear from them "So I won't be able to buy a house for a couple of years..so what?" but as you stated it is much more than that. Insurance, jobs, a bank account.

This should be published for all those who are considering walking away from their homes to see. Wish it could.

Lenn, You have just touched on what is going to be a HUGE problem in the very near future. Folks will not be able to buy anything on credit AND they are going to have a very difficult time even finding a place to rent. This is going to be a major problem.

Lenn,
The fallout is going to be dramatic and we are all going to be affected.

Lenn, the new credit paradigm hasn't hit many consumers yet. Their mindset is still rooted in the very near past. Two to three years ago they would have been able to get a loan the day after a bankrupcy was discharged. Like Bob Dylan sung; "The Times They Are A Changing."

Lenn...

Good point. I hadn't really thought about the long-term effects of all of this, but you are correct. The available pool of buyers could be decreased for as long as ten years.

Wow, that is something to think about!

Neal. Indeed. However, the Wall Street folks have very forgiving baby sitters.

Laura. I agree. If a bank won't consider a work-out until a consumer has ruined their credit, more foreclosures will take place.

Miriam. I wrote about it back in February. http://activerain.com/blogsview/390537/HOMEOWNERS-IF-YOU-CAN

Kris. Consumer loss of credit has always been one of my primary concerns. These families will be out of the home buying market for many, many years.

Bryant. Indeed. This is one of the fall-outs of the mortgage mess that is seldom mentioned, but I've written about it several times. If I know it and you now it, don't the mortgage companies know about it????

Cynthia. Yes we will. It will probably take about 15% of the home buying pools out of the market for many years.

As if things weren't going to be bad enough.

I really dont think most people know how much in thier lives are tied into thier credit scores, insurance on thier homes and cars, and checking accounts. It may well be a rude awakining for many---Bart

This is a nice blog and talks about the long term damage to the consumer. Something the talking heads are not really covering

Bart. I agree. I've thought about this often when I read of the mortgage troubles of many consumers. IMO, the mortgage problems are just the beginning of their problems.

Charlie. Thanks. The talking heads read the TelePrompter.

I am hopeful that something will be done to lower credit thresholds. Too many good people have been affected in one way or another and the standards need to modified in some fashion. Good people may have defaulted on a mortgage or an investment but maintained good payment history on the rest of their credit. The same way medical bills on credit reports at times were not given great consideration a similar standard should be established. Lenders cannot base themselves on just credit score. They will have to look at the report itself and identify if poor payment history was across the board or just on that second home that went belly up.

Sergio. I doubt seriously if that will happen. The credit deficiencies, even loss of a 2nd home, will be cause to raise the cost of credit dramatically.

Lenn - with all these valid issues being forgotten, there is one to add. Jobs - employers do check potential employee's credits. Bad credit - No Job!

Petra. You are right. I forgot that one. I just added it. Thanks.

Lenn, I can personally attest to the nightmare of "a few missed payments", having found myself in that boat back in the 1980's. My USED car carried a 22% interest rate, and my other cards (I only had two) jumped up to a similar rate. As a lender shared with me at the time, I would have been better off filing BK and unloading everything- including the house- because the arrears destroyed my credit for the next seven years. That a foreclosure would have remained for ten was hardly consolation!

Lenn it will be interesting to see how we get out of this mess. I suspect that the effects of this bailout will last for a very long time. Things will get worse before they finally get better.

ugh..........I'm so upset, looks like no one wins but the Big guys.

Lenn: My husband and I own an auto leasing-financing company, and of course, I do mortgages. We have been looking at credit reports since before there were any credit reports. Both of us have discussed this issue and length trying to figure out what will become of all the people with blemished credit. These people are already showing up at the leasing company and let me tell you this:

There aren't any auto lenders that want SUBPRIME auto loans. Just like there aren't any lenders that want SUBPRIME home loans.

Can you blame them? Subprime loans are awash in red ink and banks are dropping like flies.

I can only believe that in the future, those that lost homes during this "crisis" will be placed in a special catagory. They are not credit criminals. They are credit victims.

Lenn, by now, I should know better than to try to read one of your serious posts before my cup of morning coffee! And this one makes so many unfortunately valid points, that I should lace the coffee with Prozac!

Throughout his life, my father was totally allergic to debt, other than a home mortgage. Anything else, he paid for with cash or a credit card that was paid in full by the time the bill got there. I'm starting to channel him! But it's nice to have credit there when you need it.

Years and years, people can't fathom how much this mess will affect them long term, thanks for your post its clear and straightforward (as always :) ) . I like to read your posts Lenn, your wisdom comes thru clearly.

Lenn- I understand your points and agree that many, if not all, of our lifes pleasures and just plain survival is connected to our credit score. We are in a mess for sure. But and here we go with a but....why add to the doom and gloom of the world? yes we are in a mess and yes it is going to take some real serious work to get us out but seriously, trying to do so with a doom and gloom attitude takes so much longer to achieve the right result. Im no Pollyanna by a long shot but I have found that all crisises that have come my way whether self inflicted or not are better dealt with the thought that I WILL succeed in overcoming. We as a nation will overcome this. Besides, who is to say that 'credit scores' will remain the only way to approve someone for credit? Credit scores are fairly new as a way to 'know someone' are they not? Lots of changes could come around that would make life a little more normal for us all. We all need to work together to come up with solutions not just lament that there is a problem. As always, just my thoughts dear, just my thoughts :)

Laurie. Indeed. In an earlier life, I served as a bankuptcy trustee in MD. Folks who filed a chapter 7 could buy a home with an FHA or VA loan after 2 years and 3 years for conventional. The only problem with bankruptcy is the perceived stigma left over from the 18th century. Many folks would prefer to revive debtor's prison rather than accept bankruptcy.

Bill. Agreed. They are already getting worse each passing day.

Missy. The big guys take care of each other.

Janet. You are so right. My heart goes out to the consumer caught in this credit trap.

Patricia. I suppose it's the result of having been dirt poor, but my credit habits are identical to your father's. I understand completely.

Gail. I am particularly atuned to the credit problems of the consumers. My years as a bankruptcy trustee taught me a lot.

Martha. I understand your position. However, I believe that one of the reasons many consumers are in trouble now is because no one spoke honestly to them when they made that loan application. During the 2003-2006 years, I probably turned away 250 buyers because the numbers just didn't work. Sure, maybe they went to someone else. However, I believe that we, as knowledgable real estate practitioners have a duty to make our buyers aware of the pitfalls of risky loans.

It's such a mess and I think we may not even begin to comprehend the fallout for months, if not years to come. The anger is palpable though, I think these congress members are lucky this didn't happen earlier in the election year or they would probably all face some heavier challenges.

Many buyers with good credit are waiting for prices to come down more. They don't realize that even if prices come down interest rates will be higher so they still won't be able to afford the home. I'm glad my parents taught me to save for a rainy day and to live below my means.

Colleen. I agree. It may take years. As credit tightens, fewer buyers will be able to qualify, no doubt. It's a shame that credit worthy buyers are paying the price for the mortgage mess.

Mitchell. Buyers who are waiting are going to lose. Even if the fed lowers rates, mortgage will continue to creep up, IMO. Buyers usually only look at one thing, the price of the home.

I agree, saving is the key to getting through this mess. I'm a saver too. I'm not engaging in any descretionary spending (much).

I'm getting ready to serve the "pent up demand" when it comes.

Lenn - This one I have to reblog

Lenn, Isn't amazing that the "big guys" have been talking only numbers and Wall Street terms and not the way an everyday American can understand what the heck is going on with their country's finances?

Lenn, most Americans agree that this is a bad solution. I don't know the right way to go, that is why I hire these yahoos to do the job in Washinton. I think we should fire them all.

Petra. Thank You.

Mana. It is amazing indeed.

Fred. BINGO. Half of them enabled Franklin Raines. The other half handed him the $Millions on the way out the door.

I predict that there will be legislation that prohibits employers from running credit checks.

HEY, isn't there some rule somewhere that unless you are in the business of offering credit lines, you aren't supposed to even have access to credit reports? Since when are employers offering credit lines?

Amanda. I doubt it. The credit providers have VERY powerful lobbies. I'm sure permission is provided in the small print of the employment applications.

Amanda, I hope you're right but I think Lenn is correct. I had to have a credit check and a criminal background check in order to receive relocation clients.

Mitchell, what reason is offered for a credit check prior to relo leads?

Amanda. The relo companies don't have to provide a reason. It's a condition of receiving the relo referrals.

Amanda, Only that it is their policy both Cartus and USSA. I had to pay for it too. One of them is military relo so I understand the background check but I don't know why the credit check. I suppose they think if you have bad credit you won't be good with financials or handling money.

Personal Responsibility seems to be missing from all of this.

Linda. Thanks. You're right. However, I believe that the individual defaulting consumer will suffer more than the average Wall Street executive with a failed bank.

SEP

2008

I don't think we should bail out anyone. I think they should work it out just like the consumers. Maybe they wouldn't pay it all back - we are letting the consumer off the hook for taxes on the amount owed above what short sales are sold for. And I think Franklin Raines and his cronies should pony up and pay back their bonuses and some of their salaries! How can that be? They run a company in the ground and walk away scott free? That didn't happen with Enron, did it?

I absolutely love your post Lenn! I love that last 2 lines...

"Most financial transactions in the U.S. require a credit review.

I wonder if Secretary Paulson pulled the credit report for the Wall Street Giants he wants to bail out."

It's to bad that people so often vote for frauds that support legislation with high sounding names, regardless of low/evil affects!

Those same people will think these are unintended consequences.

Bill

Sharon. Actually, I don't object to the treasury buying the paper from the Wall Street fat cats. What concerns me more than anything is how the "assets" are going to be valued. Mark to Market would keep the price low. If they are permitted to value at Fair Market, the American tax payer will be taken to the cleaner.

Jim. Thanks. Seems to me that, if Paulson is going to put the "full faith and credit" of the U.S. Treasury behind these transactions, we need some system of valuation for these unregulated instruments.

Bill. No high sounding name attached to this one. It's pure simplicity - bail-out. Or, let me name it, the Fat Cat Feed and Recovery Program.

Lenn- Of course we have the duty to advise our buyers of the pitfalls of risky loans but I did not believe that was the subject of your post. Your post was about the 'bail out' and credit scores and/or reports. Yes we are stuck with the mess of clean up of those years and are surely suffering with the consequences for years to come but any mess requires a point where you have to say, ok what can I do to get through this and help my buyers and sellers get through as well. I believe that is what consumers are asking right now. They dont want finger pointing or a re-hash of what went or is wrong, They want to hear their options of how it is going to be fixed. They want to feel as though they will get through this. We have all learned many lessons from this time in our history and now more than ever it is so important that we as knowledgeable real estate practioners grasp forward thinking, to use what we have been teaching our buyers from the get go to a higher level and to be a part of the fix.

Martha. There are only so many words in a post or we risk losing readers.

This post is about the cumulative damage to the collective consumers caught in the mortgage mess. I have seen little written about this topic and I believe we needed more.

Others or perhaps I will post about steps to recover from impaired credit. In fact, since you mentioned "options of how it is going to be fixed", perhaps you should write something. Help them become part of the fix.

Great points! Wall Street would never want to be held to the same standard the rest of us are. My biggest concern right now, is that the Feds have now idea of what they are doing. The government dosn't understand economics.

Another point. Yes, credit issues will have a negative effect on many, however that will change. Eventually, not letting people earn income and purchase goods will impact the big boys. The laws will be changed to allow people with spotty credit histories to purchase again. I think eventually it will become illeagal to pull a job applicants credit.

The money has to keep flowing and businesses will do whatever they can to make that possible.

Brien.

Perhaps. I'm not so sure.

I believe that there is a cabal in the Congress and their cronies who would destroy the American system in order to get their grubby hands on it and transform it into their soclalist image.

They don't represent the American people. They represent their own power groups.

What will happen to the throngs of hobbled consumers? Number one: They will learn to pay cash and learn to live within their means. Speaking from experience here.

If viable solutions are not discovered, there will probably be more stonings of CEOs around the world as in India recently! People can't handle this much oppression from the obscenely wealthy when they are crippled financially. This is a global crisis, and everyone isn't as "civilized" as we are in the U.S.

The problems we all face right now are staggering. I hadn't thought about the impact on credit scores of all of these foreclosures, short sales etc. Between tightening of credit and more and more lower credit scores, buyers are going to be hardpressed to be able to buy anything let alone a home!

Diane. I agree. We're going to see a whole decade of low credit scores from a huge segment of our consumers.

Dawn. Judging from some of the organized demonstrations we've seen from activist groups in the past few years, I'm wondering how "civilized" we're remain.

Nice work Lenn. I have had to explain to the people who call me why a short sale might not be the best approach. We live in a society where credit rating is everything.

Lenn, It is more important than ever to make sure buyers are pre-approved or pre-qualified before showing any properties. "Oh don't worry I can get a mortgage" Doesn't cut it anymore. I rather know upfront who I am dealing with. If they do have bad credit there are ways to fix it before they find their dream home, make offers and waste our time.

Is is an unfortunate thing that many Americans are in this situation. I think it is part if our responsibility to make sure we help our clients purchase a home that will fit into their budget and make it lees of an emotional decision especially with the way the economy is.

Lenn- I have been wondering if, in light of the bail out of the financial institutions, revisions of the regulations governing individuals who find themselves in essentially the same situation as the institutions (and perhaps with less control and culpability) could be given some consideration that would alleviate the burden of their misfortunes and indebtedness. It would be fair.

When you tell people facing a short-sale situation (and who isn't out in our market) that they have to be delinquent on their loan before the bank will even talk to them they can't believe it. 'You mean we have to ruin our credit to get some help'? Yep, that's the message the banks are handing out. It will result in higher payments and lost opportunity for millions of people and we'll still be dealing with the consequences long after the current crisis has abated. It was short-sighted policy that got us here and short-sighted policy is continuing to tear us down.

Gene. That is one of the scenarios that is most infuriating. I understand that the benk is not willing to "stake themselves out" until they see arrears because as long as the money is coming in, why get the process started.

Eloise. It's the Congress that is giving our money to Wall Street. It's the banks that would be giving a break to the consumer. Big difference.

Tatyana. I have never sold a home to anyone who couldn't make the payments. I warn them that they need a nest egg.

Mitchell. For some of us, nothing will change.

Teresa. I agree completely. It's difficult and costly to navigate in our economy with impaired credit.

Lenn,

This is too true - something has got to change or else -

David. Don't leave us hanging. Or else what. . . . . ?

I wonder sometimes if the ones who filed bankruptcy or the ones who got foreclosed on are going to be the big winners in all this. They no longer have any debt obligations to worry about, unlike myself who is in debt and will lose thousands just to sell my now worthless house. I guess my generation (late 30's) don't see bankruptcy as that big a deal anymore. It sure seems like everyone I know is doing it to get out from under all the payments. In a strange way I kind of envy them. Isn't it sad that our once great country is now on the verge of collapse. Then again I guess everyone of us will be in the same boat, hungry, homeless and broke .

Lenn, we have a second on a rental property, they froze the account even though our credit is excellant (we never used any of the funds). We know of a couple folks whose equity lines have been frozen, also good credit standing. Kinda PO'd that losers get money, citizens do not. Shoot, you better have ar least a 720 score nowadays...

All the more reason to learn to live within your means and have savings....

Great conversation here. It's important that we talk these things out. The solution comes in the understanding- there hasn't been a spotlight on clarity for years.

Interesting dialogue on Cartus and USAA's credit check and background check requirements. I worked for Cartus as a relocation specialist back in 2001 when they had gone thru two mergers (PHH Home Equity and the other one escapes me at the moment). They were Cendant in 2001. They didn't do background or credit checks then...but you know, they are more corporate now than they ever were- and corporate America feeds off perception.

They did still want your 35% referral fee though:-)

In 2007, Wall Street's five biggest firms - Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley - paid a record $39 billion in bonuses to themselves.

That's $10 billion more than the $29 billion loan taxpayers are making to J.P. Morgan to save Bear Stearns.

Those 2007 bonuses were paid even though the shareholders in those firms last year collectively lost about $74 billion in stock declines - their worst year since 2002.

Frank and Jodi. HA! My HELOC was frozen 6 months ago. "Lower valuation" they said. Not a problem. I never used the thing anyway.

Alan. I agree completely. Savings are good.

Rebecca. I stopped taking referrals from relo companies in 1994. Even as a broker, I wouldn't pay a 35% referral fee.

Michael. Thanks for those numbers. Just makes us want to scream.

We are all preaching to te choir here. We need to call our elected official or e-mail them our post and comments. I call mine then I post. I even have forward links to him. I told him he wanted to see the pulse of America he needs to join A/R. This whole thing was avoidable with just simple guidelines in place or leaving the ones that we had. The worst part is they ( congress ) doesn't care and we don't have time to voice our opinion and it is going to get a lot worse.

Charles. It appears that it is getting worse, as we speak.

Lenn,

Hopefully, this will breed a new generation of responsible consumers...who operate within a budget...and use resources thriftily and carefully...and not impulsively!!! Thanks, Fran

Lenn,

That's the irony of this bailout plan now being worked on in Washington that those who royally messed up the finance market are being helped become whole again. Fortunately the original plan met enough opposition so that the new one should balance things out better.

Lenn,

EXCELLENT ARTICLE. We're so glad you touched on this. This can't be more true, sadly.

latest news = Wachovia is looking for buyers... Things are definetely getting worse.

Protect your assets, don't invest in online markets and instead move them into treasuries or gold.

Be careful out there folks, this is a dangerous time.

Lenn - thank you for again taking the time to point out the obvious. I just think that the old saying ' buy new and wear it out...pay with cash or do without.........has a lot of merit that has been overlooked in the last 20 years.

Lenn.... I haven't read any of the comments.... and this is one topic that I decided not to read about at all, until the dust settles. But you usually write interesting posts, so I decided to read yours. Yes, all of this can and will be a negative to the consumer. But I ignore most of what the gov't is trying to do... until they go after the CEOs and CFOs of these large companies that turned a blind eye, just to receive high bonuses, then our gov't is just as corrupt as the individuals that did a lot of this... cooking the books, misleading Wall Street and investors about many loans that were actually poor performing loans, etc etc.... it's just starting to be uncovered now.

jeff belonger

SEP

2008

Fran. Eeeek! I'm an impulse shopper. However, I am not an habitual shopper.

Esko. I'm not so sure. The original proposal was merely $700,000,000,000 to buy Wall Street's bad paper and unclog the credit lines. Unfortunately, with time, Congress did what Congress does, made the bill larger and added the usual earmarks for cronies and money to further their social agenda, about $30,000,000,000 the last I heard.

John. Agreed. Did I ever tell you about some home buyers who I knew were in trouble when they paid for their McDonalds breakfast with a credit card?

Jeff. Goodness, I thought that a mortgage industry representative would have written about this long before now. The focus has been on the Wall Street moguls with their $Millions and $Billions. My concern is the family that is now in trouble, doesn't matter why, who will suffer for many years, perhaps for the rest of their life due to loss of credit. Loss of credit costs many American consumers continued grief and money for years and years.

The consumer pays over and over for credit impairment. The Wall Street executive is PAID for his failure.

Lenn,

So am I, but I try to compensate for my impulse shopping by my discreet buying habits!!! LOL, Thanks, Fran

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SEP

2008

Lenn.... I would have written about it a while back.... but I much prefer writing educational pieces about FHA.... and not about our failing market and or economy. Some people such as yourself are better at this.... but I also want to get business from the consumer. Posts suchs as these and the one that I just wrote,

Stop pointing the finger !!!!! We screwed up !!!!

are usually boring to the average consumer. But I do hope some on Capital Hill read these..... just my opinion and .02.

jeff belonger

SEP

2008

Lenn, I agree on your comments, but would like to add a couple. Years ago the banks were running out of customers to lend to. They had already made money on all the credit cards, personal loans, auto loans,etc. So they went after mortgages. They got a willing Congress to change time tested loan standards and the start of this mess began. They pushed for credit scoring (there was a time without scores) because it allowed them to make loans without standards. Now the scores are going to be used to punish the consumer even harder. But once the banks get their pound of flesh, they will revert to the greed that got them and us to this point. Some bright person will say that a credit score isn't indicative of a persons abilitiy to pay- and it will start all over.

OCT

2008

The media has got to stop calling the financial industry rescue bill a "bailout". This has such negative connotations, that I think that this has led to a lot of confusion as to what the bill actually does. I think that the biggest problem in getting this bill passed is that the administration has done a horrible job in marketing the bill to Congress and especially to the public. The public really has no idea as to the effect on their everyday lives that the financial crisis will have. Over 50% of the public have investments in stocks in their 401(k)s, most have most of their net worth tied up in the home equity, and others can not get credit for student loans, etc.

The important thing to understand is the critical lack of capital in the financial system. Without new capital, lenders are unable to extend new credit. This bill is designed to alleviate this log jam by providing fresh capital to make new loans. It is absolutely critical that this bill get passed in some form .

OCT

2008

Well said - "work out" vs. "bail out". I think consumers are being give a lot of wrong information. I have a client who was in default, got scared and tried to "work it out" while going for a short sale. We finally had an offer and the banks turned it down as they "were working it out" and now they are giving up and filing Chapter 13. Their financial advisor/attorney said it was best and they are under the impression the impact will not be what you described above.

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