The single biggest benefit of the much-touted new rules for credit cards — prohibiting credit card companies from raising interest rates on existing balances — has already been circumvented in some cases.  They have  found a clever way to make YOU request a higher interest rate on your existing debt.  (See our entry on this story by clicking here: Banks make you ask for Higher Credit Card Rates ),  But that is just the beginning:  There are many other ways they can still get more money out of you.

While penalties have been limited, you have to be constantly vigilant and read everything they send you or you could be faced with major increases in charges before you even know it.  This is all legal under the new law.  Look for them to raise your interest rate on new balances, add annual fees and raise other fees.   Sometimes you can stop them by threatening to cancel the card– if you pay attention to all that fine print they send you in letters that look like junk mail.

Remember there is no limit on interest rates, except on old balances.  Usury laws have been eliminated.  Rates of 35% are not uncommon, giving loan sharks some serious competition.

All of these changes are going to make it harder and harder to compare the cost of different credit cards.  The requirement that each issuer offer a standard, plain vanilla credit card — which would make it easier  to compare rates and terms — was crushed by the industry whose lobbyists have been busier than yellow jacket hornets all over Capital Hill.

There are many companies making many claims about helping you prevent foreclosure on your home. No matter how good their pitch sounds, if they want you to pay them for their services, do NOT sign up.  They are unlikely to fulfill their promises and very likely to take your money.

There is a huge network of foreclosure prevention agencies that are licensed by the government and work for free.  No cost to you.

Meanwhile if you need a mortgage loan modification, the best thing to do is work through one of the FREE (do NOT pay for this service) counselors approved by the federal government.

A list of local counselors is available from HUD.
You can also get names of approved  counseling organizations from the Hope website or by calling the HOPE HOTLINE at 888-995-4673.  You can also call 1-877-894-HOME (1-877-894-4663).  The Neighborhood Assistance Corporation does this work too.

The scammers are especially clever at preying on people in trouble and they have come up with many ways to convince you they can help pay down or eliminate your debt when all they actually do is take your money.

The BBB describes three common debt help scams at their web site.

In brief the three scams are as follows:

Debt Negotiation or Settlement in which companies promise, for a fee, to call your creditors and get them to reduce your debt.  They almost never succeed.  But they do take your money.
Debt Consolidation.  The honest organizations in this business get your debts partly under control by getting your creditors to reduce or stop interest and late fees in return for regular payments (on which they are paid a commission).  You send them one check a month and they spread it out to all of your creditors.  There is one organization in this business that we trust, www.NFCC.org.  It has affiliates all over te country that usually operate under the name “consumer credit counseling” agency or service.   If you do not use this organziation, be vey careful.  Fees are often exorbitant and many of the organizations in this business simply do not pass your payments along.
Debt Elimination.  These companies promise to gove you documents that you can use to elimante your debt based on the argument that it is illegal.  You get the paper (maybe); and they get the cash.  You debts are still there when the dust settles.

According to a recent article in the Wall Street Journal, more and more Americans are deciding not to keep up with those payments.  Some are arranging to sell their homes for the current market value with the lender’s agreement to take that amount in full payment of the mortgage.  This is a “short sale.”  But for those whose banks won’t make such a deal, the solution is simply to stop making payments on the mortgage and move out — sometimes to a previously foreclosed home in the same neighborhood that is now for rent.  The bank then forecloses.

This strategy can significantly reduce your debt, but it is not without its problems.  It will always result in a reduction of your credit rating of up to 160 points, and it will stay on your credit record for seven years, making it harder to get loans and increasing the interest you pay on any you do get.  It will also be at least three to five years before you can qualify for a mortgage to buy a home.

Beyond that, the aggravation depends on the state where you live.  Every state has different rules and you should check yours before doing anything.  Some states (such as Arizona and California) do not allow lenders to pursue your other assets for any balances due after foreclosure, but in most  states, the lenders can attach other assets you may own.   In many states, the lender can sell your unpaid balance to a collection agency that can then chase you for up to 20 years.

Check our main entry on the federal rules that govern the behavior of collection agencies.

Why would any lender do that, you might ask.   The short answer, in my opinion, is that they are incompetent.  If they were smart, they might have at least gotten the full current market value of the property, and, in many cases, they could also have kept the homeowners in the home!

There is an example in the WSJ article:  An expensive “dream” home in Scottsdale, outside Phoenix built by a couple name McCaughey.  Things turned sour in their business and they could no longer afford the mortgage on the house.   If their lender, Citigroup, had offered to “cram down” the principle enough, maybe they could have afforded the house.  But that is not what happened.

With cram down off the table, the McCaugheys asked Citigroup to give them some time so they could arrange a “short sale” in which the house would be sold at current market value — well below the mortgage amount.  Citi would take all the money and forget about the mortgage balance.  In this case, Citi probably would have netted about $650,000 on a mortgage closer to $1.3 million.

Citi turned the McCaughey’s down and foreclosed.  The day before the house was to go to auction the minimum bid was dropped from $1.3 million to $379,000!  The winning bid was $486,300.  That’s what Citi got (less expenses).

The auction buyer put $54,000 into the house and its marketing and sold it for around $680,000, netting, he reported, $150,000 cash.

Citi got a lot less than it could have and the homeowner lost their dream house.  Lose/lose.  It makes no sense.

Since the beginning of this crisis, I have pushed for a change in the bankruptcy laws that would allow bankruptcy court judges to “cram down” the principle of a mortgage loan to something not less than 90% of the current market value of the home.  Last January it looked as if the provision might pass when it was reported that Citigroup, having accepted billions of bailout dollars, might change their opposition (see our previous entry: Foreclosure Prevention moving to Bankruptcy Court ).   However, this never happened and now Citi is paying the price.

Let’s look at this case again had the law been changed.  The McCaugheys could have filed for bankruptcy and the judge would have figured out that the house with the $1.3 million mortgage was worth about $675,000 in the current market.  Had the McCaughey’s been able to afford a mortgage on that amount, they could have stayed in the home.  If they could not have afforded that (and the judge would make this determination), they could have arranged a short sale and moved on.

In either case the lender, Citigroup, would have received probably $200,000 more than they actually got!

Seventeen years ago, a man named Francisco Espinoza, a baggage handler for America West, tried to use the Chapter 13 provision of the bankruptcy law to adjust his student loan.  He owed $13,000 for a course in computer-aided design that had not landed him a job.  America West had cut his pay to $6 an hour, and even though he had no other debt, he could not make the payments on his student loan.

The bankruptcy court agreed that Espinoza could not make the full payments, so they eliminated $4,000 in back interest charges and set up a tentative schedule for payment of $274 a month over five years, which would cover the loan and the interest going forward.

The lender was notified of this possible decision by the court and did not respond.  Six months later the plan was made final and the lender was notified of their right to appeal.  Again, they did not respond.

Espinoza met his payments and in due course the bankruptcy court discharged the loan and ended the case.

Then, eleven years after the case was begun and two years after it was closed, the lender went to court, with the support of much of the student loan industry, to say that they should get the $4,000 in back interest because the bankruptcy court had no right to make such a ruling without an adversarial hearing.

In other words, it was the court’s responsibility to make sure that the lender showed up in court.  Sending them notices of their right to do so was not enough.  The court should have sent sheriffs to enforce summonses.

The appeals court saw the absurdity of this argument, but the Supreme Court agreed to hear the case and it will now rule.

To me this is one more example of the incompetence of today’s lenders.  They have been milking their businesses for years now.  They do not hire enough staff, they do not train them properly, and they expect the court to make up their shortcomings.

I bet those notices were never read, or at least not by anyone who knew their significance.  Or if they were read by someone who understood, that person was too busy to deal with them and buried them.

These same lenders are refusing to do loan modifications on mortgages, losing paperwork again and again, shoving phone calls  into push button hell, and generally acting irresponsibly.

It is NOT our job to fix the situation for them.

A recent special on the PBS program Frontline pointed out the shortcomings in the original law which was modified by heavy industry lobbying.

– The bill does not regulate interest rates.  The credit card companies can still charge rates that would make the Mafia blush.

–  There was a time gap between the day the bill was signed and the various dates each provision took effect, giving the banks plenty of time to rack up interest rates on old balances (something they will not be able to do when the bill become law), add fees and penalties, and cut credit lines.  They have been actively doing all of these things.  One survey said that 50% of Americans have already had changes of one kind or another to their credit card terms.

– Small business cards are excluded from the new law.

– Debit cards are not covered.

One of the most difficult part of credit cards and debit cards is the various fees, especially overdraft fees.  Make sure you know the terms of any card you use.

Homeowners paying mortgages that exceed the value of their homes are far more likely to go into default, so the lenders are very nervous.  Last year almost 600,000 homeowners who could afford to make their payments chose to default, according to a study by Experian.

If your mortgage balance exceeds the value of your house, you have three choices:

1. Keep making the payments and hope that the value of your house will once again rise and become more than the mortgage balance.
2. Walk away and let the bank foreclose.  This could leave you liable for the mortgage balance in excess of the house value and it will certainly put a seven-year stain on your credit.
3. Arrange a “short sale” with the lender in which you sell the house at a fair market value and the bank agrees to accept that amount in full payment of the loan.  You will have to walk away but your credit situation will be much better.

For more on short sales see our previous entries like this one: Short Sales as Feasible Ways Out.

I have been pushing for reductions in principle (”cram downs”) as the only way to solve the foreclosure problem since this disaster started.  I think the best way to do it is to let bankruptcy courts take these cases and lower the principle to current market value.  But the banks hated this idea and their lobbyists defeated it in Congress.

The Obama administration tried to get banks to lower principle with some special rewards (see our blog entry on Cram Downs Gaining Favor  in Foreclosure Prevention) but this has not been a huge success.

Now, at last, some banks are facing reality (according to the New York Times) and selling off their mortgages at prices often well under 50 cents on the dollar.  The firms buying them — often reincarnations of the firms that were involved in the sale of the subprime mortgages that got us into this mess — then do the “crams downs” and get the mortgages qualified for federal guarantees under the FHA program.  This makes it possible to package and resell the ew mortgages to investors, exactly as happened before, but with federal mortgage insurance to protect the investors. (Taxpayers on the other hand are much more exposed.)

Whatever is wrong with this plan, it is good news for those whose mortgages are in trouble.  The Times relates the story of an Hispanic couple in their 60’s who could no longer make the payments on their $440,000 mortgage.  They were making no progress on renegotiating their loan until one day they got a call from one of the companies buying these loans at a discount.  Before long their principle was reduced to $314,000, and they were able to make the new payments and stay in their house.

The problem is that paperwork is making it hard for borrowers to convert their trial modification into something permanent.   Trial modifications are eligible to be made permanent after the borrower has kept payments current for three months. But the conversion requires another round of paperwork; and the same problems that we reported on earlier with the paperwork needed to start the trial are now hindering the second step.

Here is one of our reports on the first round and some links to free counseling.  Don’t pay for counseling and don’t try to do this yourself.    http://www.askjackaboutdebt.com/wordpress/2009/09/10/new-foreclosure-prevention-program-doing-very-little/