Do Credit Markets Watch the Waving Flag of Bankruptcy?   Liberty Street Economics

Personal bankruptcy is surprisingly common in the United States. Almost 15 percent of the U.S. population has filed for bankruptcy sometime over the past twenty-five years, based on my calculations using the New York Fed Consumer Credit Panel/Equifax (CCP). In 2015, roughly 800,000 debtors filed for bankruptcy, according to court records, representing 0.64 percent of U.S. households. One of the consequences for filers is a mark on their credit report—a bankruptcy “flag”—which indicates that the consumer has filed for bankruptcy.

This bankruptcy flag is visible to creditors and, according to the credit bureaus, hurts filers’ credit scores. To limit these effects, the Fair Credit Reporting Act restricts the length of time that credit bureaus can fly these flags on reports for each (personal) bankruptcy chapter: the flag for Chapter 7—in which debtors get a full discharge of (unsecured) debts after unprotected (non-exempt) assets are liquidated—must be removed after ten years, while the flag for Chapter 13—a partial debt repayment bankruptcy designed to help people keep their homes—is typically removed after seven years. For economists, the fixed timing of the flag removal (and the difference across bankruptcy chapters) gives us a laboratory to explore how the lifting of bankruptcy flags affects borrowers’ credit scores and credit outcomes, by comparing these outcomes directly before and after flag removal…

Source: Do Credit Markets Watch the Waving Flag of Bankruptcy?   Liberty Street Economics

Purchase or Refinance During a Chapter 13 Bankruptcy

Chapter 13 Plan

Chapter 13 Plan

This post is written for folks currently in a Chapter 13 Plan. It is also helpful for those contemplating filing a Chapter 13 Bankruptcy Reorganization Plan. This post is also helpful for those recently Discharged from Chapter 13. A mortgage refinance or a home purchase, while still in a Chapter 13 bankruptcy, is possible; it is also a complicated financial and, legal transaction. To do this requires a highly specialized mortgage professional experienced with both FHA lending rules and Chapter 13 bankruptcy as well as local court rules.

The Chapter 13 Payment

One of the most important things to understand is the importance of on-time Chapter 13 Payments to the mortgage underwriting process. I strongly encourage you to read this: The Chapter 13 Payment. Your Chapter 13 Trustee payment is given the exact consideration as your housing (mortgage/rent) payment in underwriting. From the underwriting perspective, one thirty-day late payment of either the mortgage or Chapter 13 Trustee payment will sink your prospects of getting mortgage loan approval for at least a year. Mail your payment early or set your on-line bill pay or direct payment to the Trustee so that you always know your payment has had time to get to the Trustee’s office and be posted by the staff at that office. Too many times, on review of the Chapter 13 Payment history, we find a payment was posted on the 2nd day of the month. One day counts as a late payment. An experienced mortgage lender can help you check your Chapter 13 payment history in real time.

Mortgage Choices for Chapter 13 Debtors (purchase or refinance)

The only mortgages available, either for refinance or purchase, for those in a Chapter 13 Plan are those insured or guaranteed by the Federal government. These mortgages are either: insured by FHAguaranteed by VA or the USDA. Each

Any mortgage so long as it’s FHA, VA or USDA.

of these home loans are underwritten with the same guidelines as set forth in the FHA Handbook. How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage? From the FHA Handbook:  “A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.*”  Most underwriters will consider the Chapter 13 Trustee’s approval as permission from the court.

Application to Incur New Debt

To get underwriting approval for a Chapter 13 Debtor to refinance the Chapter 13 Trustee (in Colorado) or the Judge must approve your application to incur new debt. Contact your attorney to determine how and when to best proceed, or not. There are situations when it may not be in your best interest to purchase or refinance while in Chapter 13. This is a process which you can only do with the advise and assistance of your attorney. Your attorney must prepare the financial statements to submit to the Trustee in order for authority to be granted for a lender to offer new credit. Your mortgage loan originator should be able to assist your attorney in completing the Application to Incur New Debt.

Mortgage Refinance After Chapter 13 Discharge?

Yes. One may refinance or purchase within 2 years following the Discharge. BUT, it is easier to get approved for a mortgage while still in Chapter 13. This is because, following Discharge, a manual underwrite is mandated. Few lenders are willing to take the risk of not having the safe harbor provided by Automated Underwriting. Begin reestablishing good credit as soon as your Chapter 13 Plan is confirmed and continue this discipline while your case is still open so by the time your Discharge enters, you have solidly reestablished good credit.

Two years following Discharge, with reestablished credit, one may qualify for a conventional or Qualified Residential Mortgages (QRM) to purchase or refinance a home loan.

Preliminary Requirements for Purchase or Refinance While in Chapter 13

  • Twenty-four months of current housing payments with no 30-day late payments and, the likelihood of the income continuing for at least three years.
  •  Two years IRS Returns showing your income is sufficient to pay the mortgage as well as your Chapter 13 payment and any debt not included in the bankruptcy payment.
  • Minimum middle FICO Score of 620 . Most will need to practice what I’ve previously posted as FICO  101a, 101b and 101c for several months prior to making a successful application for mortgage credit.
  • For anyone with a fear of having credit make time to read both Credit: Use It to Build It (Part 1) and Credit: Use It to Build It (Part 2).
  • Begin rebuilding your credit as soon as your Chapter 13 Plan is Confirmed/Court Approved; this is when your property has been revested to you.
  • The maximum limited-cash out loan to value on an FHA appraisal is presently 95% – Refinance.
  • The minimum down payment is 3.5% of the purchase contract or appraised value whichever is less. – Purchase
  • The maximum Debt to Income Ratio is 45%. This is pushing the envelope. While in Chapter 13, it is mandatory to have Court approval (in Colorado, the Trustee approval suffices) to obtain a mortgage.

There is more detail to this process than can reasonably be discussed herein but this is the essence of purchasing or refinancing while in Chapter 13.

*Reference: FHA Handbook 4000.1 II.A. 5.a.iii (H)(2)(3).

Disclaimer: This article does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

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Financially Speaking™ James Spray, RMLO, CNEFICO Pro |  CO LMO 100008715 | NMLS 257365 | November 1, 2010 – Revised May 2, 2018 | Copyright 2010-2018
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It to Build It (Part 2)

believe-in-yourself_ www.buzzle.com

 

 

 

 

 

 

As discussed in Credit: Use It To Build It -Part 1, it is essential to qualify for and properly use credit in order to have credit. A thin credit file does little good to help one build or rebuild credit. Thin credit is described as a file lacking in length and depth of credit history. Thin is not a good thing in the credit sense.

The length of a credit history is a matter of time. A short credit history may have accounts that have been open for a matter of months or one or two years. A long credit history may span decades because open, active accounts remain indefinitely.

The depth of a credit report is an issue of the number and types of accounts you have. A credit history with only one or two accounts will likely be considered thin, even if it spans many years. A “thick” file would have several accounts of different types. For example a credit history could include credit cards, installment loans and a mortgage.

The Basics

Let’s start with the basics, understand the mechanics of the FICO Pie Chart as well as the art and science of Rebuilding Your Scores. Credit scores are not a big mystery; they are simply a measure of the information reported to the credit reporting agencies by your creditors. Learn about your credit reports control that which you can as to what is reported and your credit scores will follow.

Credit Score Facts

On credit scores, how do they work? What you can do to raise your scores is discussed in this blog. It is necessary to understand there is a difference in the credit scores one may obtain for free via the Internet. These are not the scores used by lenders. They may not even be close to those used by lenders. In this blog we discuss the difference between what we call FICO or FAKO Scores?

Join a Credit Union

Not just any credit union will do. Some credit unions are so large they act more like a bank than a credit union. To learn a little more about credit unions and to find one you can join, read our blog titled: Credit Union Power. This is a key step to reestablishing your credit. Once you’ve become a member, ask for help to set up a $500 secured installment loan. Next, utilizing some of your savings, as much as possible, set up a secured credit card account and use it properly.

Beginning Anew or New?

Whether beginning from scratch as a young person with no credit or whether starting again, the tasks are quite similar. Read through both Part 1 and Part 2 of these blogs to learn more of what to do and not do as you begin this new journey. If you have a family member with excellent credit, read and share this blog on this which we call inherited credit. You have the opportunity to learn about how it works and how it doesn’t work.

Credit Utilization

Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores.

We wish you success!

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Financially Speaking  James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | September 21, 2014
 
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It to Build It (Part 1)

 

Fear

Embarrassed: Believes No One Will Grant Credit

My very good friend, we’ll call him Ramsey (not David), does not use credit. Mind you, he’s not just a simple follower of some nameless cult leader advocating that no one should ever use credit. Ramsey’s a regular fellow, professional, married with grown children and grandchildren, too. Ramsey simply does not use credit and has not used credit in the past 8+ years. The only credit he’s had in the past several years is bad credit due to medical bills. These are the type of medical bills CFPB studied and recently discussed. These are the medical bills which have ruined credit for so many for so long. This is compounded if one is not offsetting the bad credit with good credit. And he wonders why he has such poor credit scores. One must use credit to get credit for using credit.

Fear of Credit

Tips for overcoming credit phobia – Although you intellectually understand that using a credit card is beneficial, you might still have emotional concerns. Perhaps you misused or didn’t understand how to use and not use credit when you were younger. Perhaps you had a bad experience. Start over and don’t make the same mistakes, you’ve learned what not to do.

The good news is that you can take steps to get more confident about the proper use of credit.

Check your attitude and thinking – One reason people overspend with credit cards is they are thinking incorrectly. Internalize the idea that credit cards provide short-term loans. When you swipe your card, you’re borrowing money – and you’ll have to pay it back. Plastic isn’t free money or additional income. And it does not replace income.

Confront your fear – Ignorance breeds fear, so the best way to overcome a fear of credit cards is to become more educated about them. The Board of Governors of the Federal Reserve System put together this wonderful guide to help you learn more about credit cards.

Make a budget – The best way to keep your spending under control is to make a plan for how you’ll use your funds. Be realistic about your budget and stick to it. You can use this budget form from Google for free. TIP: The most restrictive budgets usually fail.

Track spending by keeping receipts – After setting up a budget, keep tabs on how you’re doing by tracking your spending. You can use online banking or any other method you’re comfortable with, just do it.

Sign up for alerts – Most credit card issuers give you the option to set up text or email alerts to be reminded of billing due dates, your current balance, etc. Even though you’re keeping track on your own, setting up an alert adds an extra layer of protection against overspending or not timely paying.

Learn the facts –. Do not let your in-use credit be more than 20% of the available credit, ever. Better is to have no more than 10% of your credit limit in use as you are building or rebuilding your credit reputation. To learn more click and read this and then this.

Next, we heartily suggest you read: Credit: Use It to Build It – Part 2

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 | September 19, 2014 | Revised March 31, 2018

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

FNMA Updated Bankruptcy, Foreclosure, and Short Sale Policies

A view shows the Fannie Mae logo at its headquarters in Washington

Fannie Mae updated its policies regarding significant derogatory credit events, which in some cases allows more borrowers to reenter the housing market. These updates are reflected in the embedded chart: How long after bankruptcy or foreclosure must you wait to get a mortgage?

  1. Waiting Period for Mortgage Debt Discharged Through Bankruptcy

The borrower is now held to the bankruptcy waiting period (4 years) and not the foreclosure waiting period (7 years). This is true even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt. This is a significant and favorable change. From the FNMA underwriting guidelines (B3-3-07): “When both a bankruptcy and foreclosure are disclosed on the loan application, or when both appear on the credit report, the lender may apply the bankruptcy waiting period if the lender obtains the appropriate documentation to verify that the mortgage loan in question was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting period must be applied.

[At this time FHA/VA/USDA require a two year waiting period following discharge and a three year period post-foreclosure.]

  1. Short Sale or Deed-in-Lieu Waiting Period

The waiting periods are being updated to establish a standard four year waiting period, with a two year waiting period permitted providing a borrower has extenuating circumstances*.

[FHA/VA/USDA require a three year waiting period following Short Sale or Deed-In-Lieu.]

  1. Mortgage Debt

As a new policy, charge-offs of mortgage accounts now require a four year waiting period following this derogatory credit (two years if the borrower can demonstrate extenuating circumstances*).

Number one became effective July 29, 2014; two and three are effective for mortgage loans with applications dated on and after August 16, 2014.

How do you know if Fannie Mae owns/owned your mortgage? Click on FNMA Loan Lookup.

Based on past experience, it will take time for the mortgage origination industry to catch up with these new policies. Further, it is likely that some will not accept these policies within their own underwriting guidelines.

*Given the reliance on automated underwriting for compliance purposes, few lenders will delve into the perceived risk of manually underwriting extenuating circumstances for fear of losing the QRM safe harbor. QRM standards were implemented on January 10, 2014. The vast majority of lenders are staying squarely inside the New Rules box, so to speak.

Reference: Fannie Mae  Selling Guide Announcement SEL-2014-10

Image Credit: Reuters/Jonathan Ernst

Financially Speaking™  James SprayMLO, CNE, FICO Pro
CO LMO 100008715 | NMLS 257365 |August 10, 2014 | Updated January 28, 2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

A Bankrupted Second Mortgage Can Foreclose

Sleeping dragon

Be aware, sleeping dragons can awaken.

The second mortgage can foreclose even after the Promissory Note was eliminated with a Chapter 7 Bankruptcy Discharge. Quite simply, the second mortgage initiates the foreclosure process under the rights of the second mortgage Trust Deed subject to the rights of the first mortgage trust deed.

By foreclosing under these circumstances, the holder of the second mortgage, following a specific legal action starting with the posting of a three day notice, may evict the residents. Should one be threatened with a three day notice to quit the property, you may wish to immediately call your attorney as this is a serious invitation to professionally negotiate a short settlement immediately.

By way of background, once the payments to the second mortgage aren’t made, the mortgage is in default. The mortgage holder has four separate options to protect its interest. First, it can do nothing and sit on its rights. Second, in Colorado, it can initiate a Public Trustee foreclosure. Third, it can file for a judicial foreclosure, although this rare in Colorado. Fourth, it may buy-out the first deed of trust and thereby perfect its position. If the junior (second) mortgage selects either the second or third option, it is most likely that the first deed of trust will also foreclose.

The Basics

A mortgage consists of two legal documents: the Promissory Note and the Deed of Trust or Trust Deed (TD). The second TD lives on, in virtually all cases, following the Chapter 7 Discharge.

Equity is returning to many real estate markets throughout the country. Among the markets enjoying substantial equity growth are several areas in Colorado, particularly along the Front Range as well as many mountain and resort counties.

Statute of Limitations

The Statute of Limitations (SOL) on a second mortgage is 15 years following the original due date; however there are exceptions and particular legal nuances which apply to this SOL. To determine how the SOL may or may not apply to a particular set of facts, you are advised to consult with legal counsel well versed with both bankruptcy and real estate law. One needs to understand that TD that has been written off continues to be a collectible debt for so long as the SOL hasn’t run the term. Written off is merely an accounting term, nothing more or less. Written off is not a ‘get out of debt free’ card.

The Short Payoff

Let’s discuss possible solutions to this situation which is becoming more common as equity returns to certain real estate market.

A short payoff occurs when a borrower cannot pay the mortgage on the property and is allowed to sell the property for less than the full amount due. This results in a loss to both the lender/servicer and the investor. All parties must agree to the mortgage being paid “short”. Providing there is a ‘make sense deal’, the lender will do this so as to avoid the expense and time of the foreclosure process. Given there are several parties involved in this decision making process, reaching consensus can take quite a lot of time – often months.

Short Payoff Settlement -Financial Negotiation

Typically the least successful negotiator is the one with an emotional involvement in the negotiation. The saying, often attributed to Abraham Lincoln, describes this situation quite well: “A person who represents himself has a fool for a client.”

This is a business transaction which may involve disclosing your income, assets, liabilities as well as proof of your ability to pay a certain amount to obtain a Release of the Trust Deed. It is suggested that by having a well prepared Comparative Market Analysis coupled with a professional Home Inspection Report to submit with your proof of ability to pay will be beneficial to reach a decision. You may expect the lender/servicer will pull a credit report in addition to thoroughly investigating your request for a short payoff settlement. They must and will investigate and verify who you say you are and your circumstances. Short Payoff Fraud is of great concern to lenders and investors alike which explains, to some degree, how difficult these negotiations can be.

Short Payoff Settlement – Hardship Negotiation

Hardship criteria include: involuntary unemployment; divorce; long-term disability; a change of employment that is more than 50 miles from the current home; a business failure; death of the primary or secondary wage earner; or a natural or man-made disaster.

I had the opportunity to assist a senior couple negotiate a hardship short payoff on a “written off” second mortgage last year. This second mortgage had been discharged in a 2011 Chapter 7 and had been “written off” a few years before the bankruptcy case was filed. The principle balance due on this second was $55,000.00; the final settlement to Release the Trust Deed was just under $7,000.00.

From the time this negotiation process began until it was successfully completed took 220 days. The hardship in this situation was long-term disability with both borrowers. We documented both of their hardships with letters from their physicians as well as photographs and x-rays documenting specific medical procedures. Finally we documented their ability to pay the negotiated short payoff by providing evidence of the gifted funds in a bank checking account.

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 | April 15, 2014

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The Chapter 13 Payment

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That which matters is when your payment is posted to your account in the moth it is due. For example, if the payment is due in December, it must be posted in December.

While your Chapter 13 payments are not reported to the credit bureaus, when you apply for a mortgage (refinance or purchase) while in a Chapter 13 Plan or within two years of your bankruptcy Discharge, your Chapter 13 payment history will be reviewed by the underwriter. This review will consider your Chapter 13 payment with the same weight as a mortgage payment.  Just one 30-day late payment will disqualify an otherwise approvable loan applicant.

Exactly What Is A 30 Day Late Payment?

To illustrate, let’s say your payment is due on December 25th. Your payment has always been made on the 25th. In fact, your November 25th payment was received by the Trustee and posted in November as it was since your first payment. However, your December 25th payment was not posted until January 2nd. Oops, you now have a 30-day late payment.

The Payment Was Sent the Same Day as Always

We understand. However, the underwriting guidelines do not understand accidental, postal or electronic delays. Indeed, the system can be harsh. Being armed with this knowledge allows you to plan for the unexpected.

Rehabilitation Expectation – Minimum of 12 Months On-Time Payments

A minimum of twelve consecutive months of on-time payments immediately prior to applying for mortgage credit is essential for approval. This supposes that all payments have been posted on time with the Trustee’s office. However, there can be an exception of a 30-day late during the payment period so long as that isolated incident is not within the last twelve months. The exception of a 30-day late payment or an interruption of on-time monthly payments must be documented and sourced as completely outside the control of the debtor.

The Blizzard Made My Payment Late

A few years back, one of my prospective Chapter 13 home buyers diligently worked to get into a position to be approved for a new home loan. By way of background, at the time he lived in a cabin at St Mary’s Glacier. That year, there was a particularly severe snow event which left my prospective client snow-bound for several days. Still, his payment to the Trustee was only one day late. We argued that this was an Act of God and entirely out of my prospective client’s control. This held no sway with the underwriter and my prospective borrower was not approved. In the interest of full disclosure, this prospective client had another 30-day late payment about 15 months prior to the blizzard. The ‘Act of God’ defense might have worked had the previous late payment not been of record.

Automatic Bill Pay – Be Aware

Those of us that use on-line bill pay through our credit union or bank love the convenience. No stamps, no envelopes and no checks are but a few of the nice features. While in a Chapter 13 bankruptcy repayment plan, set your payment date early enough so there is sufficient time for the Trustee’s office to 1) receive your payment and 2) post your payment. Be aware of Federal holidays and back your payment date up a couple of extra days to make sure you never have a Chapter 13 late payment.

The Trustee’s Staff Said a Late Payment Is OK

We understand. While a single late Trustee payment (or two) will generally not cause for a Chapter 13 to be problematic or Dismissed, keep in mind, the Trustee is not your mortgage loan originator or mortgage lender.

The Trustee said it is ok do pay my Plan payments ahead of time. Talk to your attorney, this could be a problem.

What Is the Take Away of This Post?

For those with payments due to be in the Trustee’s office near the end of the month, we strongly suggest that you mail your payment a few days early every month to help ensure the payment is posted in a timely manner. Better yet, set the bankruptcy payment to be made via payroll deduction. If payroll deduction is not available, schedule an automatic monthly payment via your on-line banking.

Unpaid Mortgage Payments Can Cause a Discharge to be Denied

As discussed above, on time mortgage and Chapter 13 payments are essential to a successful plan. Let’s say one is nearing the final month or so of their Chapter 13 Payment Plan and the Trustee learns the mortgage payments, which were to have been paid outside the Chapter 13 Plan, were not paid as agreed. The Discharge can be denied and instead after all this time, the case is Dismissed. A Dismissed case is a failed Chapter 13 from a mortgage underwriting standpoint.

We wish you success with your Chapter 13 Payment Plan!

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Financially Speaking™  James Spray, RMLO, CNE, FICO Pro  | CO LMO 100008715 | NMLS 257365 |December 2, 2013 | Updated January 10, 2018 | Copyright 2013-2018

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part provided you give complete attribution to James Spray.