Tuesday, September 04, 2007

MMI: Staying Ignorant in Five Easy Steps

by Tanta on 9/04/2007 09:16:00 AM

A consensus is emerging in some quarters that a lot of the bad borrowing decisions people appear to have made during the boom had to do with consumers being insufficiently informed. I, who have been doing internet searches on mortgage-related topics since the invention of the internet, and who have learned how to weed out the jillions of "personal finance advice" articles in my quest for actually useful information, am here to tell you that something doesn't add up.

One of these days I'm going to write a nice retrospective post on all the really spiffy advice all those advice columnists handed out to mortgage-wannahaves over the 2002-2006 period, just to see what a "well-informed consumer" might have been expected to have assumed about the world.

Today, though, I'll just content myself with this nice example of post-turmoil wisdom from MarketWatch, whose editors really ought to know better, but consumer-advice-filler-drivel is such a staple of the financial press model that it apparently will take the Second Coming to shock some folks out of it.

PALM BEACH GARDENS, Fla. (MarketWatch) -- You still may qualify for a mortgage, regardless of a shaky credit market. But you need to know the ropes because many lenders have tightened standards. So what should you do if you're buying a home today or you need to refinance? . . .

Five steps to a mortgage

Before applying for a home loan, consider taking these steps:

1. Pay down credit balances. That will make you look less risky and might help your credit score, suggests Tom Quinn, vice president of scoring for Fair Isaac Corp., Minneapolis. If you have good credit, it may be possible to raise your credit score by asking existing creditors to raise your credit limits. But ask the lender not to pull your credit report to do it. Credit-report inquiries or deteriorating credit can lower credit scores.
Is it really very helpful to tell people who think they need credit that they should reduce the amount of credit they use in order to get more credit? Bad news, folks: if you have $20,000 in credit card debt and $20,000 in your savings account and you use the money to retire the cards, you will be denied a mortgage loan because in the Brave New World the mortgage lender wants that $20,000 as a down payment. If your credit card debt is trivial, so is this advice. And for the love of God, can we stop talking about what makes you "look risky"? What, "risky" is just some subjective attribute, like "fat in horizontal stripes," that can be fixed by changing your outfit? After all this turmoil, we're still making people think that it's just a matter of appearances and easy steps. MarketWatch, for shame.

2. Get a copy of your credit report from each of the three major credit bureaus. Fix errors and get as much adverse information removed as possible. You're entitled to one free credit report annually from each credit bureau at www.annualcreditreport.com. Read six steps to correct your credit report.
I'll forgive the editors of MarketWatch when they produce empirical evidence quantifying the number of people whose difficulty getting a mortgage comes down to credit report errors. You get bonus points if you ask yourself how "fixing errors" became code, during the boom, for fraudulent "credit repair." You get double bonus points for asking how some people became able, easily and without cognitive dissonance, to tell themselves that their debt problems were "all a big mistake."

3. Check licenses of lenders you're considering. This may not be easy because state licensing requirements vary by state and lender. Banks and thrifts can be checked out at www.fdic.gov by clicking on "Institution Directory."
Do you yet know whether all depository lenders actually require state licenses? I didn't think so. Do you yet know how many imploded, bankrupt, and criminally-investigated lenders so far this year had perfectly valid licenses? I didn't think so.

4. Shop several lenders. Don't assume if you get one quote of an unusually high interest rate, all will be high. Negotiate lower rates and seek removal of unnecessary fees.
Do you know what "unusual" is? Do you know what fees are "necessary"? Please analyze and evaluate your "negotiating" strength in a credit crunch. You can use the back of this paper if you need more space. (Hint: it's called a "credit crunch" when you have no position from which to negotiate because you need a loan more than the lender needs to make one.)

5. Consider that interest rates and terms may change daily. Also, a low interest rate could mean more upfront points or added fees. Get all pricing information in writing before obtaining a written commitment for your loan. Get a commitment letter directly from the lender who's financing the mortgage, which may be different from the loan originator.
This one may be my favorite. You aren't likely to get a written price quote until your loan has been underwritten these days. That means that the written price quote is in the commitment letter. It still isn't a "rate lock" until you get a "rate lock agreement." Much, much more to the point is that a "commitment letter" commits the lender to lend at the specified terms. It does not commit the borrower to borrow. You are not obligated for diddlysquat until you sign something with "Note" at the top and "I promise to pay" somewhere in the first line. We have heard story after story about people who didn't think they could "back out" when they were confronted with closing documents that didn't look right. Helpful advice might involve explaining that issue.

I conclude that the authors of this article have never been any closer to the actual mortgage business than standing around taking up space in my lobby, eating my LifeSavers and reading my back issues of House Beautiful, before getting tired of that and going home to surf the web for stupid "consumer advice" articles from 2004 that can be rehashed into filler for today's column.

MarketWatch editors: Now do you understand why I get so "mercurial" when you do this?