One thing that’s taken a huge hit in the housing crisis is people’s credit scores. I’ve seen it with plenty of good responsible homeowners.
The reality is that most people who overextended themselves during this financial crisis did so because they had good credit scores.
In fact when I used to ask people in a seminar who had bad credit prior to the financial meltdown no one would raise their hand.
In fact it was only people who had good credit that got themselves in trouble.
The way you build your credit seems antiquated and doesn’t always reward you for being good with your money.  If you try to live frugally, use only debit cards and curtail your borrowing, you should be rewarded.
Yet someone who lives beyond their means, yet pays the minimum on their cards, will in fact end up with a better credit score, even if you’re on the verge on bankruptcy.
This goes right to the root of the problem, where we preach the benefits of spending wisely, yet reward people for living on borrowed money. It’s entirely counterproductive to the financial recovery of this nation.
Orman and I agree that people should be rewarded not for how much money they borrow and repay but for how much money they spend without using credit in the first place.
Orman realizes this and is trying to do something about it.
She’s begun offering a pre-paid debit card called “The Approved Card”, and she’s managed to convince at least one of the credit rating agencies (Transunion) to watch the spending habits of people using it.  She hopes that TransUnion will ultimately decide to use this information to help adjust a person’s credit score.
Right now TransUnion is only monitoring the data, and they are not putting it on people’s credit scores — yet.
“TransUnion is committed to supporting Suze’s efforts to understand the impact of pre-paid card use on an individual’s credit health,” a company spokesmantold the Chicago Tribune, “Our goal is to help Suze understand whether including this data in a consumer’s credit report would impact access to credit products.”
A person’s credit score can ultimately have a tremendous impact not only on an individual’s finances but also on our entire American psyche of living beyond our means. For generations it has been okay for our economy to continue to grow on borrowed money.
It’s why too many people got mortgages they couldn’t afford, and it’s part of the reason we’re in the mess were in now.
Thus, I think all the credit agencies as well as various agencies in the government should consider transcending the norms of how credit scores are determined and maybe not allowing FICO, which is a private company, to dictate what is in their best interest and not necessarily the best interest of our families and our country.
A silent rebellion has begun. This time there will be no drums or shots fired. In fact, no one will hear anything. Not even footsteps.
Homeowners have reached a tipping point of sorts: 7 million homeowners are currently underwater. They are defaulting on their mortgages. One by one they are part of Shay’s Rebellion 2.0, a rebellion being fought on the frontlines of foreclosure through strategic default.
This time however, it’s not just western Massachusetts, but a silent battalion of millions of underwater homeowners across every state that have declared a consumer rebellion. These new warriors are no longer worried about a bad credit score; instead they are concerned with their family’s economic future. They no longer trust a Congress they believe has been hijacked by a few large financial institutions. They also instinctively know their collective actions can quickly have devastating consequences to these oligarchic financial institutions.
This time, the Rebellion is a boycott caused by the banks’ own audacity, by thinking that they could take over the polity of this nation by growing too large for any President, Federal Reserve, or Congress.
Most experts suggest families are making a rational economic decision in walking away. Businesses decide to walk away from investments all the time. Oppenheim Law recognizes that families have an obligation to themselves and may feel compelled to break contracts just like any commercial real estate owner.
In fact, Time Equities, the owner of Tudor City in Manhattan, did exactly that when they walked away from billions in the largest strategic default in the history of the United States. Did we hear anyone say such conduct by these owners was immoral or unethical?
I find it fascinating that things are now coming to a head in the form of this strategic foreclosure rebellion. 60 Minutes just did a piece on strategic foreclosure, and J.P Morgan Chase just reported that strategic defaults could have devastating consequences to its bottom line.
David Stevens, Commissioner of the Federal Housing Administration, is chiding homeowners for walking away. Fannie Mae is also pleading with homeowners to stay in their homes if they can afford to pay. Even the President of the Mortgage Banker’s Association, who arranged for a short-sale of the organization’s headquarters, is warning of the dire consequences to the banking industry and the economy if strategic foreclosures continue.
However, it should come as no surprise that the Banks’ own conduct is now simply coming home to roost. The banks and investment banks, along with auto makers and even foreign countries, sought billions or as much as a trillion in extortionary taxpayer bailouts based on the rubric that because of their size, their failure would take down the economy, and the American people with it.
So Congress, conceding to the threat along with the Federal Reserve, blinked. They opened the cash spigot, convincing the public and maybe themselves the funds would be used to help bailout the millions of folks underwater. That, as we now know, never happened.
Instead, funds given to the banks were used to shore up balance sheets, pay multi-million dollar bonuses, acquire regional banks and lobby Congress against further regulation. In addition, banks were free to continue lending practices that under ordinary circumstances would be deemed usurious. Banks are still permitted to charge consumers on average 29.5% per year and sometimes as much as 70% per year on outstanding credit card charges when most banks pay account holders less than 1% a year.
In addition, unbeknownst to most, the banks lobbied Congress to prevent legislation that would have given homeowners in bankruptcy the same rights as businesses to renegotiate their underwater principal on a loan.
The Banks convinced Congress there is an illusory distinction; that homeowners had a greater moral obligation than banks and businesses to keep their word.
Of course the news during the past two weeks that Goldman Sachs as well as other banks actually created toxic financial instruments, orchestrated by placing home loans deemed to fail into vast portfolios, might also have been the last straw for revolt. In most cases, these homebuyers were duped into borrowing money from banks that knew those loans would go into default. The banks, in fact, were betting big the loans would fail.
Sixteen months ago, I warned this rebellion could happen if the banks did not start to participate in meaningful negotiations with homeowners when it came to mortgage modifications and short sales. Instead, they have given most homeowners mere lip service.
The banks routinely lose modification papers submitted by homeowners, keep the homeowners on hold whenever they call, place the homeowners in “trial modifications,” and then proceed to foreclose. Banks tell homeowners not to worry about foreclosure proceedings while the bank attempts to modify the loans. Yet without the homeowner’s knowledge the foreclosure continues.
Thomas Jefferson once stated:
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…”
While Shay’s Rebellion may be a footnote to most in American History, Shay may well have left an enduring mark on history. His legacy could be far from over.
Congress and the President must act and use the powers of anti-trust to break up these oligarchs so the public will once again place its confidence in our banking institutions. The American people must be convinced they will not be held hostage by any financial institution. No one institution will subordinate or subjugate the will of the American people.
Banks should dust off their history books if they think otherwise.
