"Would Your Client Consider a CD?"

Low Rates . . If You Qualify

Last year, I heard that question from would-be Buyers maybe 3 times.

This year, I've logged that question three times . . . just this week!

And that, with mortgage rates plumbing all-time lows: just above 4.5% to those with impeccable credit.

Which, of course, is the catch.

Few Sellers Biting (So Far)

Buyers float seller financing, like a contract for deed, precisely because they can't qualify for a mortgage.

Their credit scores may be too low (or non-existent); they may have filed for bankruptcy recently; or they may not have any money for a downpayment.

Unfortunately, all those yellow flags are problems for home sellers, too -- especially the one about limited funds for a down payment.

That's because the risk to the Seller who accepts a Contract for Deed is that the Buyer doesn't perform, and the Seller gets back a property that's much the worse for wear.

On top of that, most Sellers are selling because they need the cash, in one lump sum -- not in monthly payments stretched out over years.

"Don't Buy That New Car/Boat/etc. Till AFTER You Close"

New Fannie Mae Credit Check

Planning on a(nother) major purchase, but haven't closed on your home yet?

Better hold off.

That's because Fannie Mae has just announced plans to pull Buyers' credit a second time -- this time, up until 5 days before closing (credit check number one is when the Buyer initially applies for the mortgage).

Home Buyers who splurge just ahead of their closing risk having their credit scores decline, which in turn could have disastrous consequences for their home purchase.

To take just one example, a Buyer who finances a new car purchase and whose credit scores fall from 685 to 675 as a result would suddenly have to boost their downpayment from 10% to 20%.

If they don't have it . . . their home purchase could collapse.

Expensive new car, indeed.

Not Your Father's Bankruptcy

What's So Bad About Bad Credit??

For many consumers, preserving one's credit rating is one of those sacrosanct, preserve-at-all-costs values.

But what if you don't plan to buy anything? Or are afraid to? Or simply can't afford to?

Then, a trashed credit rating really may not matter so much. Especially if it means ditching a whopper monthly mortgage payment on a house that has plunged in value.

In the new economic landscape that many Americans already inhabit, maintaining a high credit score is a luxury they literally can't afford. In fact, torpedoing one's credit by defaulting on a "legacy" mortgage may be quite rational, for five reasons:

One. Credit scores don't matter if there's no credit to be had.

When credit is flowing, good credit scores can open the vault doors. Now, however, those vault doors are slammed shut even for many good credit risks -- and there's nothing behind, them anyways. (At least not until Uncle Sam replenishes the banks' coffers.)

The "Pay-As-You-Go Economy"

At some point, even the profligate U.S. government is likely to find its own access to unlimited credit curtailed.

In his current letter to Berkshire Hathaway shareholders, Warren Buffett pronounces U.S. government debt the next big bubble, following in the wake of the Internet and housing bubbles.

Once that bubble pops, the government will discover what many consumers already know first-hand: it's increasingly a "pay-as-you-go" world.

Two. No one's buying anything. At least not big ticket items, anyways. And if you're not buying a big-ticket item . . . you don't need credit to finance it.

In many U.S. housing markets now, prospective Buyers have a adopted a "show me" attitude, triggering a vicious cycle: wary of being stung by falling values, Buyers are waiting for the market to clearly bottom, but while Buyers stay on the sidelines, housing prices inevitably fall more.

In the mean time, with more people renting instead of owning, fewer consumers need a good credit score to qualify for a mortgage.

Three. In the land of the bankrupt, the marginally solvent are . . . welcome.

Look around -- it's a recession. People's balance sheets have been hollowed out by falling home and stock prices, and now are being kneecapped by rising unemployment. Exactly who has pristine credit these days?

Beggars can't be choosers, and that's exactly what many retail companies catering to consumers are right now. If it's a choice between selling to marginal customers or not selling at all, many companies will choose the latter.

Four. Perversely, defaulting can increase borrowers' leverage.

Lenders receiving federal bailouts are under increasing pressure to "modify" (read, relax) mortgage terms for distressed borrowers.

How does a borrower signal financial distress? By not making their mortgage payments. Ironically, someone who's current on their mortgage is unlikely to get their lender's attention.

Five. Bad credit can be rehabilitated.

Credit scores aren't static, like college transcripts, but dynamic, like one's health. As consumers handle more credit more responsibly, their credit scores increase; if they miss payments or have multiple delinquencies, they decline.

Over time, most people's credit scores recover from a major default -- just like they recover from a major illness.

Given the epidemic number of foreclosures today, the federal government might logically take steps to shorten that recovery period.

Credit Score Pitfalls

Cash Buyers "Off the (Credit Score) Radar"

I can't say I've run into any as clients, but an article in today's Wall Street Journal makes the counter-intuitive point that simply not using credit -- as opposed to using it irresponsibly -- can lower your credit scores ("Credit Score Pitfalls of the Wealthy").

As the article notes, Fair Isaac, the company that devises the credit-scoring formula (hence the acronym, "FICO scores"), weights not just how responsibly people use credit, but how much credit they have. Basically, the more, the better (an exception: having lots of unexercised lines of credit is a demerit).

So, someone who's quite wealthy but credit-averse -- presumably, they pay cash for everything -- would likely have only a good, not great credit score.

I actually encountered a prospective client years ago who didn't have a credit score. That's not unusual for someone college-age, but this woman was in her late 40's.

It turns out that she had never had a credit card, borrowed to buy anything, or even paid a utility bill. As I quickly learned, she had lived in a rural area with immediate family most of her life, and never made any of the purchases "modern consumers" take for granted!

(And yes, it's tough to get a mortgage without a credit score: I put her in touch with several lenders, who all suggested she get a cheap cell phone or make some other nominal purchase to start the credit score process, then try again in six months. Pretty much, that was the last I heard from her!)