Make Your Nut

It’s been over two months since the government released guidelines for the Making Home Affordable program (formerly known as the Homeowner Affordability and Stability Program), which was designed to allow homeowners to refinance their mortgages into more stable, equity-building 30 year fixed rate plans. The goal of the Making Home Affordable program is to enable homeowners whose home values are now worth less than their mortgages a chance to take advantage of historically low interest rates - an opportunity that would otherwise be lost due to their lack of equity.

It’s a great idea, but the execution of the Making Home Affordable program has, so far, been wrought with confusion and outright failure. A quick search on the internet reveals that the number of people being refinanced under this plan is far surpassed by the number of people being turned away. The rejected homeowners blame the lenders, the lenders blame their computers or the government - meanwhile, the housing market continues its slow descent down the cliffside to the sea. What’s the real explanation here?

I can only tell you about my own experience, and the results of my research. But I think that I may have come upon the clearest explanation of the problem yet.

We aren’t having any problem making our mortgage payment, but we are in the third year of a 10 year interest only loan, and it’s always been my goal to refinance into a 30 year fixed rate plan before the reset date. The collapse of the real estate market hasn’t really changed my plans, since our reset date is still far off enough in the future that there is a real chance of an equity-building recovery before then. But does concern me, though, is the credit crunch, which is now requiring homeowners to have near-perfect FICO scores and at least 20% equity to qualify for a mortgage. Right now, we’re in negative equity territory, but not by too much - it looks like our home value is only down by about 5%, but I don’t see our equity approaching 20% anytime soon. My FICO score is alright, but it’s nowhere near perfect. The lenders want supermodel-hot FICO scores, and mine would only qualify as “girl-next-door” attractive.

So, when the Making Home Affordable plan was announced, it seemed like a wonderful opportunity to convert to a fixed rate mortgage much sooner than planned, and with no inquiry into either income or FICO score. I went through the qualification questions on the government’s website, and I seemed to qualify on all counts - home is a principal residence, it’s backed by Fannie Mae, all of that. So, I called Countrywide. In fact, I’ve called Countrywide three times and spoken with three different people.

I called the first representative in April, and after pulling up my account, said that my mortgage qualified, but could not be refinanced yet. He told me that the Making Home Affordable plan was only in “Phase 1″ and that my type of loan would probably qualify in “Phase 2″. Mind you, none of the documentation that the government has published has any mention of “phases”. He told me to call back in May.

In May, I called, got the representative’s voicemail, and instead decided to call the main Countrywide hotline. I was connected to a very nice woman, who pulled up my account, and then said to me that my mortgage did not qualify for refinance, yet. She said things may change in the future. When pressed, she only said that there was “additional insurance purchased for the loan” which made no sense to me, since we do not carry PMI. I know that a lot of websites out there have reported that the first round of refinancings are excluding mortgages with PMI, since PMI ensures that the lenders will get paid in the event of default anyway, so there’s no rush to refinance them. Makes sense to me, but as I’ve said, we don’t have PMI.

This morning, I called Countrywide again, because it was bothering me that I did not press further on the “additional insurance” issue. This conversation yielded the most fruit - the representative told me that the plan was still in Phase 1, and that Phase 2 was now scheduled to start in June. So, I gained some degree of satisfaction knowing that I was still being rejected under the same Phase 1 rules that blocked me in April. He told me that my mortgage may have been lumped in, or securitized, with some subprime loans which made me ineligible for a Phase 1 refinance. Then he told me that the reason for the sluggishness in the execution of the plan was a lack of guidance from the Treasury Department. He told me that customers are blaming the lenders for not refinancing them, but the lenders cannot proceed with the refinancing until clearer instructions are received from the government. His argument carries some weight, and here’s why.

I did some Googling on “Phase 1″, “Making Home Affordable”, and “Countrywide”, and a number of people are being told the same thing, more or less. But of particular note is this column from Bankrate.com, which explains that, even if you don’t carry PMI, your mortgage may have been subject to mortgage pool insurance, where a lender buys additional insurance against a securitized pool of mortgages. The article states:

Individual mortgage insurance is like auto insurance, where each policy covers one particular vehicle. Pool coverage is sort of like group medical coverage, in which the employer buys one policy that covers a group of employees.

And, then, here’s the kicker:

The system of securitizing mortgages, and insuring mortgages, wasn’t built to accommodate what I described in the previous two paragraphs. Fannie Mae, Freddie Mac and seven mortgage insurance companies have been updating software and figuring out the complex workflows that it will take to get these refinances done. It’s taking a lot of time.

They have been duct-taping the system to accommodate refinances of loans with individual mortgage insurance policies. But they haven’t figured out what to do about mortgages that have pool insurance.

So, from this, I’m concluding that it really isn’t Countrywide’s (or any other lender) fault, nor is it the government’s. It’s a big programming dilemma, and the artificial implementation of a Phase 1 and Phase 2 is just the industry’s way of stalling until an appropriate software solution is devised. The lenders, though, aren’t doing themselves any favors if they aren’t explaining this correctly to their customers.

If you’ve been subjected to the “Phase 1″ speech by your lender, try to hang in there, and don’t give up hope. And don’t let yourself be talked into going through a traditional refinance as a substitute, because that will not guarantee you the best rates and will cost you thousands in closing costs.

So, today, the Treasury Department unveiled the Term Asset-Backed Securities Loan Facility, which is a fancy way of saying that they’re going to unleash $200 billion into the economy to help increase the availability of credit to consumers. Okay, that’s fine. Put that into Box A in your mind and set it aside. Everyone knows that lenders have stopped lending, and the credit crunch is hurting everyone.

Now consider this - you’ve all probably read, either on this site or elsewhere, or even experienced firsthand, that Capital One, along with a bunch of other lenders, are using these “extraordinary economic circumstances” to justify raising interest rates on credit cards, in some cases from 9.99% up to 29%, and this is for accountholders who never had a late payment, who’ve been loyal Capital One customers for a decade or more. The rate jacks have nothing to do with credit scores - the collapsing economy has taken off the safety, and lenders are going to scramble to raise rates and fees while they still can, before Congressional legislation forbids them from doing so (Summer 2010). Put this into Box B in your mind.

Time for Box C. Box C contains all of the credit card holders who have run into some sort of financial difficulty, and either have started carrying balances when previously they didn’t, or just happen to be folks who have maxed out their cards or who carry balances as a regular thing. Whenever I write anything about credit usage, I always get one or two commenters who state that they pay off their balance in full every month, so they don’t ever see finance charges. Good for you, but you are in the minority, and more so with each passing month. If you’ve been laid off, or your transmission falls out of your car on the highway, or you have a somewhat major medical crisis, it’s a good bet you’re going to be carrying a balance at some point. In other words, given the economic climate, I would bet that credit card utilization rates are higher than ever before.

Now, take the contents of all three boxes and mix them together. Do you see where I’m going with this? The lenders are going to win, big time, at the expense of the consumers, and here’s my prediction of how it will all go down.

You’ve run into some trouble, so you’re using your credit cards, maybe even maxing out some or all of them. If you’ve been particularly good, you may have even gotten credit limit increases, so you’re carrying a lot of debt while you’re waiting for things to get better, but it’s at a decent rate, less than 10%. But then, you receive a letter, from Capital One or some other credit card company, stating that due to “extraordinary economic circumstances”, the interest rate on your card is increasing to 22%, 24%, or even 29%.

The government injects $200 billion dollars into the credit markets in an attempt to increase the availability of credit. So, the credit card companies, including Capital One, take the money - and loosen the credit market by increasing your credit limits. Welcome to the new economic trap.

With the economy in shambles, consumers are relying on their lines of credit more and more. Increasing the limit on a credit card virtually assures that the credit holder will use that additional credit, and not for an iPhone or some other luxury, but for food and clothing and gasoline. But now, instead of paying 9.99% interest on that higher level of debt, that consumer is going to get dinged for 29%. Lenders will be funneling consumers right into the killing zone on this one, unless there is some provision that I don’t know about that requires that credit be made available at lower interest rates.

When we first moved into this house, I went out and opened a line of credit with Home Depot, pretty much for the sole purpose of getting a refrigerator. We got a credit line for $2100, bought the fridge, and have since paid off the Home Depot card completely. It’s been at a zero balance pretty much since last March or so, and this past Christmas we used it for a couple of gifts, and reorganized the garage on New Year’s Day, and now the balance is somewhere around $300. So, I should be great with my utilization, right? 300 divided by 2100 translates to a utilization of 14%.

Well, a couple of weeks ago, I got the dreaded letter from Home Depot telling me that they were reducing my line of credit from $2100, down down down, all the way to…$500. Doh.

So, now, my utilization on my Home Depot line of credit is 60%, which is going to knock my FICO. I didn’t do anything but behave like a regular customer, and this is the thanks I get.

No matter how annoying my own situation may be, I’m wondering if Home Depot is doing this across the board with its account holders. If so, there are going to be a lot of contractors that are going to be caught in a bind. Typically, contractors will throw all of the materials that they get at Home Depot onto their line of credit, then pay off the balance when they get paid for the job. Reduce these lines of credit, and you’ve basically screwed some poor guy’s entire way of doing business, potentially even threatening his entire livelihood.

I’ve been seeing stories crop up this week about folks getting rate-jacked by Capital One, although this is just the latest shot fired in the Great Credit Market War of 2008-2009 because lenders have been doing this for months now. The tale typically unfolds like this - a customer in good standing, having never been late or over the limit, receives a letter in the mail informing them that the interest rate on their credit card is going to increase to somewhere north of 21%. I had previously written that lenders were going to be looking for any reason to raise interest rates, waiting for you to screw up and be a day late on a payment, or go over the limit by a latte, but it seems I was giving the lenders too much credit even then. They’re taking full advantage of the one-sided nature of the credit agreement by raising rates for any reason, or no reason at all. In this case, the reason is “the economy is bad and we need to make more money, and if it’s going to hurt us or you, we’d much rather it be you”.

There is, of course, an out for the consumer in all of this. If you don’t want to accept the rate increase, you are given the option of closing the account. Well, that’s all well and good, but here’s the kicker - the new FICO ‘08 credit scoring model will penalize you for closing accounts, so consumers caught in a rate hike are stuck between a rock and a hard place. Either accept the increased rate and start paying much more in finance charges, or reject the increase and have your credit score lowered as a result. It’s a lose-lose scenario, with the lenders, as usual, holding all of the cards.

The credit reforms can’t get here soon enough. One of the provisions that’s coming (but not until July 2010) would prohibit a rate increase from applying to existing balances, so if you had a balance of $5000, and your rate increased from 7.99% to 28%, that 28% interest rate would only apply to new purchases, and you would continue to pay down your original $5000 balance at 7.99% while still keeping the account open.

In the dark ages of credit scoring, your average consumer was at an absolute loss as to how decisions regarding their creditworthiness were made. You would apply for a loan or a credit card, and the credit bureaus would churn your data through their algorithms, and a decision would be made to either extend you credit or deny your application. The algorithms, factors, and calculations were all kept under lock and key.

A few years ago, though, the landscape shifted ever so slightly, and the credit bureaus realized that there was an untapped market in consumers that wanted to know what their credit scores looked like, either before going out for a big purchase like a mortgage, or just to keep an eye on their credit reports in the face of rising identity theft. So, we were able to access our credit reports and FICO scores through the three credit bureaus - Equifax, Experian, and TransUnion - provided we paid for them, but it was useful because you could take a look at all three reports and get a sense of how creditworthy you were. There were even some consumer-friendly pie charts showing how much of your score was derived from, say, credit line utilization versus collections versus lates.

This week cast all of us back into darkness. On Thursday, February 5, the new FICO ‘08 system went into effect, and it changes the way your FICO score is calculated. But, while lenders will start using FICO ‘08 to evaluate our creditworthiness immediately, there is no provision that allows consumers to know what their new, revised credit scores are under the new formula. There are some general guidelines - collections for amounts under $100 have less impact, a “healthy mix” of debt types is better, and there’s now greater scrutiny of “the big picture” so a single collection or charge-off has less of an effect. But did anything that I just write give you any greater insight into how your score is going to change? Not really.

So here’s what we’re looking at today: a crapped out economy with extremely tight lending standards, a shrinking credit market where open lines of credit and home equity are being dramatically reduced, and now a secret revised FICO scoring model that takes away your ability to judge how creditworthy you are. And, just this morning comes the news that one of the big three bureaus, Experian, is going to stop offering FICO score access to consumers.

Tomorrow is Inauguration Day, and for the first time that I can remember, we are going to serve under a President who has demonstrated an understanding of the technologies, hopes, and concerns of my generation, someone whose background has more elements in common with my own upbringing than with my professors and corporate officers. With that in mind, I’d like to take the time to put forth my own wish list for what I’d like to see over the next four years. While I am absolutely positive that President Obama won’t have the time or resources to satisfy all of these points, it would be nice to see some measure of progress after such a long period of absent leadership in these areas.

Hybrid Technology for the Automotive Industry. I’d like to see some real incentives for the automotive industry to produce hybrid cars. We’re already on the cusp of some really fuel efficient vehicles, with Toyota and Honda debuting models that consistently top 45mpg. It would be nice to have the domestic car companies start to gain advances in hybrid technologies, to the point that a Ford or Chrysler gives the Japanese automakers a run for their money. Whether it’s by carrot or stick, this is one of the major components of reducing our reliance on foreign oil, since fuel efficiency advances, multiplied by millions of vehicles every day, would equal real progress. Make them affordable, make them more efficient, and make people want to buy them and make them with tax incentives.

Solar Power for the Home. Years ago, we heard of a fund that Pennsylvania made available which basically cut the cost of installing solar panels on your home in half. The fund reimbursed the installers directly, thus leading to lowered out of pocket costs for consumers. Demand was so high that the fund ran out of money fairly quickly, and the governor said that no further funding was forthcoming. I’d like to see an Obama administration take this concept and make it national, so that anyone who wants to undertake the task of installing solar energy panels (and thus greatly reducing their monthly costs on electricity) can do so if they set their mind to it.

Real Controls on Credit Issuer Abuse. Yes, I know we have curbs that have been passed to restrict the punitive aspects of the credit card industry, but these rules don’t go into effect until July of 2010, leaving the credit card companies with plenty of time to slash credit lines, increase fees, and generally do all of the damage that they can before they’re stopped. We need real solutions immediately, before the credit issuers make the economic situation worse by strangling credit.

Balanced Borrowing Standards for Mortgage Lenders. We’ve gone from the era of permissive, no-doc, no money down lending to the other extreme. Now, even folks with stellar credit scores can’t scare up financing to purchase a home, and first time homebuyers can’t get a mortgage without a near-perfect FICO and 20% of the purchase price as a down payment. We need a lending atmosphere that relies less on computerized scoring models and which actually takes the time to interview each mortgage applicant to determine creditworthiness. There are people out there who really want to own a home, but will never be able to gather up 20% of a purchase price within their lifetimes due to the financial obligations of, you know, living. Let these applicants be truly reviewed for their work ethic, and let qualified people - not computers - determine whether they’re a good risk for making consistent monthly payments.

So, this week retailers started reporting disappointing December holiday sales figures across the board, even at normally recession-proof outlets such as WalMart. While this isn’t at all surprising, it was somewhat of a shock to see what’s actually happening on the ground.

We spent a week in Mississippi over Christmas, visiting my in-laws. Two days before Christmas Day, my wife and I went to the mall to do some last minute shopping, and you could have sworn that it wasn’t even December. The mall was nearly devoid of shoppers, looking more like a weekday business-lunch crowd than the usual hordes of bargain hunters. Usually I am absolutely repulsed by the holiday shoppers at the mall - this was a pleasant afternoon stroll.

While I imagine that this was the same scene that was playing out in malls across the country, here’s another side of the story that brings a new perspective to our economic troubles. The night before Christmas, we had discovered that we were out of cornbread mix to make stuffing. With the supermarket having closed early, we popped into a local drugstore to see if they had any Jiffy boxes in their little food aisle.

Can you believe that the drugstore was packed with people buying Christmas gifts? Everywhere you looked, the aisles were blocked by people whose shopping baskets were filled with RC cars, clock radios, and those little plastic toys that one finds in drugstores. Scores of people, trying their hardest to make sure that there was something under the tree for their loved ones to open, no matter what.

If you are reading this, you are one of the cherished few readers who know about Make Your Nut, because, at this very moment, this site no longer exists in the Google search index. This has probably been true for a number of weeks, if not months, but I hadn’t noticed it until a couple of days ago. Here’s the story.

A few months ago, a reader notified me that a number of spam links were appearing at the bottom of every post that appeared in his Make Your Nut feed in his feed reader. I checked into it, determined that it was a spam injection hack that affected older versions of Wordpress, and promptly did nothing to resolve it. I checked the feed posts every so often, and it looked as if the spam injection only affected one or two older posts and had stopped - I had never upgraded my Wordpress installation because I was intimidated by the process, and in my mind the spam injection attack had come and gone.

A few weeks ago, I noticed that traffic to the site was gradually decreasing. I had claimed responsibility for this in my own head because I have been busy developing content for The Best Food Blog Ever, and have not been posting here as often as I have been in the past. Less content means less traffic, I figured, and chalked it up to that. I figured that after the holidays, when things calmed down, I would resume posting on a more regular schedule and the traffic would resume.

Two days ago, I got clued in to the Google Webmaster Tools site, and signed up for it, adding my two sites. To my surprise, the tools showed that Make Your Nut was not indexed by Google at all. I did a search on Google for ’site:makeyournut.com’ and it turns up 0.0 results. I hopped over to the help forum for Webmaster Tools and posted an inquiry, and that’s when a kind soul took the time to look at my site in Google’s cache and told me that there were about a dozen hidden text links at the end of every post that pointed to teeth whitening products. These links weren’t visible to me, and they weren’t visible to any of my readers like the previous attack - they are only visible to search engine spiders and are an attempt to raise the target site’s ranking by having thousands of Wordpress blogs link to it. As a result of this black hat SEO spam injection, Google saw my site as a spam site and summarily blacklisted Make Your Nut from the index.

Flash forward two days later, and here we are. I have upgraded Wordpress to the latest and greatest, which was amazingly simple and straightforward after all (I did it on the couch, using the laptop, while watching the season finale of The Biggest Loser), and hopefully that has addressed the spam injection hack by closing the security hole. I have applied to Google for reconsideration to be included in the index again. And, until such time as that happens, not a single soul is finding any of this content using Google as a search engine.

So, that’s the reason for the new template, and I fully expect to go through a few new themes before finally settling on one, since I have a brand new, clean Wordpress installation. Hang in there with me!

And, totally off topic, it’s the final days of the holiday shopping season and you still haven’t bought stuff for your outer circle of family members. Now that it’s just you and me here, without the distraction of all of those wanderers coming in off of random Google searches, I can speak more freely and let you know that, this morning, I received an email from one of our sponsors that you may have heard of - Starbucks. And Starbucks told me that they’re running a 20% off everything sale until December 24. So, if you have last minute gifts to buy, and if you or your designated giftee likes coffee, and if you like Make Your Nut, I fully encourage you to click, click, click away at the link below and buy some stuff. It’s not like anything else is going on at the moment.




It’s being reported that, over the next 18 months, credit card issuers will be reducing the limits on existing credit lines to the tune of $2 trillion dollars. I’ve already written about how Sears discontinued my line of credit - now it appears that many more consumers will be joining me in canceled-credit land.

Here’s the quote that shocked me the most, though, from Scott Hoyt, who is the senior director of consumer economics at Economy.com, a division of Moody’s:

“There are plenty of middle- to higher-income folks out there who may have a $20,000 line on their credit card but they rarely use more than $2,000 of it. If you knock that line down to $4,000 or $5,000, so what? There is another set of consumers who may have a $2,000 credit line and are borrowing $1,500, $1,800 on an ongoing basis. If you whack their credit line, that’s going to impact them pretty severely.”

I agree with Mr. Hoyt on the second part of his quote - folks who are running $1800 balances on $2000 lines are definitely going to be impacted by a reduction in their credit lines to $1500, from a cashflow management perspective. But his statement that a consumer with $2000 on a $20K line of credit is not going to mind a reduction in his or her limit to $4000 is way off base.

Your FICO score is based on a number of components, but one of the biggest contributing factors is your utilization level, or the percentage of your available credit that’s currently in use. The lower your usage, the better, with noticeable increases in your credit score occurring at the 50% mark.

Now, a family that’s bumping up against the limit on a $2000 card is running 80% to 90% utilization month after month - reducing their limit to their balance isn’t going to impact their credit scores much, if at all. But, if you take someone who’s running a $2000 balance out of $20K, 10% utilization, and then drop them to a limit of $4000, you’ve suddenly increased their utilization to 50%, which essentially tanks their FICO score. So, one day they’re a good to great risk, the next day they’re questionable - and they’ve done absolutely nothing differently.

These credit restrictions are going to toss the general notion of creditworthiness into a blender. Responsible credit users will suddenly seem less responsible because they’re going to be perceived as being heavier users of credit. And, with mounting job losses in an unstable economy, the credit issuers are pulling in the emergency lifelines just as people are most likely going to need them.

They say that online advertising revenues are entering a softening period. I’m game to test that theory.

I’ve started a new page that is attached to this site called Sponsors and Special Offers. I’ve listed a few of our affiliate advertisers there, with a brief description of each service. In selecting sponsors, I’ve specifically chosen those that I believe would be of true benefit and interest to the readers of this site - although, admittedly, I have absolutely no idea of what the typical Make Your Nut reader is like. I guess what I’m saying is, although they were available to me, I made an active decision not to run payday loan ads, or even credit card ads, for that matter. Which means that this site will make absolutely no money if that’s what you folks are looking for, but it would also mean that what I’ve been writing about for the past few years has been absolutely targeted at the wrong audience.

The sponsors that are being listed, though, I believe are at least worth mentioning to this audience. There’s ING DIRECT, which I have personally used for my primary banking for years now. Besides having no fees whatsoever, because they don’t have physical facilities and can thus run their business more efficiently, what I like is the automatic $165 overdraft cushion that each Electric Orange checking account gets. Who among us has either been subject to, or known someone who has been subject to, multiple $35 overdraft fees for multiple small purchases, like coffee, because you made a mistake in budgeting or maybe just because you’re a poor college/grad student/newbie worker? It’s wrong, it’s evil, and it’s making the poor poorer every day. With ING DIRECT, if you go negative, there’s no fee. If you keep making debit transactions while you’re negative, there’s no fee. If you manage to get to negative $165, they cut you off, but you should be able to get paid well before that point, plus they’ll shoot you an email as soon as you go negative, so you’ll know where you stand anyway.

I’ve got a couple of credit monitoring services listed. MyFICO is the granddaddy of them all, and what I have always used to pull my credit reports and scores, and there’s also Equifax. Free Credit Report 360 is another service, and you may like that one because it’s got a shorter registration form to get started (no social security number, just a credit card for identification) and a 7 day trial period.

ID Watchdog guarantees you against ID theft. The service reviews your credit report for fraudulent items, but the best part is that they constantly monitor your credit reports for any signal of fraud, and guarantee 100% resolution if your identity is compromised while you are a member.

And if, for some reason, you wanted to form your own corporation, you can incorporate for free until tomorrow, December 5, by using MyCorporation, which is run by those folks at Intuit, the people behind Quicken and TurboTax.