Ask Liz Weston

Get smart with your money

Liz Weston

How not to owe half a million in student loans

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Most college students graduate with manageable student loan debt, but there are plenty of exceptions. Marketplace Money highlighted one case last week: the medical student who expected to owe nearly half a million in loans by the time he graduated. I was in the studio with host Tess Vigeland and senior producer Paddy Hirsch to talk to this guy and discuss his options, as well as the choices he made that led him into such whopping debt. You can listen to our conversation here.

One point that Tess made, and that I’d reiterate to anyone thinking about student loans, is that taking on debt is a choice. No matter what your financial situation or education goals, you don’t “have to” borrow gobs of money to pay for school. You can go to a cheaper school, serve in the military and pay for school with the G.I. Bill, or work while you study, among other choices. You reasonably may choose to borrow some money to get through college, but if you borrow more in total than what you expect to make the first year you’re out of school, then you’re borrowing trouble.

Our caller was in a bind since he’ll need to start paying back his loans while he’s in residency. But with federal loans, at least for now, he has the option of an income-based repayment plan that will ensure he has enough money left over to eat. Once he’s in practice, he should make somewhere around $300,000 a year, which will ease the pain of paying back all that debt.

Far too many borrowers aren’t as lucky. They’re unemployed, or never got their degrees, or owe far more than they’re ever likely to earn. Nobody warned them when they were 17 or 18 and beginning to sign up for this debt that it could dog them for the rest of their lives. Private student loans in particular should come with warning labels, since they’re like paying for college with credit cards–except, unlike credit cards, the debt can almost never be erased in bankruptcy court. Read “Wipe out your student loan debt,” my column for MSN on this topic, for more details about the differences between federal and private loans, plus strategies that can help you deal with your education debt.

 

 

Regulator targets mortgage servicers

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The Consumer Financial Protection Bureau wants to “whip the mortgage servicing industry into shape,” as this post on The Consumerist puts it, and such action is long overdue. Mortgage servicers have been the choke point in the mortgage mess, often costing people their homes because of their inefficiency, inaction and indifference. The CFPB wants to increase transparency and accountability among servicers, which take people’s mortgage payments and pass them along, minus a small cut, to the loans’ owners. Here’s how CFPB head Richard Cordray put it in a speech today to Operation HOPE:

“This industry has never had a requirement, or a strong incentive, to meet the needs of consumers.  Even before the crisis, there were already problems with bad practices and sloppy recordkeeping. When the financial crisis hit, however, things got much worse…And instead of investing in new personnel and processes, too many mortgage servicers took short-cuts that made things far worse for homeowners in trouble.

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Picture every bad customer service experience you have ever had: calls going unanswered, glacially slow processes, mistakes made and not fixed, a kaleidoscopic cast of human beings who never seem to deal with you more than once, your paperwork submitted and lost repeatedly.  Now, multiply that mountain of frustration exponentially, and you can begin to get an inkling of the scope of the problems that Americans face:  house by house, neighborhood by neighborhood, and community by community.

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And it is not just consumers who suffer.  Mortgage investors do not benefit from a broken system where servicers do not fulfill their obligations or make reasonable efforts to mitigate losses.  And this failed business model widened the pain of the housing crisis and destroyed an incalculable measure of consumer trust in financial businesses, perhaps in a lasting way.”

Cordray points out that consumers have absolutely no control over which company winds up servicing their loans and can’t walk away from bad service. He quotes Abraham Lincoln, who said, “The legitimate object of government is to do for a community of people whatever they need to have done but cannot do at all or cannot do so well for themselves in their separate and individual capacities.”

Like everyone else who’s covered the mortgage industry, I’ve heard horror story after horror story from people given the runaround by their mortgage servicers. People have lost their homes, and investors have suffered far worse losses than necessary, because the servicing industry is so messed up.

The CFPB’s proposed rules won’t give people back the homes they’ve already lost, but it could prevent needless foreclosures in the future.

Reluctant lender blocks quick foreclosure solution

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Dear Liz: Is there any way to expedite the foreclosure process? My wife bought a townhome shortly before we were married. Long story short, it didn’t fit our family once we got married and had a baby. We bought a larger house and tried renting the townhome but couldn’t cover the mortgage payment. We attempted a short sale, but the bank refused a good offer, so we let it go into default. We even offered to do a deed in lieu of foreclosure, but the bank refused unless we provided financial information for me, too. Since I’m not named on the mortgage and wasn’t even around when she got the loan, I refused. We’ve mentally and financially prepared for foreclosure and now just want the process complete. The bank, though, doesn’t seem to be in any kind of hurry. The process is now entering the third year with no action on their part, and we haven’t even been to the property in well over a year. We’ve told them expressly that we aren’t fighting them on the foreclosure. At this point we just want to move on.

Answer: Offering a deed in lieu of foreclosure — in which your wife hands over the keys in return for being released from the loan — was probably your best bet to speed things along. If you don’t want to provide the financial information the mortgage company is requesting, you’re stuck with waiting this out.

It’s unfortunate, because many lenders prefer deeds in lieu as a cheaper, faster way to get control of properties they’re going to wind up with anyway. The idea is that the homes probably will be in better condition than if an angry borrower or squatter trashes them, plus the costs of formal foreclosures are avoided. As foreclosure times have lengthened, some lenders have even sent out letters to underwater homeowners in default urging them to consider a deed in lieu transfer.

One thing you should investigate is whether the lender can come after your wife for a “deficiency judgment.” If it is allowed in your state, your wife could be liable for any leftover debt that isn’t paid off with a foreclosure sale. Talk to an attorney familiar with credit and foreclosure laws in your state.

Weak bank? Maybe it’s time to move your money

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Dear Liz: I have all my money (less than $150,000) in one small bank. I love my bank, but Bankrate.com’s Safe and Sound report shows the bank having only a single star. I asked someone at the bank about it, and this person said the rating wasn’t important. Is it?

Answer: Of course it is. Your deposits are under the $250,000 limit protected by the FDIC, but a weak bank can fail, which can be disruptive to depositors. The bank that takes over typically doesn’t have to abide by the policies or interest rates promised by the failed bank. If regulators can’t find another bank willing to take over, you may have limited access to your money for a few days until your deposits are refunded to you.

A bank with “very questionable asset quality, well below standard capitalization and lower than normal liquidity” — phrases Bankrate.com uses to describe your institution — probably isn’t the best place to have your money.

Finding an apartment after foreclosure

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Dear Liz: My wife and I went through a foreclosure last year and need to rent an apartment. We have no credit card debt and over $30,000 in savings on an income of $75,000. We know that our credit will be an issue on apartment applications because of the foreclosure. What can we do to improve our chances of getting a decent apartment in a safe neighborhood?

Answer: Although foreclosures may not carry the same stigma they did before the real estate bubble burst, they still wreak havoc on your credit scores. Your scores will need three to seven years to completely recover, and that’s if you inflict no further damage. Paying your bills on time and using credit responsibly will help you rehabilitate those numbers.

In the meantime, you can increase your odds of finding a good place by looking for mom-and-pop landlords, rather than applying at apartments managed by huge corporations. The big companies usually rely on credit scores to screen out applicants, while a smaller landlord may be more flexible. Offering to make a bigger deposit or to pay several months’ rent in advance might help persuade them, said Stephen Elizas, author of “The Foreclosure Survival Guide.”

Find cheaper checking and ditch your bank

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If you’re sick of rising bank fees, check out a new feature at NerdWallet that allows you to compare the costs of more than 120 different checking accounts across a spectrum of banks and credit unions.

You’ll answer a few questions about how you use your account, including the minimum balance you can maintain and how much you’ll deposit each month. The feature serves up the best matches based on your answers. If you have enough cash on hand to qualify for an interest-bearing checking account, the feature can help you find some good options.

You also might want to read a couple of my previous posts on this topic: “How to shop for a new bank” and “7 steps to say ‘buh-bye’ to your bank.”

Changing banks isn’t hassle-free, but you can save some decent money switching to an institution that actually wants your business, rather than punishing you for it.