`Credit-repair' loans offer hope for harried

Nation's Housing

Lenders say incentive to reduce debt load is also good business

April 18, 1999|By Kenneth R. Harney

FOR THOSE buying homes and refinancing mortgages who are struggling with credit demons, a new program could be a godsend: the widespread adoption of a new, rewards-for-good- performance approach by mortgage lenders across the nation.

Advocated last month by one of the federal government's top financial regulators, the plan is in effect at the nation's second-largest mortgage company and is under active development at the largest.

The idea works like this: Even if you're having trouble with managing credit -- your credit cards are at their limit, you've fallen behind on car payments and other monthly debts -- there should be a form of home mortgage loan that provides you an incentive to straighten out your finances. You should be able to get some f orm of benefit -- such as a reduced interest rate and monthly payment -- when you have demonstrated that you're handling your credit burdens well again.

Ellen Seidman, director of the Office of Thrift Supervision, a Treasury Department bureau that oversees savings banks and other lending institutions, calls the plan the "Track Record Adjusted Mortgage," or TRAM.

Countrywide Credit Industries, the second-largest home mortgage originator in the country, calls it the "credit repair" loan and offers it through its subsidiary, Full Spectrum Lending. Norwest Mortgage Inc., the nation's largest home lender, says it's developing a good-payment rewards program of its own.

Dozens of other lenders in the booming "subprime" (less-than-perfect-credit segment) of the home mortgage market are virtually certain to introduce competitive programs in the coming months.

Subprime loans carry higher rates and fees than the "prime" mortgages that are offered to applicants with no credit blemishes. In today's market with prime home loans just above 7 percent, subprime rates generally range from 8 percent to 12 percent. Loans for applicants with the most troubled credit histories often carry rates in the low teens, plus sizable fees.

To Seidman, the "track record" concept is a win-win for borrower and lender.

On the one hand, she said, subprime borrowers typically pay higher costs "rather than working through counseling programs to improve their credit so they can finance future home purchases at [lower] rates." Far better, she says, for subprime lenders to offer at least some of their customers the chance to cut their interest rate automatically after some period -- say two years -- of regular, on-time monthly mortgage payments.

Alternatively, borrowers might qualify for lower rates after completing a credit management counseling program and making on-time payments for 12 months.

Lenders would benefit from offering the performance-reward approach, Seidman argues, because they'd keep their customers longer and end up with fewer defaults and foreclosures. Homeowners who've re-established good credit would be far less likely to refinance elsewhere if they knew they'd automatically be rewarded with a rate cut by their current lender.

Countrywide's Full Spectrum Lending couldn't agree more with Seidman.

According to Joe Harvey, Full Spectrum's president, the firm's "credit repair" program not only discourages customers from refinancing elsewhere, but "gives hope to people who through no fault of their own have gotten into trouble" with their credit.

In an interview, Harvey profiled the sort of borrower most likely to benefit from the credit-repair or track-record approach. He described the situation faced by a recent California borrower who'd been rejected repeatedly on credit grounds by other mortgage lenders. In reality, said Harvey, the man "had been an `A' [prime] credit borrower for most of his life," with 27 years of steady mortgage payments and substantial equity in his house. But his printing business had suffered recent economic reverses, and he had borrowed on credit cards heavily to stay afloat. Instead, he found himself awash in high-rate debt that he no longer could handle.

Full Spectrum took a long look at the applicant's history and put him into a credit-repair loan at 7 1/8 percent -- far lower than other subprime rates -- and increased the size of his mortgage enough to pay off his car loan, credit cards and consumer finance loans. Assuming the borrower pays on time for 24 months, the credit-repair mortgage could cut his interest rate even further.

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