Debt made its way into plenty of headlines in 2012, and not just the national debt, though that certainly garnered its share of attention in an election year. Consumer debt was also front and center. From students seeking relief from the burden of college debt, to homeowners trying to hold onto their homes or take advantage of historically low mortgage rates, this was a year when we couldn’t get away from this four letter word, and its 5-letter companion: credit.
Here are some of the biggest credit (and debt) stories of 2012:
Consumer Protection Gets a Big Boost
2012 began with a controversial recess appointment of Richard Cordray to head the Consumer Financial Protection Bureau. Although some were disappointed that post did not go to Elizabeth Warren, the Harvard law professor who conceived the idea of the CFPB, Cordray and his team forged ahead at an impressive pace. Barry Paperno, a credit scoring industry veteran and community director of Credit.com, observes:
Considering that it now regulates consumer reporting and collection agencies, has fined major banks $210 million for deceptive practices, has created a credit complaint database and process for handling consumer disputes, has produced revealing reports on credit scores, private student loans and collection agencies — to mention just a few accomplishments — it’s hard to believe the CFPB has only been in existence for a year and a half. If the first couple of years are any indication, the next couple should be very exciting for the CFPB — and even more so for those it regulates!
Elizabeth Warren, in the meantime, ran for Senate in Massachusetts, won, and landed a seat on the powerful Banking Committee. In her role as Senator, she may be able to accomplish even more than she would have at the CFPB. “The ultimate take away here for the banking industry is be careful what you wish for,” notes Adam Levin, chairman of Credit.com. “The election of Elizabeth Warren is karma when it comes to the financial industry.”
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Mark Kantrowitz, publisher of FinAid.org, can rattle off a long list of headline-making student loan news in 2012. At the top of the list was the news that student loan debt reached a new mega milestone this year when balances exceeded the $1 trillion mark, with no sign of slowing down.
But there was also some positive news on the student loan front. Congress prevented rates on subsidized Stafford student loans from doubling for another year. And the new Pay As You Earn program guidelines were released. The new program will make it easier for some recent grads to qualify for lower payments, and then have balances forgiven after 20 years rather than 25.
Still, relief isn’t coming fast enough, says Kantrowitz. “The failure of grants to keep pace with increases in college costs shifts more of the burden of paying for college onto students and their families,” he warns. “As a result, average debt at graduation increases each year, making college less affordable. This trend will continue in 2013.”
Mortgage Rates Plummet, But For Some Just a Tease
“From a mortgage perspective the biggest stories of 2012 are a combination of “good news, bad news’.” says Joseph Kelly, president of ArcLoan.com. ”The good news is that mortgage rates continued to fall dramatically through 2012 and close the year near the lowest rates in U.S. history. This allows qualified homeowners to save significantly on their monthly payments — even if they refinanced as recently as last spring.”
The bad news is that for some homeowners, these low rates are out of reach. “Even though rates are at record lows, the housing crisis continues to negatively affect many homeowners’ appraised value, and underwriting guidelines have continued to become stricter making it more difficult to take advantage of those low rates,” Kelly warns.
And the program announced at the beginning of 2012 to help underwater homeowners refinance turned out to be a disappointment as well. As announced, the revised Home Affordable Refinance Program (dubbed HARP 2.0) was going to make it possible for homeowners with loans owned by Fannie Mae- and Freddie Mac-owned mortgages to refinance, regardless of the LTV (loan-to-value). But “within months most major lenders in the country were not accepting the allowed enhancements, and in fact the majority lowered their maximum accepted LTV to 105%,” Kelly notes. “Those lenders that continued to accept over 105% have experienced delays of up to 6 months in processing.” In the meantime, some 10.8 million, or 22.3 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2012.
Also in February 2012, the National Mortgage Settlement was announced as the biggest multi-state settlement since Big Tobacco. Forty-nine state attorneys general and the federal government reached a settlement with the country’s five largest mortgage servicers. The settlement was to provide as much as $25 billion in relief to homeowners and payments to the states. At the end of the year, however, too many homeowners are still waiting for relief to come and some states are looting settlement funds to boost their own sagging revenues, rather than to keep homeowners in their homes.
Without programs that could effectively help homeowners make their loans more affordable, mortgage loan modification scams continued to flourish this past year, says Steve Rhode, founder of GetOutofDebt.org.
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Lending Innovations Challenge Status Quo
Social lending platform LendingClub.com announced that it had surpassed $1 billion in person loans. By doing so, the peer-to-peer lending platform allowed individuals to muscle in on what has traditionally been the exclusive (and lucrative) territory of banks and finance companies. They also saved borrowers money in the process.
They were just one of many fairly new companies that announced news tools to help borrowers. ReadyForZero.com enhanced its online debt reduction program by allowing users to schedule payments in advance, making DIY debt reduction that much easier.
eCredable.com announced a new program that it says will help consumers qualify for competitively priced car loans — even if they don’t have a credit history. The company helps borrowers prove their creditworthiness by verifying the routine bills they pay which aren’t typically reported to the national credit bureaus. That information can then be used by Roadloans to approve borrowers. This innovation represents a first “since automated credit systems have been in use (for the past 30 years),” says CEO Steve Ely.
And this year, at Credit.com we released a new version of our free Credit Report Card, which provides a free credit score, details about the factors that make up that score, and most significantly, helps match consumers to lenders likely to extend them credit.
While individually these represent milestones for the companies that have announced them, collectively they represent a shift in decades-old models of lending that is overdue for reform. As they say, the best is yet to come.
Image: RambergMediaImages, via Flickr