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This simple chart from Bankrate.com illustrates an interesting point about mortgage rates and savings rates.  Notice how they seem to move in lock-step.

The green line represents the path of the 5-year ARM since 2003.

The blue represents the path of your garden variety, FDIC-insured, 5-year Certificate of Deposit.

If you're a homeowner that likes to limit a home downpayment in favor of buying interest-paying CDs, this chart may help you rest easy the next time you're shopping for a mortgage.

According to the graph, no matter when you choose to lock your rate, you can expect the same spread between your mortgage rate and your CD rate.  Ish. 

Now, just for comparison.  Over the same period of time, if you invested in the non-FDIC-insured Dow Jones Industrial Average instead of CDs, you would have gained 51.13%.  That's much higher than any CD was yielding.

At any given time, I am working with handful of first-time homebuyer clients that are boyfriend and girlfriend, fiance and fiancee, or something similar.

Usually, the rental lease is ending for one or both of them so they decide that its easier to just move in together.  Rather than rent, the combined incomes and bright future lead to the decision to buy their first home together.

Until that marriage or civil union happens, though, there are a number of financial and legal issues to consider.  As always, Barbara Corcoran does a terrific job of straight-shooting on The Today Show.

This clip from May 2007 is timeless because it reminds us how love is blind, and also blinding.  Non-married homebuyers can't forget to take proactive measures for long-term protection.  The most important of which is opening a life insurance policy.

For all of her real estate savvy, Barbara sometimes sounds like a well-versed mortgage planner. 

I love that she reminds the viewer how accidents happen and people sometimes die unexpectedly.  The worst legacy you can leave a loved one is a mortgage payment that was manageable with two incomes, but is an impossibility with just one.  A basic life insurance policy can protect against that and the policy is cheap.

Watch the video and listen for Barbara's sound bites.  At three minutes in length, it's a powerful segment.

First, a definition:

(Home Equity) = (Value of Home) - (Amount Owed On Home)

There are two ways that equity is created:

1. The homeowner pays down the principal balance on the mortgage. 
2. The home's value increases because of appreciation

But just because both methods increase the equity position in a home, that doesn't mean that they're equal.  Quite the contrary.

Method #1: The homeowner pays down the principal balance on the mortgage. 

When a homeowner pays down a mortgage, he is using funds from a paycheck.  As all of us know, by the time we get our paycheck, the earnings have already been taxed by local, state and federal governments. 

Now, if the money was left in the bank, it would earn interest.  By contrast, once the money is withdrawn and used to pay down the mortgage, those interest payments are forfeited in favor of a 0.00% rate of return.  A home is not a bank account and it does not pay interest for making "deposits". 

Neither does a home make "deposits" readily available to its owner; if a homeowner wants to access a portion of their principal paydown, he is required to ask the bank for a remortgage.  Not only can the application be denied for a number of reasons, it can also take up to three weeks to process.

Method #2: The home's value increases because of appreciation

Equity is also created when the home itself creates value.  Looking back 100 years, real estate has appreciated so we should expect that it will continue to appreciate as a long-term investment.

As homes increase in value, homeowners benefit from additional "dollars-on-paper" and this is where building equity via appreciation really shines. 

When a homeowner sells his appreciated residence, he not only earns a profit for just having owned the home, but the profit from the sale may be 100% tax-free.

For couples filing jointly, up to $500,000 of gains from the sale will be exempt from taxes; for individuals, $250,000.  Check with your accountant to see how tax law applies to you personally.

So, not only is home equity an asset, it's an asset that may not get taxed.  Clearly, that's a huge advantage.

Now, this isn't to say that paying down your principal balance is a poor financial planning decision.  It's just to say that there may be smarter targets for your investable dollars. 

Paying down principal, after all, is not creating wealth -- it's just moving wealth from your liquid bank account to your illiquid house.

The only way that wealth is truly created in real estate is through home appreciation.  The home is the "thing of value", not the mortgage.

The mortgage is just the debt.

There's a fine line between marketing savvy and outright misdirection.  Visa USA may have crossed it.

Earlier this month, Visa USA published a "report" titled "Americans Unaware That Employers Can Legally Refuse to Hire Job Applicants with Low Credit Scores". 

"Wow", I thought, "this would make an excellent blog topic."  And I started to write.  Only I couldn't shake the idea that this was marketing piece from Visa and not a true report.

So, like any other curious person, I turned to Google to dig a little deeper.  Here's what I found:

What Visa USA said originally in the press release:

Many employers have made checking a credit score a mandatory part of the job application process, just as drug testing and criminal background checks are now common requirements for jobs in many industries.

How Experian spokeswoman Maxine Sweet contradicts Visa USA:

"We do not score for employment reports.  If you chose to do that, I think you would be breaking the law."

How Fair Isaac spokesman Craig Watts contradicts Visa USA:

"Credit scores don't help employers make smarter employment decisions.  They are for judging credit risk."

How the Fair Credit Debt Reporting Act contradicts Visa USA:

The Fair Debt Credit Reporting Act restricts employers from using credit reports for hiring or employment decisions. If such a report is made, companies are required to advise the applicant or employee that the report is being ordered, together with the name and address of the credit agency supplying it. Finally, the report can be ordered only if it serves a legitimate business purpose.

How the EEOC's policies contradict Visa USA:

An applicant's poor credit rating has also been ruled by the courts to be an unlawful basis for refusal to hire unless a business necessity for such a policy can be established.  Inquiries about charge accounts and home or car ownership may be unlawful unless required because of business necessity.

What Visa USA said after being pressed by Detroit News columnist Brian O'Connor about all of the contradictions:

"We don't have figures on whether that's true or not, but anecdotally it seems that more and more employers are doing it."

Now, yes, it's technically true that an employer can legally not hire you because of low credit scores, but the types of jobs in which a person would be subject to credit scoring scrutiny is limited to those very few jobs in which a person's credit rating matters for their job's basic functions. 

One example I can think of is a position in which an employee is required to have a company credit card in his/her own name.  If a person can't qualify for a credit card, that person can't fulfill the job's basic requirements.  I am sure there are other examples, too, but the point is that the Visa USA headline is misleading to the average consumer.

And there you have it.  One more reason to read beyond the headlines.  Especially when the source of the information is a company with something to sell.

Sources
Americans Unaware That Employers Can Legally Refuse to Hire Job Applicants with Low Credit Scores
Visa USA
September 13, 2007
http://www.usa.visa.com/about_visa/press_resources/news/press_releases/nr429.html

Employers myth out on credit scores
Brian O'Connor
Detroit News, September 15, 2007
http://detnews.com/apps/pbcs.dll/article?AID=/20070915/OPINION03/709150334/1308

Discriminatory Interview Questions
Findlaw.com
http://earthlink.findlaw.com/employmentbook/HFCHP1_h.html

I fielded a lot of phone calls yesterday from my clients about the Fed lowering the Fed Funds Rate and how it impacts them personally.  I love days like those -- it shows me that my clients are paying attention to the financial world and how it impacts them.

Education is the benchmark of my practice and I really enjoy talking to everyone, helping them relate the news to their lives.

See, in all of the talk about the Fed Funds Rate, specific numbers tend to get left out of the article in the newspapers and from the graphics on the TV.  That's why I built the graph above.

The Fed Funds Rate has little impact on the everyday lives of people like us because its an interest rate that banks use in lending to each other.  Think of it like an interest rate "among friends" -- a little bit lower than what you'd charge someone else, but still high enough to get compensated.

Now, there's a little trick here.  The "someone else" are consumers like me and you.  When they're lending to us, the banks tack on three percentage points and they call that new interest rate "Prime Rate". 

This is why Prime Rate is always 3.000% higher than the Fed Funds Rate.

Therefore, because the Fed Funds Rate is now 4.750%, Prime Rate is now 7.750%.

That small detail is a pretty big deal because banks tend to use Prime Rate as a starting point for consumer loans.

• Home equity lines of credit may be Prime + 0.500%
• Credit card loans may be Prime + 8.999%
• Auto loans may be Prime + 2.000%

Here's where it gets interesting for the everyday American. 

According to the L.A. Times, consumer debt in the United States (not including mortgages) is $2,456,000,000.  Chop 1/2 percent from that and Americans are saving $1.228 billion in interest every single month because of what the Fed did.

Now, for people that don't carry consumer debt, the impact is likely to be small.  But many people hold balances on their credit cards, or have not paid down a HELOC.  Starting Tuesday afternoon, the rates on those debts dropped.

Prime Rate was 4.000% in June 2004 before the Federal Reserve started a string of 17 rate hikes to 8.250%.  Tuesday's drop is the first reversal since the rate hikes began.

A few clients called me this week to share concerns about a declining housing market and how it would impact their long-term financial planning.

"I need my home equity for retirement", one said.  "What if foreclosures on my neighbors ruin my nest egg."

Our ensuing conversation covers some basic facts about home equity:

• Home equity is an asset -- just like stocks, bonds, or a stamp collection
• Home equity grows or shrinks as a home's value grows or shrinks
• Home equity grows or shrinks at the same rate, regardless of the mortgage payment, rate, or product
• Home equity tends to represent a disproportionate share of a homeowner's net assets

If you are a homeowner worried about your home equity evaporating in a falling housing market, one realistic solution is to separate the equity from the home via a remortgage.  Then, hand the equity to a financial planner who can invest it somewhere safer than real estate.

Money market fund or basic savings accounts often fit the bill.

An astute observer will recognize that equity separation creates a larger mortgage balance and that may result in a higher monthly payment.

Well, some of my clients have an ingenious way to handle that circumstance: they choose to think of the extra monthly expense as "equity insurance" payments.

I like that idea because it makes complete sense to me -- pay a little more each month in order to preserve the value a large chunk of cash.  Brilliant!

Now, there are also two major benefits to extracting equity that usually get overlooked (so I'll point them out):

1. The dollars you put in the bank account earn interest
2. The dollars you put in the bank account are available in a moment's notice for emergencies

These are two huge deals.  Dollars that are still in the form of "equity" not only earn a 0% interest rate, but aren't available for 2-3 weeks because of the time it takes to remortgage a home (if the bank even approves the application).

And this is what my clients and I review.

Right now, the equity separation wildcard is that tightening lending guidelines are reducing the number of families that are eligible to do it.  So, if you feel at-risk with the amount of equity in your home and want to diversify or add safety to your holdings, call your loan officer and your financial planner for ideas and make a plan.

The screenshot above is from Countrywide's Web site, taken a few minutes ago.  Without context, it seems like a regular advertisement.  Get a 12-month CD issued by Countrywide and backed by FDIC.  Earn 5.65 percent.  Sounds like a good deal.

But, out of context, the ad does us no good. 

In context, let's look Countrywide's offering versus what other banks are presenting for the same FDIC-insured, 12-month Certificate of Deposit.

The chart at right is from Fidelity's Web site.  It shows that eight banks are offering anywhere between 5.000% and 5.150% for the same product.

As Professor Woolridge asked: "What can we infer from the data?"

I hate to answer a question with a question (and especially with a rhetorical question), but what does it say when Countrywide offers a CD yield a half-percent higher than everyone else? 

And then brags about it!

To me, it says that Countrywide is desperate to borrow funds from as many channels as possible and that the company's problems may be deeper than believed.

The company stock is off 42% in the last month, it's tapped an $11.5 billion line of credit recently, and layoff notices began circulating Friday.

And then the story takes an interesting twist when we consider that its CDs are priced so far out of the market. 

Remember: Certificates of Deposit offer an interesting debt opportunity to Countrywide because each "deposit" is FDIC-insured for up to $100,000. 

In other words, even if Countrywide defaults on its CDs, the holders of the CDs stand to lose nothing except the opportunity cost of giving their dollars to the Calabasas-based lender.  The FDIC (i.e. U.S. taxpayers) will replace their "lost" principal balance.

This is a clear case of Moral Hazard if I've ever heard one.  By paying a half-percent more than every other bank on Fidelity's Web site, Countrywide appears to be taking on risk for which they won't be responsible if the company fails.

And this is what Professor Woolridge told us.  Sometimes the bank with the highest yield is the bank with the biggest troubles.

In Countrywide's case, he may have been right again.

Here's a lesson to take from the wholesale shift in mortgage lending: Your credit gets you access to low rate mortgages and, therefore, your credit score is worth protecting.

Some keys to good credit lie in the basics:

• Pay your bills on time every month
• Don't surpass your credit limits
• Don't co-sign on a loan and expect that it's being paid on time

Some are not so obvious:

• Don't close a credit card just because you don't use it any longer
• A credit limit should be always be THREE TIMES its current balance (at least)
• Capital One credit cards could be bad for your credit score

One of the most overlooked, common sense tips, though, relates to having a credit history.  To help earn a good credit score, you need to show that you have successfully managed credit in the past.

Let's use a good metaphor to hammer home the point.

A credit history is like a dating history.  On the first date with somebody, you're probably going to wonder one or both of the following:

• How many boyfriends/girlfriends has this person had?
• What's the longest relationship he/she has been in?

If your date has never been in a relationship, you're going to think twice about making a commitment,  After all, he/she has no track record and no history.

On the other hand, if your beau/belle has been in a series of long-term relationships, you feel just a little bit safer knowing that he/she understands responsibility and commitment.

Let's tie it all in.

Credit bureaus take your "dating history" into account -- the longer your history, the better.  This is why leaving credit cards open (even if the balance is $0) is a good thing and why applying for cards (even if you don't really need them) helps buoy your credit score. 

Anyway, to make a long story short (too late!), improving your credit scores is about more than just the basics -- it's also about being commitment-capable.

Mathematics is highly-relevant to financial planning.  It helps us grasp concepts such as compounding interest, amortization schedules and return on investment.

But, forget all of the complex equations.  Basic math is all you need to get to the key point:

(Net worth) = (Total value of assets) - (Total value of debts)

There are two ways to increase your net worth -- you can increase your assets, or you can decrease your debts.  Either way works.

Most people think that paying down a mortgage increases their net worth.  But that's wrong.  Every dollar used to pay down mortgage debt was really just a dollar that previously existed as an asset.

In other words, paying $1,000 to your mortgage means subtracting $1,000 from both sides of the equation above -- a net gain of zero.

To take it a step further, the $1,000 was an asset that earned interest in your bank account.  After using it to pay down debt, it's no longer earning that interest.  Long-term, therefore, you forfeit the gains of compounded interest.

Additionally, by reducing free cash, you lose access to "emergency funds".

Should you ever need that money down the road, you'll have to apply for a remortgage with the bank to get access to it.  That process can take 2-3 weeks, and the bank may decide to turn you down.

Paying down your mortgage reduces your debt, but it isn't a safe course of action for most people.

Now, to be fair, there are plenty of instances when paying your mortgage balance down does makes sense.  For example, your mortgage interest rate greatly exceeds your savings rate and you are fully-funding your matching 401(k) plan and have a qualified insurance plan in place.  There are others, too. 

My point is that there are plenty of situations when it doesn't make sense to pay down your balance -- you just have to be tuned into to your own life goals to understand what those situations are.

There are no blanket truths when it comes to personal financial planning.  Carefully consider all of your options and make sure to talk with a professional first.

Every now and again, a basic Web site hammers home a major personal financial tip. 

Have you ever wondered what your coffee habit is costing you?

Courtesy of software developer Hugh Chou, the Coffee Calculator calculates what you pay for your store-bought coffee each year, and how much money you forgo in life savings because of it.

Did you know:  If you buy a plain $1.87 grande drip coffee from Starbucks every working day versus drinking free coffee in your office, you'll forfeit more than $6,000 over 10 years' time?

But you don't take your coffee "plain", right!  You're of the grande, sugar-free vanilla, non-fat latte ilk!  Well, in that case, you'd best check out the savings for yourself.

The next time you're struggling to pay your bills, or to build a 12-month asset reserve, or to fund your 401(k) plan at work, review the dollar you spend on non-essential items in your life.

Starting with specialty coffee.

The Justice Department is pressuring national tax-preparer Jackson Hewitt to close down 125 of its tax preparation stores.  Allegedly, these stores stole $70 million from the IRS. 

Each store is owned, or partially owned, by the same franchisor and are spread across four separate states.

The tax stores and its owner are accused of using fake W-2s, bogus deductions and other fraudulent claims to reduce the tax liabilities of its clients, and also of paying kickbacks to store managers and employees.

I am highlighting this story because income tax preparation is similar to mortgage planning in several ways:

1. It's not One Size Fits All -- each individual needs individual counseling
2. It's a crucial part of a person's short- and long-term financial plans
3. There are plenty of low-cost providers in the marketplace

I am not picking on Jackson Hewitt -- these stores targeted by the DOJ represent just 2% of the corporation's total franchises -- but this is a terrific example of how fraud permeates every level of every business, no matter how big or small.

There will be huge penalties for the franchise owner, but the penalties will be worse for the individuals whose tax returns will need to be amended.  Corporations have insurance and can declare bankruptcy. 

Tax penalties and liens can hurt an individual forever.

At this time of year, I get a big kick out of watching tax stores pop-up, and then fade away beginning April 15.  It creaes the notion that taxes are a seasonal thing when we all know that the reverse is true.

Taxes and tax planning is an all-year thing. 

If your accountant is a temporary employee who only works from January 1 - April 15, that should tell you something.

Look.  You are going to pay for your accounting, one way or another so make the choice to make taxes a bigger part of your plan.  It's best to work with a trusted accountant that can help you plan for the long-term and fit your tax strategy into your overall financial plan.

Need a referral?  Just ask.

Source
Jackson Hewitt accused of tax fraud in IL., 3 other states
Crain's Chicago Business, April 4, 2007
http://chicagobusiness.com/cgi-bin/news.pl?rssFeed=news&id=24475

The pie chart at right comes from a Bankrate.com survey, sampling 1,000 adults about their current housing situation.

The question asked: What type of mortgage do you currently have? 

The answers were all over the map.

I am actually okay with the 34% "Don't Know" figure.  I have worked as a loan officer for long enough to know that some people just don't know.  At some point, these people seek help.

It's the 57% "Fixed Rate" figure that scares me. 

The sample size was small, but there is no way that 57% of homeowners carry fixed rate mortgages (even though they think they do).  A "5-year fixed rate mortgage" is not really a fixed rate mortgage -- it's an ARM in which the interest rate remains fixed for 5 years.  Some folks, unfortunately, don't (or can't) make that distinction.

These people have been lulled into a sense of security about their mortgage.  They specifically don't seek help with mortgage management because they believe their mortgage payment can't change over time.

And then it changes.

I am not providing a direct link to the Bankrate.com story because the biggest value of the story is in the graphic used here.  If you own a home, you need to understand the basic structure of your own mortgage just as you need to balance your checkbook each month.

Looking over your mortgage statement or reviewing your closing documents never goes out of style so if you don't know how to interpret what you're reading, get help from a professional.

A year ago, I called the 15-year fixed mortgage a "sucker's bet" in one of my most popular posts ever.

There was a fair amount of debate around the subject and some of you posted legitimate economic discourse on the subject.  It made me feel good about my audience, actually.  What is a "safe" investment anyway?  In what investment vehicles can returns be maximized?  How do tax deductions apply, or not apply, to certain Americans.

There were a ton of interesting comments.

Only one person, however, went so far as to create a spreadsheet to uncover the heart of debate.  Using pure mathematics, an Air Force veteran in Virginia dissected the argument and drew the most logical conclusion of anyone.

Thank you, Dave Goodridge.

Dave put his dual degree in economics and electrical engineering to work in building an Excel spreadsheet.  You can download the file and test your own scenarios with the usual caveats and qualifiers (i.e. borrower itemizes his interest tax deductions, interest payments are within the bounds of the top marginal tax bracket, invested refunds are paid into a 100% tax-deferred account).

In the end, it appears that the better of the options -- 15-year fixed versus 30-year fixed -- comes down to the likely investment return on the payment delta.

Dave made a terrific case that it's not the 15-year mortgage that's for suckers -- it's the failure to manage your own mortgage and finances that is. 

If we can learn anything from Dave, it's that math never goes out of fashion and to always question what you read.

It's just good luck for post-Super Bowl home buyers this week.  On the heels of less-than-hawking testimony from Fed Chairman Ben Bernanke, mortgage rates have dropped by about 0.25% across the board.

The impact of lower rates is palpable.  A $300,000, 30-year fixed mortgage is now $49 less expensive per month and a similar 5-year ARM with interest only option is $62.50 less expensive per month.

Savings add up over time.  At a 5% rate, $62.50 grows to $4,250 in 5 years.

The best part is a lot of folks are going to benefit from the drop -- purchase contracts are arriving in our office at a dizzying clip right now.

Now, the key is: just because rates dropped doesn't mean you should buy a bigger home.  Treat lower rates like a reverse form of "found money" and maybe one day that money will find you -- in need of $4,250.

The much-hyped VantageScore credit scoring system seems to be getting a lot of press lately, so thank you to Holden Lewis at Bankrate.com for keeping it real.

According to the VantageScore Web site, it is the "new standard in credit risk scoring". 

"Why did we create VantageScore?  Simply put, the industry expressed a need for a new approach to credit scoring across the three major credit reporting companies...VantageScore is a cutting-edge scoring model that consumers tell us is easy to understand and use." (emphasis added)

That's fine and all, but here is the other side of that hype as it pertains to mortgage lending (from the BankRate.com piece):

"People in the mortgage industry say there's no chance that home lenders will adopt VantageScore. They will stick with the FICO score because it has proven to be accurate."

For the mortgage industry to adopt VantageScore, it would literally eliminate hundreds of millions of data sets that predict the likelihood of mortgage default with near-certainty.  As I was quoted in the article: "How is the industry going to turn its back on that?"

In the case of VantageScore, cutting-edge does not mean better, it just means newer.

It appears that banks offering fixed income investments are preparing for a period of declining interest rates.

Beginning in June 2004, short-term interest rates began to rise.  Buoyed by the Fed Funds Rate, interest rates for fixed income securities such as Certificates of Deposit began to rise, too. 

For example, in November 2005, the highest yielding 12-month CD at Fidelity Investments was at 4.40%.  By November 2005, it was up to 5.20%.

It appears the upward trend is over, however.

A look at today's CDs on Fidelity's Web site shows the following yields over specific periods of time:

• 3-Month: 5.20%
• 6-Month: 5.15%
• 9-Month: 5.15%
• 12-Month: 5.10%

In other words, banks feel that interest rates will decline over the next 12 months and they certainly don't want to be paying you any more interest than they have to.  And remember -- CDs are guaranteed because they are FDIC-insured.  This is as risk-free as you can get with an investment.

This is simple research that you can do on your own, too.  Just open up your local daily and take notice of how many advertisements you find for CDs.  You'll see the trend, too!

The longer the term on the CD, the lower the offered rate will be.  This is because banks and businesses expect the U.S. economy to slow down in 2007.

Just to throw a thought out there...

As home values level-off (and in some cases drop), there is a lot of chatter that homeowners will feel less wealthy because of "equity lost". 

In theory, this will translate into less money spent by homeowners.

Read the rest of this entry »

Futures contracts allow a person to buy or sell a specific amount of a product on some specific date in the future.

For example, an Iowan corn farmer may be nervous about how the winter will impact his 2007 harvest.  So, to protect his income, he can buy futures contracts that guarantee a buyer for his crop at a specific price in June 2007.

Regardless of the market price for corn in June 2007, the farmer can know exactly what price he'll get.  If market prices are higher than what his Futures contract is for, he loses.  If prices are lower, he wins.

The Merc provides a helpful Web site to learn more about the product.

Bankrate.com's Jay MacDonald penned a very smart piece about how savvy real estate investors can use the Housing Futures markets to hedge against losses in home equity, or exposure to declining real estate markets. 

It is an interesting concept that homeowners can protect their "income" just like the corn farmer from Iowa.  Imagine some of the goals you could accomplish:

• Plan to avoid capital gains taxes by keeping your net proceeds below $500,000 for married couples; $250,000 for singles
• Know exactly how much money you will have for a downpayment on your next home
• Combine Housing Futures with a Mortgage Rate Futures Market and lock your next loan years in advance
• Remain fully-leveraged on your home and use the extra equity for investment and retirement

The list goes on.

Or, as noted by University of Houston's Bauer College of Business Finance professor Craig Pirrong, the Futures markets can give people with a $50,000 minimum investment the chance to speculate on real estate markets without buying homes directly.

In buying financial instruments that mimic real estate markets, a real estate investor can avoid all of these arduous and costly steps:

• Buying a home
• Paying closing costs
• Finding tenants
• Paying for maintenance
• Insuring the home

And, in theory, Futures Contracts are much more liquid than an actual investment property so it can be sold immediately.

Source
Housing Futures to Allay Bubble Fears
Jay MacDonald
Bankrate.com

http://www.bankrate.com/brm/news/real-estate/20060810a2.asp

The Orlando Sentinel picked up a terrific BankRate.com story this weekend about failed marriages and the mortgages left behind.

"Divorce is one of the leading causes of foreclosure today," says William Martin, a lawyer in Lowell, Mass., who specializes in real estate. "The other major cause is a catastrophic health event."

Health problems can leave a family unable to make regular monthly payments and turn a mortgage into a financial burden. Divorce can turn a mortgage payment into a financial weapon. Though a divorce decree can end or nullify a marriage contract, it cannot end or nullify a loan contract.

It is easier to break a marriage contract than it is to break a mortgage contract.  That's pretty powerful stuff. 

I have witnessed this issue on several occasions.  A family splits up, and while the paperwork is being filed, emotions run high and the battles are frequent.  Neither the husband nor the wife pay attention to the family bills (or choose to ignore them out of spite), and then the real financial chaos begins.

Most married couples jointly signed on their mortgage, their credit cards bills, and utilities.  It shouldn't surprise you, therefore, that divorcing couples tend to emerge from divorce proceedings with heavily damaged credit ratings because neither party wanted to cover the other's "expenses" during the separation period. 

Even when payments are court-ordered, bills still go unpaid because people can be people, at times. 

When bills go unpaid, it's a bad thing. 

When mortgage bills go unpaid, though, it's a disaster! 

After 90 consecutive days of non-payment, the lender files for foreclosure with the county and then both parties to the divorce officially enter a World of Hurt.

• Credit scores plummet
• Interest rates on credit cards increase
• Home loan eligibility over the next 3-7 years is severely hampered

When divorcing couples ignore mortgage payments in a game of Chicken, both parties are playing with fire and probably don't even know it. 

Once a foreclosure process begins -- even if you "settle up" and keep your house -- the default history follows you forever on your credit report, and on your title report.

During divorce proceedings, the usual resolution is that one party keeps the home and remortgages it in their name only, dropping the other party from the mortgage obligation and the title. 

This process is incredibly simple and pain-free -- but only if both parties have maintained their strong credit rating throughout the divorce.  If the credit is damaged, the mortgage can't be reworked and the divorce proceedings can grow more contentious.

Therefore, the most efficient and least costly approach is to address the mortgage early with your divorce attorney and reach a common sense agreement that benefits both parties. 

Ignoring the mortgage out of spite is a foolish game in which both parties lose.

Source
Divorce ends a marriage, but the mortgage lives on
Bankrate.com, April 23, 2006
http://www.orlandosentinel.com/features/home/orl-mortgage2306apr23,0,3191875.story?coll=orl-shoppinghg-headlinesforthe