Buyers hurt by tougher credit scores
More lender flexibility needed for real loan growth
By Tom Kelly, Thursday, March 12, 2009.Maybe it's just the point in our lives, but it seems that the availability of home mortgage money mirrors that of college tuition: There are some terrific programs for the needy, the wealthy always find a way, but those in the huge middle category often have few options.
Some longtime homeowners and perfectly qualified "new-generation" buyers who have been on the sidelines are having extreme difficulty in getting financing -- or refinancing their present loan. The pendulum has now swung from "no loan ever rejected" to "no loan good enough for funding."
The new "risk-based pricing" introduced by Fannie Mae and Freddie Mac is a step in the wrong direction. In case you missed it, Fannie Mae and Freddie Mac -- the two biggest players in the secondary mortgage market -- recently announced they would add extra fees to offset "higher risks" and losses associated with certain credit scores and loan programs.
Credit scores, which are known as FICO scores and are generated by Fair Isaac Corp., typically range from a high of 850 to a low of 300. These numbers are compiled by the three national credit agencies. Most of the time, consumers who grade out above 760 get the best mortgage rates, those between 760 and 700 are in the middle and those under 630 usually pay the highest rates, if they can get financing.
Under the new guidelines, a borrower with a 699 FICO and a 25 percent down payment will be nailed with a 1.5 percent risk fee at closing. A buyer with a FICO score between 700 and 720 will pay an additional three-quarters of one percentage point. Someone previously judged to have very good credit -- a 739 FICO -- will be assessed an additional quarter-point fee.
For example, a young woman, 27, with excellent credit and a decent job, bought a home four years ago. She used her savings and a loan from her grandparents for the down payment. To keep payments at a minimum, she chose an interest-only loan and recruited longtime friends as roommates to help pay the monthly mortgage.
After four years of perfect mortgage payments plus a move to a better job, the woman began the process to refinance to a fixed-rate loan. To her surprise, her credit scores had dropped considerably, due to a late credit-card payment from her previous job. While her name was on the card, it was company business (custom printing, copying) and not her personal use. Before the card was transferred to her successor, a payment was missed.
After the missed payment, the woman's credit scores from the three bureaus were 696, 706 and 756. Since most lenders take the middle score when it comes to mortgage qualifying, she was assigned a score of 706 on her loan documents, which then cost her an additional $2,364.
Here's why:
A 706 credit score had a "risk-based" markup of 0.75 points based on her estimated home value of $420,000. (If the value had appraised at $425,000 or more, the add-on would have been only 0.5 points because her loan-to-value ratio would have been below 75 percent). If the middle credit score was 740 or higher, there would be no add-on at all.
"It was my fault for not following the timing of the business card closer," the woman said. "But should it cost me more than $2,300 even though I have paid my mortgage on time for four years? By the time I try to explain and get it worked out with the credit company, I lose my loan lock. I don't want to gamble that rates will remain low when or if I ever get this straightened out."
The punishment doesn't fit the crime -- how things have changed. The "media" have been hammered lately by housing officials for reporting how difficult home financing has become and that there is plenty of mortgage money available for "qualified" buyers. It appears that qualified now borders on perfect.
Home inventories are high. In order to have any kind of loan growth in the residential market, something less than flawless credit must be made satisfactory to lenders.
Next week: Cleaning up your credit score.
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Submitted by Rick Hardman on March 12, 2009 - 8:07am.
Unbelievable!
Another interesting thing about this - The government is running ads for annualcreditreport.com which only allows you one "free" credit report a year (hence the name). They are saying that many are getting confused with freecreditreport.com because that is not free. However, one is built to help you manage your credit before you find out in a situation like applying for a home loan, while the other is aimed to be an annual service.
I think that the current administration is not so interested in the people of this country as they are in power.
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Submitted by David Reed on March 12, 2009 - 6:00pm.
There is no story here. There are millions of dollars worth of loans made every day to those with less than flawless credit and the pendulum simply hasn't swung that far. And it's stories like this that perpetuate the myth that no one except Bill Gates can get a mortgage.
In the example the author illustrated, the .75 point fee added doesn't have to be paid by the client in one $2,300 sum. The rate can simply be adjusted by 1/8 percent to more than take care of the adjustment. From this desk that's probably a $300,000 loan and with a 30 yr fixed rate that works to an increase of about $40 per month.
$40 per month is nothing near punishment and such stories only stoke the flame that lenders aren't making loans to the everyday borrower.
Unfair? Probably, according to the anecdote. But in my opinion it simply reminds us of how spoiled everyone became in the 2000s.
Fannie and Freddie both are shoring up their credit standards as best as they can, although the horses left the barn 8 years ago.
Someone who has to pay 1/8% more for their loan?
And rates are around 5.00% now? Puh-lease....
Submitted by Scott Cheffer on March 13, 2009 - 9:36am.
I believe there IS a story here.
Chapter 1: The woman was not responsible for the credit card of her previous employer. Therefore it was either the ex-employer or the bank that made the mistake reporting the late payment as hers. Studies show that there are way too many mistakes on credit reports. I believe it was the FTC that said it often takes six months to fix an error. And there is little to no recourse for the consumer.
Chapter 2: Let's say she was responsible for one late payment in the 4-year period since she bought her home. The card-issuing bank added a late charge. Now, she's assed an additional charge of $40 dollars per month.
Chapter 3: She is 27, and has owned a home for four years. So she had some savings at 23. She got friends to rent from her. She recently got a better job. She sounds like a very independent and focused woman.
Chapter 4: We were not spoiled over the past few years. We were victimized by banks that used poor underwriting judgment or committed outright fraud to churn out loans. We were victimized as investors when the ratings companies blessed piles of feces and called them miracle fertilizer. We were victimized as citizens while the regulators just pretended to be working.
Chapter 5: It appears empathy is harder to come by than a mortgage. Unfair? Yeah.