Editor’s note: The loss of homes, jobs and wealth, coupled with an environment of tighter lending, has barred some consumers from owning a home again for at least several years. Part 1 of this "Rebuilding Homeownership" series explores the scope of bankruptcies and foreclosures and the impact to would-be homeowners. This report, Part 2, explores the assistance that real estate agents can offer in helping consumers get back on firm financial footing, and Part 3 explores whether lenders will make allowances for borrowers with checkered credit histories.
The financial crisis has taken millions of Americans out of the housing market. Foreclosures, short sales, bankruptcies and the spiraling debt that accompanies a job-depleted economy have trashed that traditional predictor of risk — the consumer credit score.
Real estate professionals nationwide face the challenge of dealing with clients whose credit scores will be marred for years to come. For many of these "credit-challenged" consumers, the real estate agent is the first point of contact for their next attempt at grasping the American Dream of homeownership.
"In most homebuying scenarios it is typically the (real estate agent) who is first to make contact with a client. What (real estate agents) do next can impact that borrower and their ability to buy a home," said Richard Bowen, real estate instructor at Alpha College of Real Estate who teaches a monthly class called "Credit Challenges."
"By understanding what constitutes effective credit repair, a Realtor can guide (a) client away from moneymaking schemes, which actually have the potential to hurt their client."
Agent dos and don’ts
There are legitimate resources agents can offer. There are also landmines to avoid when faced with such clients.
State regulators of real estate licenses stress that agents should not go beyond the scope of their licenses when advising clients, especially if they charge for that advice. States have different descriptions of what licensees are allowed to do; many do not address credit counseling specifically.
Florida law, for example, says real estate licensees may face disciplinary action for performing services that they know — or should know — they are not competent to perform.
"If the licensee does not have training on credit counseling issues they should not be doing so," said Alexis Antonacci Lambert, spokesperson for the state’s Department of Business and Professional Regulation.
In California, a real estate broker’s license also allows the licensee to be a mortgage broker. Therefore, an agent in California may advise their client on credit issues if that assistance is provided in the process of doing what such brokers are licensed to do: i.e., buy or sell a house or procure a loan.
A real estate agency in California cannot take on a client specifically to help fix that client’s credit. For that, the agency needs to be registered and bonded, according to the California Association of Realtors’ assistant legal counsel, Gov Hutchinson.
"Agents aren’t lawyers. They’re not really supposed to get into this stuff with their clients. They should say this stuff is complicated and that (the clients) should get advice from an accountant or a lawyer," Hutchinson said.
The situation becomes especially sticky if an agent is getting paid for their advice.
"If they are going to start getting paid for their advice, they can’t do that with a real estate license. As long as they’re not getting paid for it, a lot of agents will provide … help with credit for prospects down the road," said Tom Pool, spokesperson for the California Department of Real Estate.
Pool emphasizes that agents should vet any advice they give clients to make sure it’s accurate. Although the department has not received complaints from consumers about credit advice given by agents, it has received numerous complaints about agents not properly informing clients about the possible downsides of short sales.
Specifically, the fact that lenders may pursue short-sale sellers to recoup the difference between the amount the house sold for and the total outstanding loan amount.
In that case, Hutchinson’s advice is the same.
"It’s not really the agent’s role to advise the client of the legal ramifications of what they’re doing, though they should be aware of it. Having said that, we do tell agents not to let clients sign something without reading it. CAR members have access to (a form called) the Short Sale Addendum, which is for clients and says there are legal ramifications to short sales and they should contact a lawyer," Hutchinson said. …CONTINUED
Getting up to speed on credit issues
Before even encountering a client with credit problems, it doesn’t hurt to bone up on the impact of foreclosures, bankruptcies and/or short sales on credit scores, as well as on methods to improve credit scores in general.
The FICO (Fair Isaac Corp.) score is the credit score most widely used by lenders and creditors and ranges from 350 to 800. While the company does not release exact information about its scoring formula, it does offer some examples of how various negative items on a report impact a score.
For someone with an original score of 680, maxing out a single credit card will make a score fall 10-30 points, a 30-day delinquency will cause a 60- to 80-point fall, settling a credit-card debt (vs. paying in full) will result in a 45- to 65-point drop, a foreclosure will cause an 85- to 105-point drop, and a bankruptcy will cause a 130- to 150-point drop.
FICO’s scoring system doesn’t distinguish between bankruptcies and foreclosures. They are both regarded as serious delinquencies, although a bankruptcy may have a bigger impact on a borrower’s credit score because more lines of credit are affected, FICO spokesman Craig Watts told Inman News (see Part 1: "Real estate’s down-and-outers").
Short sales and deeds-in-lieu of foreclosure carry the same weight if they are reported as mortgage defaults to credit reporting agencies, Watts said.
Foreclosures remain on a credit report for up to seven years. Chapter 7 bankruptcy remains for 10 years, while Chapter 13 bankruptcy remains for seven years.
One of the most important facts to stress to clients is the importance of the passage of time when rebuilding credit. In order to qualify for a mortgage as soon as possible after a foreclosure, short sale or bankruptcy, the consumer should begin to rebuild a good credit history immediately by paying off debts, making payments on time, not carrying balances on credit cards, and reducing the amount of credit they use to — at the most — 50 percent of their credit limit, according to some consumer advice.
Consumers can also negotiate directly with their creditors to remove negative information from their credit report. If a creditor refuses to negotiate, or disputes to credit bureaus fail, consumers have the right to add a 100-word statement to their report explaining the circumstances behind a negative item such as a foreclosure.
Those who wish to eventually return to the housing market, depending on their circumstances, will need to rebuild their credit score with, at the very least, 12-24 months of optimal credit behavior, according to credit counseling agencies.
One of the best tools agents can provide are references to HUD-approved housing counseling agencies. These agencies provide free information about raising credit scores, steps to take pre- and post-purchase of a home, and every variety of loss-mitigation counseling: foreclosure prevention, loan modification, short-sale negotiation, etc.
Such agencies can be resources for clients themselves or agents hoping to help their clients. Some agencies are seeing an increasing number of calls from real estate agents.
"(Agents) are significant community stakeholders and many times they will hear from someone they sold a home for because they are a trusted advisor," said Melinda Opperman, senior vice president of community outreach and industry relations at Springboard Nonprofit Consumer Credit Management.
Opperman says that about 40 percent of Springboard’s clients are having budget shortfalls because of unemployment and underemployment. Its clients with foreclosures and short sales on their records typically got them at the beginning of the housing crisis, she said, and are now thinking of returning to the market. Most wish they had received counseling even before buying their first home, Opperman said.
In addition to free counseling, these agencies provide numerous educational resources for anyone hoping to improve their credit, including "The Consumer Guide to Good Credit" manual. The National Association of Realtors also offers a credit scoring guide.
Many, if not most, consumers have no idea what their credit score is, said real estate agents and credit specialists interviewed for this report. For those clients, the first step is to order credit reports from the nation’s three major credit bureaus: Equifax, TransUnion and Experian. For free annual reports from these bureaus, clients can visit: www.annualcreditreport.com. For a FICO score, clients can use: myfico.com.
If a client is close to a desired credit score, say 700, then agents can point clients to several different resources to help improve their score.
Mike Pennington, a Realtor in Atlanta, said he sends his clients to Quizzle.com, a money management site that provides a free credit report and free score from Experian and offers credit improvement tips. If the clients choose to share, he talks to them about their results. …CONTINUED
He also offers clients an incentive to get prequalified for a loan: up to $250 off of the commission at closing, or a free home warranty.
"Most people don’t really know they have an issue. If they wait till (the) last minute to find out, they can’t buy a home. It benefits the buyer to be prequalified, to know what they’re getting into, and what they can really afford. The worst thing that you can do to a real estate agent is waste two or three weeks of their time. It’s well worth the $250."
About a quarter of Pennington’s clients have something on their credit report that could affect their interest rate, he said. He commonly deals in homes that are between $100,000 and $165,000, which means that he sees more people with credit problems than colleagues who cover higher-priced homes.
He does not advocate giving clients credit advice, however.
"It’s a very fine line to cross, between an advocating role for a client and being a lawyer or financial planner. (Agents) should direct traffic (instead) and say, ‘Go here, go there,’ " he said.
Other resources include credit proofreading services such as Rapid Rescore, which automatically search for errors in a credit report and help consumers notify credit bureaus about incorrect balances, credit limits or payment dates, among other inaccuracies.
Such services also estimate how much a person can increase their score by reducing usage on revolving credit lines or paying off high-interest debt.
Up to 70 percent of credit reports contain at least one error, according to a 2002 study by the Consumer Federation of America.
Mortgage brokers can also be useful resources, as they often have similar credit analysis systems that can figure out, for example, how much a payment on a certain account will raise a credit score.
Sniffing out scams
Credit proofreading agencies differentiate themselves from credit repair agencies, as the latter can be associated with scams. As a Realtor providing references to clients or prospective clients, it’s important to know what to look for when evaluating credit repair agencies, especially those that guarantee the elimination of accurate negative information.
According to the Federal Trade Commission, "when negative information in your report is accurate, only the passage of time can assure its removal." An FTC Web site outlines several ways to spot scams.
Only creditors and the credit bureaus can change information on a credit report — credit repair agencies can only dispute information on that report — which is also something consumers can do by themselves, and for free.
Andrea Altieri, a Realtor in Denver, said she believes that credit repair services "are not worth the money that one pays for them," as a common strategy of such companies is to write protest letters. "I have (had clients who use credit repair services), but it doesn’t always get them anywhere," Altieri said.
Another major red flag: companies that charge advance fees. Under the Credit Repair Organizations Act, it is illegal for companies to charge fees before they provide the promised service.
Another major no-no is file segregation, in which credit repair companies urge clients to create a new credit history, typically by obtaining an Employer Identification Number to use instead of a Social Security Number.
But there are some legitimate businesses that offer credit assistance, said Rachel Dollar, a lawyer and author of the Mortgage Fraud Blog.
"So long as the programs are utilizing valid methods of repair, such as disputing incorrect credit entries, they can be valid and legitimate services. The problem arises when the bad credit is well-deserved and the derogatory information cannot be removed through legitimate means.
"In those cases, certain companies cross the line and agents or consumers who utilize the services might be committing bank fraud if they seek a loan based on the enhanced or repaired credit," Dollar said.
Credit repair and real estate agents
Some real estate agents do refer clients to credit repair organizations and are pleased by the results. …CONTINUED
Fannie Mae will not purchase or guarantee a loan in which the borrower has a FICO credit score below 620. Borrowers with insufficient credit history to generate a FICO score may qualify using manual underwriting procedures that rely on "nontraditional" measures of credit worthiness, such as past payment of rent or utility bills.
Smith went to Omega four and a half years ago and said that company erased $37,000 of debt, mostly medical, from her own report. That fix helped her buy the home she has owned for the past four years, she said. Since then she has referred two out of three clients to Omega, and she said she hasn’t had any complaints.
The company is not accredited by the Better Business Bureau and receives an "F" on the bureau’s grading scale because of "BBB concerns with the industry in which this business operates." The company has a single complaint on its BBB record, for a refund/exchange issue.
Still, there are certain items credit repair cannot erase, Smith said: "Foreclosures or short sales. You’re not going to get that deleted. I haven’t seen that deleted yet."
Credit repair organizations will typically dispute negative information on a client’s credit report with credit bureaus and creditors. And, according to the Fair Credit Reporting Act, credit bureaus have a maximum 45-day window to prove whether the disputed items are entirely complete and accurate, or to remove disputed items.
Consumers should continue to monitor their credit reports, however, in the event that a previously deleted item is re-inserted. Creditors can submit information certifying that the item is correct and complete, and request this re-insertion.
Smith and others Inman News spoke to said that prospective clients often returned to the referring real estate agent to buy a home after they had improved their credit.
‘A dose of reality’
For other prospects, however, the resources agents offered provided them with a sorely needed reality check.
"Some of them realize that they don’t want to deal with it. Sometimes reality smacks you in the face," said Altieri.
Jay Gallagher, a Realtor in Concord, Calif., said he used to offer new clients free credit repair kits — with information about credit scores and challenges to items on a credit report, such as a template of challenge letters — but he said he stopped after he realized that the kits were not an effective way of getting new business.
"We found that the type of buyers who were attracted to that type of service were not disciplined enough to take our advice and actually implement a plan of action. They expected us to wave a magic wand for them and make all their credit problems disappear," Gallagher said. "We would instruct them on what to do, but once they realized that it took hard work and time and they had to pay their bills to repair their credit, they drifted off."
Andy Heller, a real estate educator and investor, works with lease-to-own buyers plagued by credit problems who see lease-to-own as their path to homeownership. Agents can help themselves and their clients by looking for clues that the clients really do want to fix their credit. "Sadly, as many as 60 percent of these families I deal with fail to fix their credit," even after being referred to free counseling, he said.
Others are more blunt about what the agent’s role should be when dealing with clients ridden with bad credit: "I think the best resource to offer someone who has bad credit, no job, no assets, foreclosure or bankruptcy is a dose of reality. Homeownership doesn’t come without significant life-altering risks."
"Any agent who fails to provide that information as resource should be stripped of their license and forced out of the industry," stated Aaron Catt, a real estate agent in Boise, Idaho, responding to a thread on Realestateforum.com.
By "waving the banner that your home was an ATM," real estate agents played a role in inflating the housing bubble, Catt said.
Pennington, the Realtor from Atlanta, said agents should leave it up to the clients to do whatever is necessary to raise their score.
"Point them in the right direction and let them learn on their own. You want to focus on the next prospect. From an income perspective, if you’re trying to fight someone else’s issues, you’re not selling real estate," he said.
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