Homebuyers Face Tough Underwriting Restrictions As Mortgage Lenders Practice “Defensive Lending” To Avoid “Buybacks & Fines” From Federal Agencies

7 07 2012

“Defensive lending is the mortgage equivalent of defensive medicine…rather than more medical tests, mortgage lenders are adding underwriting requirements and program restrictions to avoid overstepping a sometimes ambiguous line” that will trigger penalties from Fannie, Freddie or FHA…”

Even minor technical infractions in underwriting or documentation can cause “buyback” demands by Fannie or Freddie when loans go into default, with costs per loan for the lender sometimes soaring to hundreds of thousands of dollars. Plus the Justice Department is putting pressure on major banks to pay millions of dollars to settle allegations of systemic flaws in their mortgage practices — settlements the banks consent to not on the merits but to avoid protracted litigation and hits to their stock prices.

Both the Federal Housing Finance Agency, which oversees giant investors Fannie Mae and Freddie Mac, and the Federal Housing Administration, which runs the low-down-payment FHA program, are considering steps they might take to persuade lenders to open the mortgage spigots a little wider. Together, Fannie, Freddie and FHA account for more than 90 percent of all home loan funding. The focus of their little-publicized reform projects: the “overlay” rules many lenders have adopted that lump extra fees, larger down payments and higher credit-score requirements onto home loans than Fannie, Freddie or FHA require.

For example, Fannie and Freddie may accept FICO credit scores of 660 to 680, and FHA will approve applications with scores as low as 580. Yet lenders originating loans for them often want to see scores 100 points higher. Another example: FHA recently inaugurated a “streamline refi” program designed to encourage widespread refinancings for borrowers with good payment histories by offering low mortgage insurance fees, no appraisals and no credit checks.

For more:  http://www.washingtonpost.com/realestate/federal-agencies-could-induce-private-lenders-to-ease-restrictions-on-home-loans/2012/07/06/gJQAlIduRW_story.html


FHA Mortgage Underwriting: HUD Rescinds New Rule Requiring Collections & Upaid Bills Over $1,000 To Be Paid Off

29 06 2012

“…policy change would have affected borrowers whose national credit bureau files have one or more collections or disputed-bill accounts where the aggregate amounts were $1,000 or greater…if the now-rescinded rules had gone into effect, as many as one in three FHA loan applicants would have had difficulty being approved…”

Under the withdrawn plan, borrowers with collections or disputed unpaid bills would have been required to “resolve” them before their loan could be closed, either by paying them off in full or by arranging a schedule of repayments. In effect, if you couldn’t resolve the outstanding credit issue, you might not be able to obtain FHA financing.

Disputed bills are commonplace in many consumers’ files but may not indicate serious credit risk. Rather, they might simply be a disagreement between merchant and customer over price, quality of the product or the terms of the credit arrangement. Open collection accounts are also common but tend to be viewed more ominously by lenders since they often indicate nonpayment over an extended period. Unpaid creditors frequently charge off unpaid accounts, then sell the files to collection agencies that pursue the customer and report nonpayments to the national credit bureaus: Equifax, Experian and TransUnion.

For more: http://www.washingtonpost.com/realestate/federal-housing-administration-rescinds-tough-new-rules-on-mortgage-applicants/2012/06/28/gJQAqFFx9V_story.html

Understanding Credit Reports: Answers To 10 Of The Most “Confusing” Questions Regarding Credit Report “FICO Scores”

29 07 2011
  1. What’s the difference between a credit report and a credit score? Does a credit report include my FICO® Score?
    Your credit report doesn’t contain any scores. Credit reports and scores are very different kinds of information. Your credit report contains information about your credit history gathered by the credit bureau from your lenders, state and county courthouses, collection agencies, and similar sources. This information shows your pursuit, use and repayment of credit. A credit score helps lenders interpret the data on your credit report. FICO® Scores are credit scores between 300 and 850 that are calculated only from your credit history information found on the credit report. Each FICO Score predicts how likely you are, compared to other consumers, to become seriously late repaying creditors in the future. The higher your score, the more likely you are to repay your creditors as agreed. Lenders may use both your credit report and your credit score to make some credit decisions.
  2. When I apply for a line of credit or an extended line of credit, will it hurt my FICO® Score?
    Not necessarily. When you apply for credit, the lender often will check your FICO® Score or credit report before making a decision. When you later check your credit report yourself, you may see that credit inquiry listed. Whether an inquiry affects your FICO Score depends on several factors, such as the type of credit you applied for and the number of inquiries you already initiated within the past year. For example, your score will ignore mortgage, auto, and student loan inquiries made within the 30 days prior to scoring. So if you shop around for a loan and apply for one within 30 days, those lender inquiries won’t affect your score during that time. Mortgage, auto or student loan inquires that have been on your credit report longer than 30 days are treated by the FICO scoring formula as a single inquiry if they occurred within a focused period of time, such as 45 days.
  3. Are all credit scores FICO® Scores?
    No. “FICO” refers to a particular brand of credit score developed by the FICO company which pioneered credit scoring. Ninety of the top 100 U.S. lenders use FICO® Scores. Most consumer websites sell other brands of credit scores to consumers, but such scores are used by few lenders and in many cases aren’t sold to lenders at all. These scores can mislead consumers and may come with poor advice about their credit picture. Consumers can get the same FICO Scores that lenders use at www.myFICO.com.
  4. Does my credit score determine whether I get credit?
    Your score will likely play a big part in that decision, but lenders won’t all view your score the same way. That’s because lenders have different tolerances for risk. Some lenders will require a higher score than others do for the same basic credit product. Also, lenders often will consider other information in addition to your score as they make their decision. This can include information from your credit application (such as income, length of time on your job, own vs. rent), any prior credit experience you have had with that lender, and the value of the property (auto or real estate) you want to buy.
  5. Will seeing a credit counselor hurt my FICO® Score?
    No. The FICO® Score ignores any mention of credit counseling or debt management plans on your credit report. It also won’t hurt your FICO Score if your credit report includes one or more accounts described as being paid through a credit counseling agency or a debt counseling agency. However, if such an agency does not pay on time, your score will be affected. It’s always a good idea to send your payments to the agency a little early so the agency can get your payment to your creditors on time each month.
  6. What can I do to significantly improve my credit score in the next couple of days?
    There are no quick fixes when it comes to improving your credit standing. Getting a good FICO® Score is the result of maintaining responsible credit habits over time. The most important of these habits are:
    • Pay your bills on time
    • Keep any credit card balances low
    • Apply for new credit only when necessary
    You also should check your credit reports for accuracy. You can get your reports for free once each year from www.annualcreditreport.com.
  7. Does checking my own credit report or credit score hurt my FICO® Score?
    No. When you check your own FICO® Score or credit report, the resulting inquiry on your credit report is ignored by the FICO scoring formula and will never hurt your FICO Score.
  8. Has everyone’s credit score dropped because of the recession?
    Not at all. While it’s true that recent financial problems have resulted in lower FICO® Scores for many people, millions of others have managed their credit in ways that have increased their scores. They have paid their bills on time, lowered their credit card balances, and postponed their pursuit of new credit.
  9. Do FICO® Scores consider race, gender or income in their formula?
    FICO® Scores don’t consider any personal information from credit reports including your race, gender, nationality, address, income and marital status. As a result, lenders who use FICO Scores are better able to comply with the federal Equal Credit Opportunity Act by making lending decisions in a non-discriminatory and fair manner.
  10. Are the FICO® Scores sold to consumers by myFICO.com an approximation of the score lenders see?
    FICO® Scores sold by myFICO.com are precisely the same scores used in credit decisions by thousands of U.S. lenders and other businesses, large and small. Other websites may sell scores that imitate the FICO Score in look and feel, but they use different formulas, have different score ranges, and may mislead people into taking inappropriate actions with their credit. Genuine FICO Scores are always clearly labeled as such.

For more:  http://bankinganalyticsblog.fico.com/

Mortgage Industry Credit Reports: 2nd Quarter 2011 Survey Of Credit Risk Managers Expects Mortgage And Home Equity Delinquencies To Rise Along With Interest Rates In The Next Six Months

13 07 2011


High Credit Report “FICO” Scores: Keep Credit Card Utilization Under 25%, Open New Accounts “Sparingly” And Keep Available Credit Accounts “Open”

8 06 2011
  • Myth:  To get a high score, run up high balances on your credit cards. 
    Using a lot of credit is usually NOT good for one’s credit risk score. Roughly 30 percent of a FICO® Score is determined by the person’s reported debt, with particular emphasis on revolving credit utilization (balance divided by credit limit).  We find that high scorers typically keep their reported utilization under 25 percent on credit cards.  
  • Myth:  Paying your credit card bill down to zero every month will boost your score.
    This is a great habit to get into and we strongly encourage it. It helps the consumer firmly control her credit card usage, encourages her to spend within her means, and helps avoid runaway debt. Because the information on credit reports is limited, however, this excellent habit doesn’t necessarily translate into a higher credit score. Here’s why. The FICO® Score can’t see – and can’t deduce — how much the borrower last paid the card issuer. On the credit report you’ll see the account balance last reported by the card issuer. But the previous month’s balance isn’t shown. Nor is the amount of the borrower’s last payment. And the way an account balance is reported, it rarely reflects the borrower’s most recent payment.  That’s because many lenders report to the credit bureau the same outstanding balance that was last billed to the borrower. Other lenders report the balance as of a particular day in the month.  So if a borrower habitually runs up a high card balance every month, his credit report will likely show those same high balances even though he routinely pays off his balance in full every month.
  • Myth:  To raise your credit score quickly, open a new credit card or take out a loan.
    The FICO® Score considers a wide variety of information about each reported account. In this case, opening a new account will likely have more negative effects than positive effects on the person’s score. On the plus side, it may improve the person’s credit utilization rate. It may also broaden the mix of credit types on the person’s credit report although this is a minor scoring factor.  On the down side, the person will typically lose points in areas such as their length of credit history and the area we describe as “new credit,” or one’s propensity to seek new credit. Although the score will most likely drop from opening a new account, it should recover within a few months in response to responsible credit management.  The best advice for consumers is to take on new credit sparingly and only when genuinely needed.
  • Myth:  To raise your credit score quickly, close any unused credit cards.
    If opening an account can lower your score, then closing an account must raise it, right? Actually this is rarely the case. Years ago lenders believed that having too much unused or available credit was a high-risk factor. In reality, having unused or available credit is often indicative of lower risk, and is viewed favorably by the FICO® Score. Closing a credit card typically removes available credit from the person’s credit report. That’s why closing a credit card doesn’t boost one’s FICO Score, and in some situations may actually cause the person’s score to drop.

For more:  http://bankinganalyticsblog.fico.com/

Mortgage Loan Underwriting: Studies Find That Credit Reports And FICO Scores Are Mostly Accurate And Represent The “Best Predictor” Of Homebuyer Credit Risk

11 05 2011
  • The accuracy of U.S. credit reports has been validated by a new report from the Policy & Economic Research Council (PERC)
  • Titled “U.S. Consumer Credit Reports: Measuring Accuracy And dispute Impacts”, the study found less than 1 percent of all credit reports examined by participants prompted a dispute that resulted in a credit score adjustment and an increase of a credit score of 25 points or greater
  • FICO has further found that credit bureau reports are more accurate than data from other sources
  • It is the the best predicter of the financial decisions that people will make
  • The majority of credit report errors do not involve information crucial to the assessment of credit risk
  • Consumers can also find information on credit scores and credit reports at www.scoreinfo.org and www.myfico.com



For more:  http://bankinganalyticsblog.fico.com/

New Mortgage Loan “Credit Score” Rules Go Into Effect On July 21 Mandating Lenders Disclose “FICO Credit Score” Used In Determining Interest Rate And Home Loan Underwriting Decision

4 05 2011


  • The Dodd-Frank financial reform bill has a provision that requires credit scores and related information to accompany any risk-based pricing or adverse action notice
  • These new requirements take effect on July 21, with a goal of providing additional consumer access to credit scores
  • The hope is for greater transparency into the credit granting processs

First proposed rule requires that any lender sending a risk-based pricing notice must include the credit score used in making the credit decision

  • The credit score range of the scoring model used by the lender
  • The key factors or reason codes that adversely affected the credit score
  • Must disclose five “reason codes” any time inquiries are a “key factor” that adversely affected the score
  • The date on which the credit score was created
  • The credit bureau that provided the credit score

Second Proposed Rule focuses on the inclusion of credit score information in certain adverse action notices

  •  When a lender denies credit to a consumer, the adverse action notice must now include the credit score used in making the decision
  • There are five adverse action model forms to assist lenders with compliance
  • FICO® Score models and versions include five reason codes when inquiries adversely affect the score