Flexible rules could extend mortgages to millions

Flexible rules could extend mortgages to millions

Kenneth R. Harney

Sep 26, 2014

WASHINGTON – Are the two biggest players in the American mortgage arena – Fannie Mae and Freddie Mac – needlessly preventing millions of African-Americans, Latinos and young consumers from qualifying for a loan because they don’t have a FICO credit score?

Some critics say the answer is an emphatic yes. James H. Carr, formerly a vice president at Fannie Mae and now a senior policy fellow with the nonprofit Opportunity Agenda, says the failure of both corporations to adopt up-to-date, more sophisticated credit scoring models has a “disparate impact” on minority consumers and is discouraging first-time home purchases. Large numbers of Americans cannot be scored using the decade-old FICO models that are still mandatory at Fannie and Freddie, says Carr, and as a result they can’t qualify for mortgages.

Typically these are consumers who make minimal use of traditional forms of credit. They pay their bills for rent, utilities and cellphones, but none of these are reported to the national credit bureaus – Equifax, Experian and TransUnion. Many are young, just starting out in their careers. Disproportionately they are minorities.

Some civil rights and financial groups agree that to more fairly serve the full range of home buyers, the two dominant home lending corporations need to adopt the technologically superior and more inclusive models that are now available from Fair Isaac, developer of the FICO score, and its chief competitor, VantageScore LLC.

The Vantage score is widely used by banks in the credit card and auto loan fields. Yet neither Fannie nor Freddie accept Vantage scores, they have not accepted any of the improved models offered by FICO since the housing boom and bust, and they do not appear to be in much of a rush to do so.

Here’s the problem- Without a credit score, most mortgage applicants are doomed to rejection by lenders who expect to sell loans to either of the giant corporations.

When consumers have little or no information on file, their credit data may be “unscoreable” and they must either forgo borrowing or use alternative lending sources that charge high or extortionate interest rates. But advanced scoring methods, as used in the latest Vantage and FICO models (Vantage 3.0 and FICO 9), are able to score greater numbers of people with so-called “thin” files, making them eligible for lower-priced loans.

VantageScore LLC claims that its newest version can score 30 million to 35 million consumers who are currently unscoreable by the systems used by Fannie and Freddie. Of these consumers, roughly 10 million have scores that are near or exceed the minimums required by the two companies. Roughly 9.5 million of the newly scoreable consumers are either African-American or Hispanic, and 2.7 million of these have scores that could open them to qualifying for a mortgage, assuming they meet income and underwriting criteria.

Some financial and credit industry groups have urged Fannie and Freddie to open their systems to more inclusive scoring models. In a letter to the companies’ regulator earlier this month, the National Association of Federal Credit Unions asked that lenders be allowed to use more “updated and accurate credit scoring models” in order to “expand access to [mortgages] for those consumers who are unable to be scored by the FICO model.” In a letter to financial regulators, seven interest groups representing consumers, lenders and credit reporting companies said the mandatory use of FICO models “disenfranchises millions of potential well-qualified borrowers” who have thin files or are infrequent credit users. Lisa Rice, vice president of the National Fair Housing Alliance, told me in an email that her organization has “been pushing [Fannie and Freddie] for some time to test the VantageScore system so they can begin allowing lenders to use [it],” at least on a pilot basis.

So what’s Fannie’s and Freddie’s take on all this? A spokesman for Freddie was noncommittal- “We study scoring model refinements on an ongoing basis,” he said. Fannie Mae was slightly more positive and specific- “We are studying the costs and benefits of incorporating Vantage 3.0 or FICO 9 into our process,” said spokesman Andrew Wilson. However, he added, “we are confident that the tools we use today accurately consider a borrower’s credit history.”

Bottom line if you’re one of the millions with “thin” or unscoreable credit and would like to buy a home but are shut out- Don’t give up hope. Fannie and Freddie are at least thinking about adopting more advanced scoring techniques. That’s got to be a plus.

House panel considers ways to boost credit scores, but complications come to light

House panel considers ways to boost credit scores, but complications come to light

By Kenneth R. Harney September 19 at 7:45 AM

Do you think you’d have a better chance to qualify for a home mortgage if negative items in your credit files were erased after four years rather than the current seven?

How about if your credit reports included information on your utility bills, rent, cable, mobile phone and other monthly payments? Wouldn’t this give a nice jolt to your credit scores, assuming you’ve paid these bills on time? Shouldn’t this be federal law?

Millions of Americans have stakes in the rules governing credit – especially people who could use a little credit help to qualify for a mortgage.

A hearing before the House Financial Services Committee last week touched on these and other possible legislative fixes to the national credit system. But some of the answers that emerged weren’t as straightforward as you might guess.

Start with removing negatives from credit reports. A new legislative proposal from Rep. Maxine Waters (D-Calif.) would amend the federal Fair Credit Reporting Act to require the national credit bureaus to delete most negative information – delinquencies on credit cards, mortgages, foreclosures and short sales, among others – within four years. Bankruptcies would remain on file for seven years, rather than the current 10.

In effect, this would erase most traces of the credit troubles many consumers encountered during the housing bust and recession. It would also give adrenaline boosts to their credit scores and create opportunities for huge numbers of renters who would like to buy houses but can’t meet today’s high credit score requirements.

Waters, the ranking Democrat on the committee, said adopting a four-year standard would end “the unreasonably long time periods that most adverse information can remain on a credit report.” Since “the predictive value of most negative information contained on a credit report gradually diminishes after two years,” she said, a change would treat borrowers more fairly and better conform to practices in other major economies. In Sweden, she said, the standard retention period is three years, while in Germany it’s four.

Sounds promising, right? Maybe.

But the credit industry says: No way, it’s a terrible idea. The fact that you experienced a serious delinquency or foreclosure is still relevant – and statistically predictive of future delinquencies – for more than four years. Dumping information too early would hamper lenders’ capacity to evaluate the true risks posed by loan applicants. Ultimately it would be harmful to everybody, lenders and borrowers alike.

Stuart K. Pratt, president and chief executive of the Consumer Data Industry Association, testified that although a handful of developed countries have more lenient rules, “82 percent of credit systems” worldwide require credit bureaus to retain negative data for anywhere from four to 10 years.

Following the hearing, Pratt told me that “it doesn’t seem right to us coming out of the great recession that we would erase predictive data” that lenders now use to carefully underwrite applications for mortgages and other credit.

What about including in credit reports rent performance, utilities bills, cable and other services requiring monthly payments and factoring them into scores? As a general rule, few if any of these payments – though they are directly related to consumers’ creditworthiness – are given any weight in your credit scores. Wouldn’t mandatory consideration of them help people who pay their bills on time but don’t have extensive credit files?

Sounds like a no-brainer. But it isn’t. Though the national credit bureaus generally favor supplementing their own information with “alternative” credit data such as rental payment histories, some consumer groups think it’s not a great idea.

At the hearing, Chi Chi Wu, staff attorney for the National Consumer Law Center, said her group opposes inclusion of utilities payments in credit reports because it could actually depress many consumers’ scores, especially those with lower incomes.

Studies have shown, she said, that many consumers prioritize their monthly energy payments, and when money is tight, between 20 percent and 30 percent of them choose to pay utilities late rather than the rent or other bills. They make it up subsequently, but if utilities reported late payments to the credit bureaus, large numbers of consumers could end up with 30-to-90-day delinquencies in their files and see their credit scores plunge.

Bottom line from the hearing: Congress is beginning what could be an important long-term review of credit reporting and scoring-system practices. But figuring out how to treat everybody fairly could be a challenge.

Underwater homeowners hold their breath

Underwater homeowners hold their breath

Kenneth R. Harney Sep 12, 2014

WASHINGTON – Congress is back from its summer vacation, so the burning financial question on thousands of homeowners’ minds right now is this- Are you guys finally going to help out consumers who are underwater on their mortgages, many of whom face crushing federal tax bills if they accept – or have already accepted – principal reductions by their lenders?

This question is especially sensitive in the wake of the $16.65 billion toxic loans settlement reached last month by Bank of America and the Justice Department. Roughly $7 billion of the deal is earmarked for direct borrower relief, and a large chunk of that is expected to involve principal write-downs for underwater owners. Earlier settlements with JPMorgan Chase and Citigroup also included debt reductions.

But here’s the problem- Under current tax law, when most of these owners accept reductions in what they owe, the amount forgiven by the bank gets reported to the IRS and the owner is hit with taxes as if it were ordinary income. Congress created a temporary exception to this tax code rule solely for distressed homeowners – the Mortgage Forgiveness Debt Relief Act of 2007 – but that law expired last Dec. 31 and has not been renewed for principal reductions during 2014, whether they are obtained through loan modifications by lenders, short sales or foreclosures.

If Congress does not extend the law retroactively, according to Attorney General Eric Holder, “hundreds of thousands” of underwater owners could be hit with tax burdens they may not be able to handle. Equally troubling, the nine-month lapse in the debt relief act already has prompted large numbers of owners to avoid the possibility of a huge tax bill altogether. Deeply in the hole on their mortgage debt, they have opted for bankruptcy rather than trusting Congress to renew the law.

“I’m seeing a lot more bankruptcies because of [the expiration],” says Kevin B. Tolbert, a realty agent with Keller Williams in Port St. Lucie, Fla., who has specialized in helping underwater owners do short sales. Tolbert estimates that he handled more than 300 short sales from 2010 through 2013, but he has avoided them this year. With the potential for heavy tax levies on clients who opt for principal reductions, Tolbert says, until Congress renews the law “I really can’t recommend” that owners take the chance. Nor can he recommend that they declare “insolvency” under the tax code to avoid having to pay money to the IRS.

So back to the main question- What’s happening in Congress on mortgage debt forgiveness? It’s complicated. Before heading out for summer vacation, it appeared that action was imminent in the Senate. The Finance Committee approved a so-called “extenders” bill that would have renewed the debt forgiveness law along with 50-plus other expired tax code programs such as credits for alternative energy and for research and development.

But before a vote was taken by the full Senate, Majority Leader Harry Reid, D-Nev., prohibited consideration of a Republican-backed amendment that would have repealed an excise tax on medical devices that is a source of funding for the Affordable Care Act. That knocked the entire extenders bill off track. Sources on Capitol Hill say Reid now wants a vote on the extenders – and is willing to take up the Obamacare amendment – but plans to delay action until the lame-duck session after the November elections. Since the extenders bill has bipartisan support, it has a good chance of passage then.

On the House side, Ways and Means Committee Chairman Dave Camp, R-Mich., is not likely to schedule a separate vote on mortgage relief, sources say, but he won’t block a short-term extension of the program if the Senate passes the extenders bill in its current form and sends it to the House.

So what’s the outlook for owners scheduled to receive principal debt reductions from banks in the coming months, along with others who have completed short sales or loan modifications this year? Thousands of Bank of America borrowers covered by the August settlement have some little-publicized special protection- The settlement requires the bank to set aside $490 million to help defray portions of customers’ tax bills in the event Congress fails to extend the relief law.

For most other underwater borrowers who plan to receive principal reductions this year or already have, it’s still nail-biting time. But the odds for eventual renewal by Congress – yes, even this Congress – appear to be a little better than even.

A policy switch at FHA

A policy switch at FHA

Kenneth R. Harney

Sep 5, 2014

WASHINGTON – Hundreds of thousands of home sellers have had their pockets picked at closings during the last decade – they’ve been charged interest on their mortgages after their principal debts had been fully paid off.

This practice, endorsed by a federal agency, cost consumers staggering amounts, with estimates ranging into the hundreds of millions of dollars a year during periods when mortgage rates were high.

But thanks to a policy switch made final last week, charging extra interest payments on loans insured by the Federal Housing Administration (FHA) will soon be banned. FHA, which traditionally has served as a major source of financing for moderate income first-time buyers, many of them African-American and Latino, for years has allowed lenders to charge borrowers a full month of interest when they sell or refinance a home. This has been the case even when borrowers pay off the mortgage weeks in advance of the end of the month.

Picture this. Say you went to closing on an FHA loan Sept. 3. Under standard industry rules followed by Fannie Mae, Freddie Mac and the Dept. of Veterans Affairs, your interest charges cannot extend beyond that date. But under FHA’s long-standing policy, lenders have been allowed to hit you with interest charges through Sept. 30.

Why? Good question. The Consumer Financial Protection Bureau essentially posed it to FHA last year- Aren’t you allowing lenders to soak hapless consumers with post-payment penalties at closings when they have no alternative but to pay up? And, more to the point, didn’t the Dodd-Frank financial reform legislation of 2010 prohibit penalties of this sort? How is your policy, which sometimes results in unexpected extra charges of hundreds of dollars, legal?

FHA argued that the bond investors who buy packages of insured mortgages expect full-month payments of interest plus principal, and that in any event, FHA lenders charge borrowers slightly below market rates to help compensate for the post-closing payments. But critics said there was no way this alleged bargain favored borrowers, who inevitably paid far more in extended interest than they ever received in hair-splitting “reduced” interest rates.

The National Association of Realtors, which had railed against FHA’s policy for more than a decade, estimated that during 2003 alone, sellers and refinancers were forced to pay nearly $690 million in extra interest charges. Realtors in Maryland even persuaded Sen. Ben Cardin, a Democrat and ally of the Obama administration, to introduce legislation that would have prohibited the extra interest fees. But FHA didn’t like the bill and it died without getting even a hearing in the Senate.

Asked for comment on FHA’s policy change, Realtors association president Steve Brown said he applauded the move, which was “long overdue” and should “result in cost savings for millions of Americans who rely on FHA-insured loans to purchase their homes.”

Here are the details of the policy reform- Starting Jan. 21, new FHA mortgages will require lenders to collect interest only on the balance remaining on the date of closing for a home sale or refinancing. Under the revised policy, if you’re selling your home and you have a $150,000 balance left on your FHA loan, the lender will have to stop charging you interest on the date of the closing, not compute the interest charges that would be due through the end of the month and roll them into your bottom line.

In guidance published in the Federal Register, FHA urged lenders not to find new ways to penalize borrowers. The agency said they should “look elsewhere” to recoup whatever revenues they expect to lose by virtue of the policy change, and continue “to offer [consumers] the same interest rates that they offer now,” rather than finding some way to tack on a premium.

So could these changes make FHA more attractive to borrowers compared with the alternatives? Yes, but there are two caveats- Sellers and refinancers who currently have FHA loans and expect to close before Jan. 21 won’t likely see much benefit. Plus FHA’s other current negatives – super-high mortgage insurance premiums that are non-cancellable for extended periods – won’t be disappearing.

Nonetheless, FHA remains the go-to choice if you have minimal down payment cash (3.5 percent), issues in your credit files and you are not eligible for a VA loan, which is the best deal around with zero down and generous underwriting.