Fannie Mae gives “transactors” credit for good behavior

Fannie Mae gives “transactors” credit for good behavior

Kenneth R. Harney on Apr 29, 2016

WASHINGTON – Are you a “transactor” or a “revolver” when it comes to your credit? Terms like these never have mattered much to home buyers seeking a mortgage. You’ve probably never heard of them. Yet they are about to become more important to millions of mortgage seekers, and could even help determine whether you qualify for a mortgage in the first place.

A transactor is someone who pays off credit bills in full every month or makes more than the minimum required payment. A revolver is the opposite- Someone who routinely makes the minimum payment on credit cards and other debts, rolling balances over to the next month. Credit industry statistical research suggests that, all other factors being equal, revolvers tend to present higher risks of future default to lenders, especially when they are accumulating substantial unpaid balances. Transactors tend to be lower risk.

But up until now, mortgage lenders and investors had difficulty distinguishing revolvers from transactors. Credit reports told them whether you as an applicant were late on card payments, whether you defaulted on your car loan, but didn’t tell them what you paid on your balances month by month over extended periods of time. They didn’t reach back to show distinctive patterns and trends in your money management- Did you roll large monthly balances on three credit cards during the last six months of 2015? Are you a rate surfer, transferring balances from one account to another, always making minimum or no payments? Up until recently, traditional credit reports used in the mortgage arena weren’t able to answer questions like these. Now they will.

Fannie Mae, a dominant player in the mortgage market, will soon begin evaluating how all loan applicants have managed their credit over the previous two years – how much they owed in revolving debt each month, the minimum payment allowed on each debt, and how much they actually paid. Mortgage credit reports acceptable to Fannie will need to include “trended credit data” like this on every applicant.

As a general rule, according to Eric Rosenblatt, Fannie’s vice president of credit risk analysis and modeling, the new system will “benefit borrowers who regularly pay off revolving debt” and should “provide more creditworthy borrowers access to mortgage credit.” That’s a big deal.

Starting June 25, the new reach-back data will become an integral part of Fannie’s automated underwriting – an online system that is used by the vast majority of mortgage lenders to determine whether applicants are eligible for the loan they’re seeking. Two of the three national credit bureaus – Equifax and TransUnion – will supply two years worth of continuous, month-by-month data on the credit management patterns of millions of mortgage applicants.

This should prove especially important for consumers who might not qualify for a mortgage because their credit reports contain too little information to generate a credit score. Many of these would-be purchasers are first-timers – millennials just starting out on their careers. Others are individuals who simply do not make much use of credit but now need a mortgage.

TransUnion conducted a study of “unscorables” and found that by adding credit usage data into their reports, 26 million thin-file or unscorable consumers could generate credit scores and that nearly three million of these consumers could be classified as “prime” or “super prime” credit risks – possibly qualifying them for reduced interest rates from lenders, according to Joe Mellman, TransUnion’s vice president and mortgage business leader.

Fannie Mae’s use of the new credit report data will not affect anyone’s FICO credit score, but it will open the door for applicants who look marginal or unqualified yet demonstrate responsible credit management habits over time. They may not have vast amounts of credit available to them, but they pay off or limit their balances.

Experts in the credit industry consider the upcoming move by Fannie Mae to be a major advance in fairer credit. Terry Clemans, executive director of the National Consumer Reporting Association, says it amounts to “the biggest change to the mortgage credit report in nearly a quarter of a century.” Freddie Mac, the other big mortgage investor, is “evaluating” whether to adopt a similar approach, according to a spokesman.

Bottom line for you- Be aware that how you manage your credit could now become a key determinant of whether you get a mortgage. Transactors will reap the benefits; revolvers playing games with credit cards will get more scrutiny.

payment loan? If your FICO score is good, you’re in luck.

Looking for a low-down-payment loan? If your FICO score is good, you’re in luck.

By Kenneth R. Harney April 20

If you’re planning to buy a home with a low down payment, you need to be aware of some important but virtually unpublicized price changes underway in the mortgage market.

If you’ve got good but not great credit, such as a FICO score in the mid to upper 600s, you’re going to get hit with higher fees on a conventional (non-government) loan with a low down payment. Count on it. On the other hand, if you’re part of the credit elite – your FICO score is 760 or higher – congratulations: You’re in line for an unexpected discount on fees, despite making a tiny down payment.

What’s going on? Put simply, the mortgage insurance premiums on loans eligible for sale to giant investors Fannie Mae and Freddie Mac underwent a shake-up this month. Applicants with lower scores and smaller down payments got whacked.

To illustrate: According to one mortgage insurer’s rate sheet, the buyer of a $400,000 house with a 660 FICO, a 3 percent down payment and a fixed rate of 4 1/8 percent would have paid $2,359 a month in principal, interest and mortgage insurance before the premium changes took effect April 4. Today, the same borrower would be charged $2,495 a month – $136 more a month, $1,632 more a year. But a borrower with a 760 FICO seeking the same size loan with a rate of 37/8 percent would now be charged $162 less per month – $2,002 vs. $2,164 – because of the pricing revisions.

[ led-to-inform-consumers-about-extra-interest/2016/04/12/0c76e00e-0001-11e6-b 823-707c79ce3504_story.html> Lawsuit says banks improperly failed to inform consumers about extra interest]

What about slightly larger down payments, such as 5 percent ($20,000) on the same $400,000 home purchase? If your FICO is a 620, you would have paid $2,261 a month before the change. Now your mortgage will cost you $2,407 a month. If you’re at the higher end of the credit spectrum, with a 760-plus FICO, the 5 percent-down loan would have required $1,931 a month in payments before April 4. That now drops to $1,890.

A little background here: When you make a down payment of less than a 20 percent on a conventional loan, private mortgage insurance is required, to limit some of the potential risk for the lender or investor. Typically, the premiums get tacked on to the monthly payments. Fannie Mae and Freddie Mac also add their own extra charges on low-down-payment mortgages. The lower your credit score and the smaller your down payment, the higher the add-on fees charged by Fannie and Freddie.

Mortgage insurers say they were forced to make the pricing revisions because Fannie and Freddie rejiggered capital requirements on them. “We had to end up charging more,” said Michael Zimmerman, a senior vice president at MGIC, a major insurer. The “cross-subsidization” in premium rates that previously existed – where borrowers with excellent credit were charged a little more in premiums so that lower-FICO borrowers could pay a little less – has “now been eliminated.”

[ f-them-apply-for-a-mortgage/2016/04/05/6fbcd910-fa76-11e5-886f-a037dba38301_ story.html> Many couples pay more when both of them apply for a mortgage]

Fannie and Freddie officials say the revised capital requirements were necessary to ensure that the companies they deal with have sufficient strength to handle future default and foreclosure claims. Andrew Wilson, a spokesman for Fannie Mae, said the mortgage insurance companies could have revised their rates differently, limiting the impact on lower-score home buyers, but they chose otherwise.

Bose T. George, managing director of equity research at Keefe, Bruyette & Woods, a highly regarded mortgage industry analyst, says Fannie and Freddie also had choices: They could have reduced their own “significant” fees on lower-down-payment, lower-FICO borrowers, fees that they have had in place since the housing crisis. “They have never revised their fees, and to expect private companies to subsidize lower-score borrowers is unrealistic,” he told me in an interview.

Putting aside these inside-the-industry spats, what do the new changes in insurance premiums mean to you in practical terms? If you’ve got a FICO score in the mid to upper 600s and you want to make as small a down payment as possible, you’ll probably want to look to the Federal Housing Administration for your financing.

FHA offers 3.5 percent minimum down payments and is more flexible and lenient than Fannie and Freddie on credit issues and debt-to-income ratios. Last year, FHA slashed its own premiums, and they’re now the less-costly choice below 700 FICO.

But FHA-insured loans have a key drawback: Unlike private mortgage insurance, you generally can’t cancel premium payments once your equity reaches a certain threshold. So you could end up paying monthly premiums indefinitely. That’s a real turn-off.

Homeowners fight mortgage-interest overcharges

Homeowners fight mortgage-interest overcharges

Kenneth R. Harney on Apr 15, 2016

WASHINGTON – For years it was widely considered a massive, government-sanctioned rip-off of home mortgage borrowers. Then it was banned by the Consumer Financial Protection Bureau. And now it’s the subject of class-action suits that accuse four large banks of illegally collecting millions of dollars in excess mortgage interest payments from their customers.

The source of all the controversy- The Federal Housing Administration’s long-time policy of allowing banks to charge homeowners a full month’s worth of interest when they went to pay off their FHA-insured loans – even after they had paid back all the principal they owed.

To illustrate- Say you were preparing to pay off your mortgage balance in full on May 3. Under the government’s policy, lenders were permitted to charge you interest on the paid balance though May 31, collecting it at the closing May 3. It was the equivalent of being charged for a full tank of gas, even though all you pumped was three gallons.

The official rationale for the controversial policy was that mortgage bond investors expected full months’ worth of interest payments on FHA loans, not partial payments. Unless borrowers paid off their loans on the first of the month, the lender could charge them interest for the full month. But FHA was alone in its stance on this. Neither of the two giant mortgage players, Fannie Mae and Freddie Mac, forced consumers to make extra interest payments on loans to please Wall Street. Nor did the Department of Veterans Affairs (VA) do so on its home mortgages. FHA officials also argued that because of the opportunity lenders have to charge additional interest, they typically quote more favorable interest rates on FHA loans – 0.10% to 0.15% lower – compared with non-FHA loans.

Last year, after the CFPB ruled that FHA’s policy amounted to a prepayment penalty prohibited by federal law, FHA rescinded the policy for new borrowers taking out loans on or after Jan. 21, 2015, but kept it in place for an estimated 7.8 million homeowners who had FHA loans dating to previous years. At the same time, the agency conceded that the savings FHA borrowers supposedly received from its policy were illusory, and that “in most cases” the extra interest payments exceeded any small interest rate break up front.

In a series of legal moves last week, attorneys representing FHA borrowers sued Bank of America, Wells Fargo Mortgage, U.S. Bank and SunTrust Mortgage for allegedly failing to properly disclose the extra-interest policy to clients paying off loans originated before the deadline. All four banks, according to complaints filed in federal district courts in Florida and Georgia, violated FHA’s own rules by using payoff disclosure forms that were not approved by FHA and did not adequately advise borrowers on how to limit or avoid extra-interest charges. The approved FHA disclosure expressly informs borrowers that “it is to your advantage” to schedule closings either at the end of the month or by the first business day of the month.

The net effect of the allegedly improper disclosures, the suits charge, is that large numbers of borrowers paid more in interest than they could have, and that the four banks collected substantial sums in post-payment interest illegally on FHA mortgages.

All four banks declined comment on the suits when I contacted them last week.

Real estate industry estimates of excess FHA interest charges over the past decade and a half have ranged into the hundreds of millions of dollars per year. In 2003 alone, according to one estimate from the National Association of Realtors, FHA borrowers paid nearly $587.4 million in excess interest.

One of the plaintiffs in the class-action suits, a homeowner in Florida who allegedly was overcharged by Wells Fargo, claimed in her suit that the bank informed her in a loan payoff statement that she would owe $1,227.68 interest. Yet her typical monthly interest charge was just $613.84. Wells Fargo’s payoff statement was not in the format approved by FHA, she said, and was “both misleading and confusing” and did not properly advise her of her options.

One of the attorneys representing the plaintiffs, Naveen Ramachandrappa of Bondurant Mixson & Elmore in Atlanta, said the suits reveal that the four lenders “took hundreds of millions of dollars in illicit profits” by not following the rules, and “those funds need to be returned to plaintiffs” and to other borrowers who have been victims across the country.