Major Policy Switch at FHA to Favor Those with Superior Credit, Regardless of Income
May 18, 2008
Saturday, May 17, 2008
Lower income borrowers often have higher credit scores and soon may benefit
Syndicated Columnist
DALLAS — Who has better credit scores on average, a homebuyer with a higher or a lower income?
Inside the country’s fastest-growing home-mortgage program, the surprising answer is: People with lower incomes have slightly higher FICO scores.
That finding, which emerged from a statistical analysis of all approved mortgages insured by the Federal Housing Administration (FHA) during fiscal 2007, is now buttressing a forthcoming major policy switch that could affect thousands of buyers and refinancers.
FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a “risk-based” system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s.
FHA’s move, which will cover all new applications including “jumbo” loans up to $729,750 in high-cost markets through December, will bring the agency in line with the private sector’s predominant approach.
Brian Montgomery, FHA’s top official, outlined the impending change in a speech at the annual conference of the National Association of Real Estate Editors.
Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented low risk of default on their loans, and an inappropriate subsidy of applicants who were likely to default.
A study of an entire year’s applications turned up the additional fact that FHA’s lower-income borrowers typically had higher FICO scores than buyers with larger incomes.
“Is it counterintuitive? Yes,” Montgomery said. According to the study, applicants with FICO scores of 680 to 850 had median incomes of $48,756 last year, while those with low scores of 500 to 559 had median incomes of $53,388.
Fair Isaac Corp.’s FICO scores range from about 300 to 850 — the higher the better — and are predictive of future defaults and foreclosures. Even at rock-bottom down-payment levels of 3 percent, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-size down payments.
All of which underlines the key reason for making the switch to risk-based pricing: Why should people who have demonstrated superior credit — irrespective of their income levels — pay the same mortgage-insurance premiums as loan applicants who have seriously flawed credit histories?
Under the new system, according to FHA’s outline of its plan, “a larger number of low-income borrowers [will] benefit from premium reductions than … moderate-, middle- and upper-income borrowers combined.”
On 30-year loans with down payments of 10 percent or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25 percent of the loan amount upfront and annual renewal premium payments of 0.5 percent.
Borrowers with down payments under 5 percent and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25 percent up front and 0.55 percent annually.
All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5 percent premiums upfront, and 0.5 percent annually.
To set premium rates by credit standing, FHA plans to use the middle score of an applicant’s three FICOs generated by the national credit bureaus — Equifax, Experian and TransUnion.
If only two scores are available, it will use the lower.
For applicants with thin or “nontraditional” credit histories on file at the bureaus, FHA will underwrite and price the loans without reference to FICOs, with heavier emphasis on rent and utility payments among other measures of creditworthiness.
Though FHA mortgage volume has more than doubled in the past year, the move to risk-based pricing is expected to make it more attractive to buyers and refinancers.
During the housing-boom years, FHA lost much of its business to subprime lenders and insurers who offered zero-down, low- or no-documentation loans at high interest rates and fees, including prepayment penalties.
FHA, by contrast, always has required at least a 3 percent down payment, full documentation of income and assets, but has never permitted prepayment penalties.
Since taking over as FHA commissioner in 2005, Montgomery has emphasized “modernizing” FHA and winning back market share.
That has included pushing for higher loan limits to serve greater numbers of borrowers in high-cost areas such as California and along the East Coast.
FHA also is now the government’s key vehicle for refinancing borrowers stuck with unaffordable — and often toxic — subprime mortgages.
Kenneth R. Harney: kenharney@earthlink.net
Copyright © 2008 The Seattle Times Company
Mortgage Market Credit Restrictions Expand
May 12, 2008
Kenneth R. Harney: kenharney@earthlink.net
Saturday, May 3, 2008
Check out commute before you buy
May 12, 2008
The Washington Post
WASHINGTON, D.C. — When you’re stuck in traffic burning $3+-a-gallon gasoline to creep along at walking speed, it offers time to think. Would it be easier if I left home earlier? Would I be better off riding a train? How bad will my commute be in five years? Would life be easier and cheaper if I found a job some place where the roads aren’t as crowded and the homes aren’t so expensive?
A new Web-based tool developed by the Center for Neighborhood Technology (CNT), a Chicago-based urban-development think tank, can help put facts behind those daydreams.
The CNT developed a Web site, at htaindex.cnt.org, that takes into account household expenditures for transportation, along with home prices, to estimate whether a home is truly affordable for households with moderate incomes.
Academics at the CNT argue that a home isn’t really affordable if its location forces a household to devote an excessive amount of the family budget to transportation.
How much is excessive? They say 18 percent of the area’s median pretax income is typical; lowering that to 15 percent would be better. That’s on top of the 30 percent of pretax income that they estimate as an affordable budget for a home’s mortgage principal and interest plus property taxes and homeowners’ insurance, which lenders call PITI.
The Web site is a data fest even by wonk standards. It’s a map-based tool offering information on housing and transportation costs for 52 metropolitan areas.
You can zoom in on individual neighborhoods and pull up U.S. Census information on the percentage of neighborhood residents who use mass transit, their average monthly spending on transportation, the number of wage-earners and cars per household, and other data.
The Web site also displays nearby subway and commuter rail lines and stations.
Other housing-affordability measures ignore the need to travel, CNT President Scott Bernstein said. Travel consists of more than your daily commute. “Only 20 percent of the trips we take in America are to work,” Bernstein said. All those other little trips, runs to the grocery, Little League games and the dry cleaner’s, actually make up the bulk of our travel.
The site has some major drawbacks. Although it was launched nationwide only last week, the database uses 2000 Census data, which are growing stale. Housing and transportation expenses have soared since the government collected that information.
But you can still use the site to compare one neighborhood to another. Then you can develop your own price estimates to help gauge whether a home will truly be affordable once you add in the transportation expenses.
Always do a trial commute during rush hour before you make an offer on a home. Time the ride and estimate your gas consumption.
As you size up neighborhoods, take the time to figure out where you will worship, buy groceries, go to the movies. Is bus or rail service available, even if only as a backup for days when your car is in the shop?
Copyright © 2008 The Seattle Times Company
Credit Tip – Identity Theft
May 9, 2008
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Identity Theft |
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You may have heard that ID theft is one of the fastest growing crimes in the U.S. today. When disputing negative entries on your credit report due to identity theft, make sure to take the following steps: 1) File a police report with your local law enforcement 2) Complete an identity theft affidavit from each creditor affected by the ID theft 3) Request [from the affected creditors] in writing the application documents showing your handwritten signature on the forms (the creditor must comply within 30 days). 4) File an ID theft complaint to the Federal Trade Commission (FTC) so they can assist with the investigation and further bolster your case. 5) When disputing the negative entries, make sure to send a letter and copies of the documents issued to the creditor and law enforcement. |
Seattle in Top 10 of Markets That Are Doing Just Fine!
May 8, 2008
Daily Real Estate News | May 2, 2008
Markets That Are Doing Just Fine, Thanks
Some cities aren’t feeling the pain of falling home prices or rising unemployment. Despite the national slowdown, they’re doing just fine.
To identify the economically healthiest cities, Forbes magazine examined key measures in the country’s 50 largest metros. The magazine studied unemployment and job-growth data from the Bureau of Labor Statistics, home price data from the NATIONAL ASSOCIATION REALTORS®, and information on gross metropolitan product growth provided by the U.S. Conference of Mayors.
Here are the 10 cities that Forbes sees as practically recession-proof, along with the percentage of growth for median-priced homes in the past year.
Houston +1.1 percent
Seattle +1.2 percent
Dallas-Fort Worth +.5 percent
Source: Forbes, Matt Woolsey (04/29/2008)
Homebuyer Seminars in Washington – Helping Buyers Educate Themselves On All Aspects of the Purchasing Process
May 8, 2008
Learn more at http://www.betterhometeam.com/seminar!
Upcoming Seminars in Marysville, Newcastle, Arlington & Everett!!!
How Long Does Information Stay On Your Credit Report?
May 5, 2008
Credit information can, and usually does, stay on a person’s credit report for seven years. Collections stay on the report for seven years from the date of last activity – whether that is the date that the account was filed as a collection or the date the account was paid in full. Here’s an example:
“Jane Borrower” had a collection for $300 filed against her in October of 1994, and she hasn’t paid it. It is now September of 2001, so in a few weeks that collection can come off of her credit report. (She will probably have to request of all three credit bureaus that they take it off.) However, Jane has applied for a loan today, and the loan officer tells her that she has to pay off that debt in order to be approved. Since she has the money, she pays it off. Because the date of last activity is now September 2001, the collection will show on her report until September 2008 – another seven years.
Bankruptcy information can stay on a credit report for ten years. Information about foreclosures is reportable for twelve years from the date filed. Garnishments, judgments, and tax liens can stay on the report for twelve years from the date of entry or for seven years from the date they were satisfied. Dismissed garnishments, judgments, and tax liens are not reportable.
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Type of Information |
Length of Time Can Stay on Credit Report |
| General credit information | Seven years |
| Collection | Seven years from date of last activity |
| Bankruptcy | Ten years |
| Foreclosure | Twelve years from the date filed |
| Garnishment | Twelve years from the date or entry or seven years from the date satisfied |
| Judgment | Twelve years from the date or entry or seven years from the date satisfied |
| Tax lien | Twelve years from the date or entry or seven years from the date satisfied |
| Dismissed garnishments, judgments, and tax liens | Not reportable |
A consumer can request copies of his or her credit report from the three credit bureaus and dispute information that is incorrect. Incorrect information can be corrected or removed, but correct information (good or bad) usually stays on the report for the period allowed. Only the credit grantor or credit bureau can remove correct information – the consumer cannot remove it.