When you were in high school, did your parents ever caution you about the company you keep? The people you share common interests with can be either a positive or a negative influence on your decision making. They can lead to to success, or they can lead you astray.
When lenders want to evaluate a potential borrower, they don’t interview friends, but they do examine the financial characteristics of a borrower’s life, and they make determinations based on the historical behavior of others with the same characteristics. That’s the whole point of a FICO score. The Fair Isaac Corporation built a successful business around classifying and categorizing large groups of people based on similar financial characteristics. If people in your group default at higher rates than other groups, your FICO score will suffer, irregardless of whether or not you think or act like those people. It’s not possible for credit underwriters to look into your heart or determine whether or not you have upstanding morals. They aren’t interested in you as an individual. They can only go by what others with your financial characteristics have done.
Drawing lines in the shades of gray
In any group of potential borrowers, there are some that will default, and there are some that won’t. Despite default rates north of 50%, there are still some subprime borrowers dutifully paying their mortgages. Should we bring back subprime lending because the 40% who would make it are currently being denied access to a mortgage?
The job of credit underwriters and actuaries is to properly classify people into the appropriate groups, then draw a line across the shades of gray. For the sake of bank solvency, this line will always be drawn conservatively. Obviously a 50% or greater default rate experienced in subprime is far too high, but what is an acceptable rate of mortgage default? FICO scores between 640 and 620 default about 15% of the time. The GSEs cut off in this range, and it can be argued that a 15% default rate is much too high and perhaps the GSEs should tighten further.
But even if only 15% of borrowers with FICOs between 640 and 620 default, that means that 85% do not. If the FICO score requirement is raised to 640, then 85% of creditworthy borrowers will be denied credit. Although the ratio drops with FICO scores, no matter how low you go, some creditworthy borrowers will always be denied credit. That’s the price they pay for the company they keep.
Fannie Mae Tightens Mortgage Standards for Some Home Buyers
By Jody Shenn – Aug 22, 2012 10:13 AM PT
Fannie Mae, the largest source of money for U.S mortgages, told lenders that it’s tightening some of its qualification standards for people buying homes or refinancing loans.
I thought the realtors said credit was already too tight. I suppose that’s an easy call for them to make since it isn’t their money at risk.
The changes include a reduction of the maximum loan-to- value ratios for some adjustable-rate mortgages to 90 percent, from as much as 97 percent, and an increase in required credit scores for certain loans, the Washington-based company said yesterday on its website. Fannie Mae also will start demanding more tax returns from self-employed borrowers, according to Matt Hackett, underwriting manager at New York lender Equity Now Inc.
That one is going to cause problems for many consultants coming out of the recession. The self-employed will need to wait an additional year to prove the recession is over and their income is secure.
“This can knock a decent portion of borrowers out of the picture who had a rough year in business two years ago,” Hackett said of the tax-information demand, tied to an update of its underwriting software used by originators. Two years of personal and business returns will be required to verify incomes, up from one year of personal returns. “You’d be surprised how much of an effect this has,” he said.
As Perspective pointed out yesterday in the comments, we can’t pity the self employed too much. “I have friends who run/own their own firms. Everyone of them is doing well, but can’t get a mortgage (the size they’d want) because their returns show they’re living on much lower income than they really are.
They have the temerity to complain about this. So, I have to buy my meals, vacations and cars with after tax income (33% reduced) while you get to buy/finance all of that with pre-tax income, and then you have the nerve to complain about mortgage standards keeping you from buying your dream home?”
Tougher guidelines from Fannie Mae (FNMA), which along with smaller rival Freddie Mac guarantees mortgage-backed securities financing about two-thirds of new loans, may add to challenges for a housing market that’s showing signs of recovering after a six-year slump. Pacific Investment Management Co., manager of the world’s largest mutual fund, said in commentary yesterday that while “record-tight” credit standards are impeding real- estate sales, they “will not last forever.” …
Pimco is right about today’s standards not lasting, unfortunately. The idea that current standards are “record-tight” is complete bullshit. We have merely returned to the sound underwriting that existed prior to the housing bubble. Low money down, no-doc mortgages are not the birthright of every American. I don’t think we are done tightening yet because delinquency rates are still far too high.
Credit Scores
Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages not vetted by its Desktop Underwriter computer software. Scores will need to be at least 640, up from a previous minimum of 620, on a scale ranging from 300 to 850, according to the memo. It is also eliminating a policy that provided lenders the flexibility to accept scores 40 points below its normal requirements for specific products if borrowers had other strengths.
If 640 becomes an absolute minimum threshold, many more “creditworthy” borrowers will fail to make the grade.
Changes to its guidance on so-called underwriting exceptions also will eliminate the concept of a “benchmark” ratio between borrowers’ income and housing costs of 36 percent, according to the memo. Instead, 36 percent will be the “stated maximum,” though the ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.
A 36% stated maximum will be huge. The benchmark was widely ignored by lenders, but now they will have to pay attention to it. People with large student loans, car loans, and credit card debts will suddenly be unable to buy homes. This will knock out many potential first-time buyers.
The new approach “provides more transparent requirements with regard to how compensating factors must be applied,” Fannie Mae said.
The company will end its FannieNeighbors product that offered underwriting flexibility for borrowers in so-called underserved areas. The loans were part of a program that also offers the aid to low-income individuals or public safety, education, military and health-care professionals.
Borrowers without traditional credit will be limited to loans for one-unit homes that they plan to live in, and the company will no longer accept “exterior-only” property appraisals for mortgages run through its computer software.
Obviously, all of the above exceptions lead to high default rates, otherwise they wouldn’t be making these changes.
Fannie Mae is loosening some standards, according to the memo. The loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements also will fall for certain co-op loans, according to the document.
When will credit standards loosen up?
Many people believe that credit standards will get looser as soon as prices bottom out because lenders will have less risk. I don’t think that will be the case. Lenders will still be worried about buy-backs because most of them operate on an origination model. Lenders on an origination model need to see delinquency rates back to historically low levels. We are still a few years away from that. Expect to see tight credit standards for the foreseeable future.
2002 Rollback
The asking price for today’s featured REO is just over its 2002 purchase price. Ten years later, and this property hasn’t gone up in value at all.
- The former owner was a Ponzi like most of my daily profiles. He bought the house for $375,000 on 5/2/2002. He used a $300,000 first mortgage, a $37,500 second mortgage, and a $37,500 down payment.
- On 8/29/2003 he refinanced his first mortgage for $375,100 and withdrew his down payment.
- On 12/30/2005 he refinanced with a $542,500 Option ARM with a 1.5% teaser rate. With that loan he extracted $130,000 from the property including his original $37,500 down payment.
He did lose the property, but he made $130,000 on the bank put. It turned out well for him.
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Proprietary OC Housing News home purchase analysis
311 West AVENIDA PALIZADA San Clemente, CA 92672
$380,000 …….. Asking Price
$375,000 ………. Purchase Price
5/2/2002 ………. Purchase Date
$5,000 ………. Gross Gain (Loss)
($30,000) ………… Commissions and Costs at 8%
============================================
($25,000) ………. Net Gain (Loss)
============================================
1.3% ………. Gross Percent Change
-6.7% ………. Net Percent Change
0.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$380,000 …….. Asking Price
$13,300 ………… 3.5% Down FHA Financing
3.54% …………. Mortgage Interest Rate
30 ……………… Number of Years
$366,700 …….. Mortgage
$95,271 ………. Income Requirement
$1,655 ………… Monthly Mortgage Payment
$329 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$95 ………… Homeowners Insurance at 0.3%
$382 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,461 ………. Monthly Cash Outlays
($247) ………. Tax Savings
($573) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$115 ………….. Maintenance and Replacement Reserves
============================================
$1,771 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,300 ………… Furnishing and Move In at 1% + $1,500
$5,300 ………… Closing Costs at 1% + $1,500
$3,667 ………… Interest Points
$13,300 ………… Down Payment
============================================
$27,567 ………. Total Cash Costs
$27,100 ………. Emergency Cash Reserves
============================================
$54,667 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."  |
$650,000 315 AVENIDA CABRILLO #2 |
0.05 miles - bd / – ba 1,200 Sq. Ft. |
|
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$629,000 132 West MARIPOSA |
0.32 miles 3 bd / 2 ba 1,226 Sq. Ft. |
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Fannie Mae: Falling Economic Confidence to Slow Housing Recovery
American consumers remain cautiously optimistic of housing as home prices rise, Fannie Mae reported Monday.
According to the GSE’s August 2012 National Housing Survey, consumers maintain a cautious but improving view of homeownership and the housing market. The average home price change expectation is 1.6 percent, mostly consistent with July’s results and down from a June high of 2.0 percent. Meanwhile, 11 percent of those surveyed say home prices will go down in the next year, holding steady at the lowest level since the survey began in 2010.
Eighteen percent of respondents say it is a good time to sell, the highest level since the survey began. At the same time, the percentage of respondents who say it is a good time to buy remained steady at 73 percent. Approximately 40 percent of respondents said mortgage rates will go up in the next year, 4 percentage points higher than July.
Consumers scaled back rental expectations a bit. Of those surveyed, 44 percent said they expect rental prices to increase in the next year, a drop of 3 percentage points, while 5 percent expect rental prices to fall. The average rental price change expectation fell 0.7 percent to 3.2 percent, the lowest level since January this year.
While consumer sentiment demonstrated a slight shift toward buying over renting, stalling household financial expectations and falling economic confidence will likely temper the housing market recovery.
“Consumer attitudes toward the housing market remain modestly positive, despite signs of increase concern over the direction of the economy,” said Doug Duncan, SVP and chief economist at Fannie Mae. “Friday’s disappointing jobs report underpins the gradual nature of this year’s housing recovery and supports our view that the muted economic recovery is still subject to downside risk and that additional Fed easing will soon be forthcoming.”
The number of respondents who believe the economy is headed in the wrong direction continued to tick up to 60 percent, the third straight rise to the highest reading since the start of the year. Thirty-three percent said the economy is on the right track, a slight drop from last month and 5 percentage points down from May’s peak.
Those who expect their financial situation to get worse dipped to 13 percent, while those who expect no changes in their financial situation increased to 41 percent.
Finally, the share of respondents who say their household income is significantly higher than it was a year ago remained level at 20 percent, while those who say it is significantly lower increased to 16 percent.
Strategic default still a problem for lenders
Eighteen percent of current loans remain underwater, according to Lender Processing Services’ (LPS) July Mortgage Monitor report.
In states where the percent of current loans sitting underwater is extremely high, the percentage of new problem loans was also higher.
For example, the state with the highest share of new problem loans was Nevada, where 54.7 percent of current loans are underwater, followed by Florida (33.1 percent), Arizona (28.4 percent), and Georgia (42.8 percent).
LPS also examined the relationship between high loan-to-value ratios (LTV) and the likelihood of becoming a new problem loan. For loans that had an LTV greater than 150 percent, 4.4 percent went from being current to delinquent.
For loans with an LTV of 110-120 percent, 2.2 percent became new problem loans.
“As negative equity increases, we see corresponding increases in the number of new problem loans. In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines – should they occur – could jeopardize recent improvements,” explained Herb Blecher, senior vice president of LPS Applied Analytics.
Overall, the delinquency rate for July was 7.03 percent, a yearly drop of 11 percent and a 30 percent decline from the January 2010 peak.
The percent of inventory in foreclosure stood at 4.08 percent and remained mostly unchanged both monthly (-0.2 percent) and yearly (-0.9 percent).
July saw about 186,000 foreclosure starts, down 10.5 percent yearly but up 7.1 percent monthly. There were about twice as many foreclosure starts as foreclosure sales or liquidations, which numbered about 93,000.
Foreclosure inventory in judicial states continued to be elevated at 6.46 percent compared to non-judicial states (2.38 percent). Also, foreclosure sales was much lower in judicial states, where 2.09 percent of foreclosure inventory went to sale compared to 6.71 percent in non-judicial states.
Paging all OC homedebtors who remain trapped in the delusion….
”Until you convert your debt-based promissory assets into real-world tangible assets they are not wealth”.
http://azizonomics.com/2012/06/03/debt-is-not-wealth/
Debt is not wealth? Surely everyone in Orange County knows that the more debt you have the more wealth you have, right?
Debt is wealth
Appreciation is income
Credit is savings
Is Housing Ripe For A Pullback?
If you keep a close eye on the stock market and the economy, then it’s crucial that you tune out the daily noise. There are so many data points we process that give the impression of a long-term trend, even if it’s really just a short-term shift.
A few examples come to mind…
The U.S. economy
For anyone tracking the market this summer, you would think its rising value reflects a brightening economy. Instead, the recent gains are largely attributable to expected imminent action from the Federal Reserve and a quiet phase for the European crisis. A broader look at the U.S. economy, extended over a number of quarters, reflects little of the joy the market seems to be experiencing.
Foreclosures on the rise
Another disconnect appears to be emerging among housing stocks, which have rallied sharply for nearly a year. The housing market indeed appears to have hit bottom, and in some markets, home prices have ticked up a bit. But in many respects, this is still a troubled sector, characterized by many foreclosed homes that have yet to hit the market.
Bear markets are notorious for head-fakes.
Interesting, that’s the exact term I’ve been using too: head-fake. Although it’s always difficult to tell, this environment feels like a head-fake.
I don’t know if builder stocks are a headfake, but I think this year’s house price rally has certainly gotten ahead of itself. We may not take out the spring lows, but we may revisit them in many markets.
That’s true, builder stocks have been rising. But do you think their increased stock is an effect of their being significantly fewer REO’s on the market?
The lack of REO on the market has strongly stimulated builder sales. The increase in activity is being interpreted by the market as a signal to buy their stock. The banks still have plenty of liquidation to do, so I wouldn’t be surprised to see a very deep correction in builder stocks at some point.
Prices will slightly fall in nominal terms. Prices will drastically fall in real terms. They can print and subzidize Real Estate and send the dollar into oblivion.
Wow, 380k for that? I’m stunned, I mean really stunned. My brain literally can’t process the price tag and the returned value. I can imagine what needs to be done in order to get it livable, but just from a few reno price tags I caught off of Angie’st list my guess would be around another 100k? If anyone has a better guess please chime in as I’m pondering a fixer these days as well. Perhaps if it was for a rental you can cut some corners and just it back to ok.
This was a rental unit in the beach community of San Clemente. The former owner extracted every penny of appreciation and rent while putting absolutely nothing into the property. It’s a classic example of how people here view investment properties.
This must be one awfully nice neighborhood for a hovel like this to sell for anything like $380K. This place needs to be torn down. Is the lot worth that much?
The lot may be worth that much. It is very near downtown San Clemente and the beach. The property itself is a POS.
A FICO score tells a lender how much money they can extract from a borrower, plain and simple. The propensity to default is only one aspect of this. If you think about it, the only way to get a score over 800 is to borrow money for consumption items (credit cards, car loans, boats, ATV’s, etc) and then to make your payments dutifully. In other words, you have to be a tried and true debt slave to get an 800 credit score.
So when I hear people bragging about their credit score, I have to laugh. A high credit score in some ways is worse than a low credit score, when you understand what it says about you.
I never thought about it that way, but you’re right. For years, I wondered why my credit score hovered in the low 700s when I had no debt. Then someone pointed out to me that it was not an 800 because I had no debt. That was eye opening.
Have you heard that closing a credit card hurts your credit score? That’s sort of strange, isn’t it? You would think it would be the opposite.
Once you think of a credit score the way a lender does, it makes perfect sense though.
This actually happened to me. I closed an account that I didn’t use much and had too low of a limit anyway, I couldn’t even buy most international airline tickets with it. It was a card from my credit rebuilding days, but I’d have to say it was a lesson that was worth learning. Anyway, it had an annual fee they didn’t want to waive and they wouldn’t increase the limit. So off with it’s head! My credit score dipped a few points and slowly rose again after a few months.
I learned the trick is to keep your total amount of “credit” the same with fewer cards. This will keep your score the same or within a few points.
Our FICO scores were in the 800s a few months ago. Then we transferred $20k onto a credit card from a second mortgage (the credit card offered 4% fixed for life on transfers with no transfer fee, and the mortgage’s rate was 9%). Additionally, we paid-off the $80k remaining on the second with cash. A couple of weeks ago we applied to refinance the first. My score was 745 and my wife’s was 760! How’s that for being financially responsible?
It looks like a credit score around 740 is best. A score of 800 means you use debt too much, and a score of 640 or less means you don’t use debt very responsibly.
Perspective,
I think they penalized you for credit card large unsecured debt while your second mortgage paid off is a secured debt. Of course they are not you so they can’t tell that you transfer one burden to another with lower rate of interest.
SkyChef has no idea what he is talking about.
Mellow, I know what I know and I know what I don’t know. In contrary, you don’t know what you think you know and definitely, you don’t know what you don’t know.
Uh….. re: your list of consumption items–you forgot to include OC SFR’s/condos etc. purchased from y2k onward. Facts are stubborn.
Perhaps you should write to Fair Isaac Corp and inform them of your finding….
We have no debt and we have credit score in 800+. Actually we have debt every month by using CC for everything from grocery, shopping, bill payment and pay them off at the end of the month. We collect points and got cash awards while paying cash got nothing. Your assumption about people with credit score of 800+ is laughable.
I think the fact that you use the cards so much is contributing to your score. The credit card companies are hoping you will have a month or two when you don’t pay off your balance in full so they can make some money off you.
There are always bruised egos when I bring up credit scores, yet you fit the profile I described exactly. You load up on consumer debt each month and then pay it off. I’m glad you pay it off but your behavior targets you as somebody the bank can make lots of money off of, hence the 800 credit score. The reason they offer you the free swag is because it gets you loading up on debt consistently and they are hoping eventually you will slip up and start paying interest on your monthly bills. Enough people do this each month to make it very profitable for banks to “give away” cash.
You fail to see the point because you have an automatic brain, push the button then you response like a robot w/o thinking. Please allow me to open up your horizon.
1) Person A uses debit card as a form of cash to pay for his normal expense assume $1,000 a month included phone bill, gas bill, grocery etc. He got nothing for his cash spending in return.
2) Person B uses CC to pay for the same expense of $1,000 a month then pay off his CC at the end of billing cycle. In return, he got cash reward based on the charges while person A got nothing in return while paying his expense with his own cash. Not only that, person B got his credit score build up whether he wants it or not.
3) By the end of the month, person B pays less then person A and get everything better.
4) By analytically comparison, based on the above example, I conclude anybody believe person A finance is better than person B is an idiot beyond proof. Yes, I’m looking at you.
“Enough people do this each month to make it very profitable for banks to “give away” cash.”
This proves to me you don’t know jack-s*** about how the CC cartel operates. With the exception of few gas station operation which has different prices based on cash or credit, majority of retailers have same pricing whether you pay by CC or cash. If you pay by cash, the retailers keep the differences and if you pay by CC, the cartel gives back some crumbs. Choose one of the 2 paying method. The world of knowledge & common sense is much larger your small pond.
Sky Chef: I feel your pain
MR: The banks make money on each CC transaction from fees collected from the retailer, NOT from the cardholder who pays his total balance off each month. Also, a credit score is determined by an individuals ability to pay + payment history but the % of debt drawn vs total open credit typically carries more weight.
Glad I could clear that up for ya
What we are witnessing is somebody who has been told something their whole life that can’t accept that reality is different from what they were told.
I know there might be nothing left in there for you when it’s coming to analytical debating skill but don’t let me losing hope in the human race, please try harder.
What is this debate about for you? The credit score is a measure of how much money a lender can extract from a borrower. Nothing you’ve said disproves that. In fact, you’ve tried to shift the debate to a bunch of unrelated nonsense because your ego was bloodied. If you don’t believe my statement about credit scores, then move along, or better yet make a good counter point.
I was trying to help the readers of this blog understand the difference between the hype and reality of credit scores….not to waste my time debating your personal spending habits. Good luck to you on your quest to obtain credit card rebates.
[...] I pointed out a few days ago, Some creditworthy families will always be denied mortgages. It is not possible to give everyone a loan. We tried that back in 2005, and it didn’t turn [...]
[...] I pointed out a few days ago, Some creditworthy families will always be denied mortgages. It is not possible to give everyone a loan. We tried that back in 2005, and it didn’t turn [...]
[...] I pointed out a few days ago, Some creditworthy families will always be denied mortgages. It is not possible to give everyone a loan. We tried that back in 2005, and it didn’t turn [...]