Jo Cel Perez’s Blog

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A few weeks ago I was mentioning how the rates consumers pay are tied to their credit scores and tips on how they can improve them. Well now in light of the recent stimulus package, both Fannie and Freddie are planning large fee increases by toughening their credit score and down-payment rules on April 1, 2009.  

If a buyer is purchasing a duplex, the buyer could be charged a 1 percent add-on to their interest rate. Lenders will be if their not already factoring in these higher fees. Now buyers with down payments of less than 25 percent will be charged a three-quarter point add-on penalty, no matter how high their credit score is.

Those who would like to refinance and take cash out could be charged three points depending on the amount of equity they have.

Source: Washington Writers Group, Kenneth R. Harney (02/15/2009)
 

Since there are so many tips out there about how to improve one’s credit score, I though I would put my two cents out there. Fico scores are very important and often times determines the rate of interest you will pay on a mortgage loan, what type of financing you are able to get, and even if you can qualify for a mortgage. You can try these tips out and see what happens, or your Loan Officer can run a credit analyzer through the credit agency which will give you more specifics about what you can do regarding your specific credit situation..

First and foremost, have your Loan Officer give you a copy of your credit report…..

1. To improve your credit score by 8-15 points try paying off any credit card balances that are less than $1000 and remember to leave the accounts open.
2. Review your credit and look for any duplicate accounts. Have the credit agency remove any duplicates.
3. Review your credit and look for multiple social security numbers. Advise your Loan Officer of any social security numbers that aren’t yours or your spouses. Have the credit agency remove them.
4. Payoff any collection accounts that are less than 6 months old. This can potentially increase your credit score by 8-14 points.
5. Of course during the loan process continue to make your payments on-time. Late payments can affect your credit score from 40-100 points.
6. Review your credit report for any errors. Errors can be corrected with documentation and a updated credit report can be ran.
7. Make sure you have at least 3 trade lines (accounts) that have been opened for at least 2 years and leave the accounts open (you can loose 7-12 points)
8. Collection and charge-off accounts, even if sold to other companies, will remain on your credit until they are paid. Once paid, you may be able to have the accounts deleted. A lender may delete a late payment depending on the circumstances.
9. Shopping around for another lender can cost you to loose 5+ points for each inquiry.
10. Over time it can take 3 months to 1 year for on time late payments to improve your score after recent late payments, Bankruptcy, or Foreclosure.

Keep in mind these may not increase your credit score by these exact numbers, but this can give you a pretty good idea on how much of an impact a few changes can make. Again your Loan Officer can do this for you through a credit analyzer, but the cost of that will most likely be passed on to you…..

We might see more of a surge of home sales and loans if the lenders would loosen up their guidelines a little more. Now I’m not saying that they should go back to the lax underwriting guidelines that contributed to the housing crisis. But given the economy and the inability for the average American to place a decent down payment on their home, lenders can make getting loans a little more flexible.

Risk based: Lenders might want to take a queue from FHA, or the temporarily defunct CALHFA. Yes, they take a little more risk by lending on higher loan-to-values, but they have back it up with reasonable debt ratio guidelines and sound Fixed and Arm products. They don’t make negative amortization loans. And even with those borrowers who have lower fico scores, they compensate the risk with the appropriate rate.

A little flexibility and common sense: If a borrower is refinancing and happens to have very stable employment,excellent credit, low debts, and very low loan-to-value (30%), then let them have a interest-only loan or a 5 year ARM. But if another borrower had a BK discharge on their credit, but the debt ratio was 28%, and the loan-to-value is 90%,then that is someone who maybe could only qualify for a 30 year fully-amortized loan. If the borrowers aren’t qualifying due to the debt ratios, then maybe a 35 or 40 year loan would be the product that would fit.

Get things moving: The lenders are dealing with losses, but they can help on their end by making sound products that help borrowers with purchasing or refinancing. This could save jobs as the lenders are able to make more loans and increase volume. Taking some risks and making sure the products are sound might help to get the financial institutions moving again.

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I recently answered a question about what happens when a bank is taken over by the government. This got me thinking a little bit more about the pros and cons to having that happen. Would it be a good or bad or make any difference at this point?

To sum it up bank nationalization means a bank is owned and ran by the government. This has happened in our country’s history before and we came out ok. Case in point being the S&L debacle a few decades ago. The government took over and slowly sold off the banks’ assets and then eventually there was recovery. This also happened in Sweden and France, but France may be restarting the process. Below are my thoughts about the good and the bad regarding nationalization.

The good:

• More loans being made to consumers. More flexible guidelines would exist and more borrowers would qualify….
• Current deposits remain insured thru FDIC. Since FDIC can borrow money straight from the US Treasury, they would never run out of money.
• Equity holders would be wiped out..
• Possible guarantee of all deposits at US Banks…not just the one’s who are in trouble.This would raise levels confidence with consumers where they have their money, and shareholders as well..
• Foreclosure slow down…thereby banks won’t loose as much money and home values should normalize..

The bad:

• Customer service quality impacted. There would most likely be a decrease in quality service as banks become more conservative and lose employees…
• Closure of more branches
• Loans made to meet social objectives, quantity not quality. Banks may have a more political agenda…
• US Taxpayers taking on more expense/debt

Would nationalization solve the problem of bank failures? Or will this increase the crisis? Will smaller banks be able to compete? Should the government discontinue anymore bailout programs and let the foreclosures run its course? It’s hard to say, anyway you look at it’s still going to be a challenging road….

You might have heard the frequent ads out there about loan modifications. But for someone who isn’t behind in their payments and can’t sell their home, are the lenders really willing to work with borrowers? What does a consumer do if their somewhere in the middle?

One story to tell….

Some clients of mine were trying to sell their home last summer. Because of plummeting values, they ended up having to wait. They decided to apply for a modification with their lender. The package included a hardship letter explaining why they needed a modification. These clients could still afford their payments, but due to unexpected medical cost and other unexpected expenses, a little relief was needed. These clients have great credit, and very little debt as far as their credit report goes. The only issue was that they didn’t have sufficient value any longer, and coming up with the difference was impossible.

To make a long story short..

My clients were sent a loan application to apply for a refinance. No one called them to discuss their specific situation. A few weeks went by and then they received a denial statement for excessive obligations. The kicker was that the denial notice didn’t have a phone number or even the information on what credit agency was used when their credit was pulled. They tried to contact the resolution department to see if they could find out what their ratios were and perhaps pay down a debt to make the numbers work. They were told what the basic ratios were (28/38) and that was it. The CSR couldn’t transfer them because the department wasn’t taking any calls. They couldn’t speak to an underwriter or a credit manager. I thought that was interesting that if they were approved they would be contacted. 

What can be done if you are trying to get assistance?

Well if you have the cash to pay an attorney or a Real Estate professional then contact a qualified and licensed attorney through the California State Bar or compare the services and fees offered by other licensed brokers from the Department of Real Estate. If you don’t have the money to pay for this type of service then contact a non-profit agency that offers home loan programs such as:

• Home Ownership Preservation Foundation
• Department of Real Estate 
• California Consumer Home Loan Information Program

If lenders are going to modify a loan, shouldn’t it be done pro actively and not just after payments have been missed? Why are those who are current with their payments but in a tight situation not rewarded, and those whom are missing payments are rewarded?