FICO

Not too long ago, the credit world was much different than it is today.  Credit bureaus operated in near secrecy, gathering information in ways that may surprise you.  For instance, did you know that Retailer’s Credit (now Equifax) received information about you gathered by the Welcome Wagon hostess?  Your credit worthiness may very well have been based on things such as the quality of your home furnishings and the Welcome Wagon hostess’ opinion of your character.

For the consumer, trying to see what was in your report was nearly impossible.  It could be full of errors and inaccurate information and you’d never know!  Let’s face it, even if you knew about it you couldn’t get it corrected.  Even today, many customers we work with are surprised when we offer to send them their report so they can review it.

Lending decisions in the past were made partly on the content of that report, but mostly on the whim of the underwriter at the bank you were applying at.  This process was very subjective and not very fair.  If you didn’t “look right” or were stereotyped by ethnicity, neighborhood, or profession, you may have been denied credit solely on that information alone.

This started to change slightly in the 1960’s when credit cards became popular.  There was no way to personally interview an applicant who lived states away from the issuing bank, and as we pointed out previously, the information in the credit reports that were available was not very reliable.  Many disastrous lending decisions were made using the information in those reports.

During this same period Congress had begun investigating discrimination in housing loans and the practices of collection agents.  The result was the FCRA, enacted in 1971 and later the FDCPA in 1977.  The FCRA literally forced Credit Reporting Agencies (CRA’s) to clean up their act.  As the data in consumer reports became more standardized and more accurate, lenders began to rely more on the reports and less on the underwriters’ subjective opinions.

Lenders then began to develop their own automated risk-scoring, but the results were inconsistent and inaccurate.  They often still factored in things like age, gender, race, familial status, etc.  The system was headed in the right direction, but still broken.

Fair Isaac and company capitalized on this new movement and on the push to reform mortgage lending by compiling their risk model scoring.  Finally released in the 1980’s, it was touted as an impartial, consistent way to evaluate credit applications and was developed to take the prejudice and instinct out of the equation.

Given that Congress was pressuring lenders to eliminate discriminatory lending practices, FICO seemed like the answer to their dilemma.  They jumped on it and have never really looked back.  Most lenders employ their own internal risk calculation, of which FICO is only a portion.
FICO has been accused over the years of factoring race, age, and gender into their equations, but the most common complaint is that of zip-code discrimination.  In a historical sense, however, FICO did wonders to level the playing field.  Not until very recent years could a consumer see their credit score – a remnant of that old secrecy pact.  California’s SB1607 was the first law to mandate consumer disclosure of scores in 2000!

We would not need credit had it not been for Edwin.

Years ago in the early days of our country settlers moved to various parts of the country.  As the population grew, they set up businesses, normally a general store, a tavern, and later – a bank.  General stores at the time would often extend credit to the community, people purchasing what they needed while the store keeper kept track with a pencil and paper.  As those people brought their goods to market to sell, they’d return to pay off the store keeper.

Everyone except Edwin, that is:

At some point, now lost to history, the merchants in some town all gathered for a morning coffee klatch to discuss business. The owner of the general store mentioned Edwin and how he hadn’t paid off his bill last month.  The livery owner chimed in with a similar experience.  The other store owner’s hadn’t dealt with Edwin yet, but they’d make a note that Ed was to be cash-only should he stop into their establishment.  Edwin then became the first settler to officially have bad credit.

The shop keepers began to see value in sharing information and agreed to keep notes on who they were having trouble with.  Additionally, they agreed to meet every so often and share that information.  Eventually the list grew longer and needed to be written down.  Thus, the first credit report was born.

The origins of credit reporting were keeping track of negative experiences only; those who paid late or did not pay at all, a tradition that stuck with credit reporting for years and still has a strong influence on it credit reporting today.  As the settlements grew into cities, these informal meetings became more organized, eventually taking the name “Mutual Protection Societies.”  Mutual Protection Societies was the forerunner of CRA’s as we know them today, organized to keep track of people who had burned a merchant.

Time progressed and people like Edwin became more mobile.  It wasn’t hard for someone with a bad reputation to pick up and move to the next town.  To combat this, the Mutual Protection Societies began to join together and cover larger territories.  Now if Edwin wanted to escape his past he had to move to an entirely different geographic area.

One of the large Mutual Protection Societies was Retailers Credit in Texas, which covered the southern part of the country keeping information on consumers in “files” which consisted of a ledger sheet in a file carrying the consumer’s name.  Retailers Credit eventually changed their name t o Equifax and began branching out to the west.

The Union Tank Car Company of Chicago, a railroad leasing company, purchased the Credit Bureau of Cook County in the late 1960’s and it’s approximate 4 million ledger-card files contained in 400 seven-drawer filing cabinets.  Thus, TransUnion was born and was the first to pioneer tape-based data storage allowing it to branch out and cover larger territories without the need for branch offices.

Meanwhile, TRW, formerly Thompson Ramo Wooldridge Inc., had jumped into the credit reporting business.  TRW was the first to provide credit data on demand by electronic, real-time means.  This propelled TRW to the top of the heap, becoming the largest repository of credit information in the world.  Edwin’s days of hiding from his past were over.  TRW had the ability to store data on anyone regardless of geography and provide it to anyone, anywhere, within a matter of hours.

TransUnion stuck mostly with it’s original mission of keeping credit-related data only while Equifax, and to a lesser extent, TRW had compiled additional personal data and opinion, character reports, as well as commentaries from neighbors and insurance agents.  Talk about an unregulated industry gone wild!  It was truly a “consumer report” that Equifax provided, containing much more than mere payment history.

Secrecy was tightly kept, lenders were not allowed to disclose the content of a consumer’s file to the consumer.  Violators were dealt with harshly, resulting in a denial of access to any further reports and occasionally lawsuits over confidential trade information rights.  The CRA’s refused to make consumer disclosures.  You did not know what was in your file and could not correct any errors.  The CRA’s were an industry without regulation and consumers began to fear them, realizing the unchecked power that they were amassing.

As previously mentioned, Congress stepped in with the FCRA in 1971, regulating and standardizing the information in consumer reports.  Consumers were finally allowed to see their reports and dispute errors therein.  As light was shed on the CRA’s practices, they began to clean up their formerly secretive and sometimes abusive acts.

Ever wonder why creditors are allowed to see other inquiries made for your credit report?  In the early to mid 1970’s there was a television commercial selling a “get rich quick in real estate” package.  To get rich quick, a customer would apply for 10-20 credit cards all at once.  Since inquiries were not reported publicly lenders had no way of knowing that their customer had applied all over town.  Someone with an income capable of supporting $5,000 in credit could grab $60,000 in credit in a day.  They could then cash out the cards, buy a piece of property, sell it quickly (flip) and pay off the cards.  They could repeat this process until they ran into a property that did not sell.  No joke!!

The huge default that followed got the attention of lenders who pushed for the right to see inquiries on credit reports to prevent such exposure.  That marked the end of the television commercial and instituted the practice of inquiries being taken into consideration in lender’s internal risk model scoring.

Lending A Hand

Marla Wynn

The Wynn Team

Related posts

• What is a Good Credit Score?
• The Bank of Mom and Dad
• Successful Qualifying – The Three C’s
• Quickly Increase Credit Score
• Oh No…Credit Report Inquiries!
• Mortgage Don’ts
• Mortgage and Divorce

We posted on May 1, 2009 about HVCC on Conventional loans which stated:

Up until now the loan officer had the control to select an appraiser they felt had the best ability to appraise the house that would be used for the collateral for the mortgage loan.  That was the idea.  The problem was that some lenders would influence or coerce appraisers to appraise a property at a certain value in order to make the transaction work.

We went on to explain and quote the Home Value Code of Conduct:

the Code of Conduct also states that all members of the lender’s loan production staff…shall be forbidden from:

selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work

having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment

Those changes only impacted Conventional Mortgages.  Effective February 15, 2010 FHA Mortgages have a similar ruling.  In HUD’s Mortgagee Letter 09-28 they implemented Appraiser Independence which states:

Prohibition of mortgage brokers and commission based lender staff from the appraisal process

Although this mortgagee letter explained this was to go into effect January 1, 2010 the effective date was extended out until February 15, 2010.

So What Impact Does this Have?

Minimal.  The reason the impact of this change will be minimal is because when the HVCC ruling went into place for Conventional Mortgages many lenders adopted a similar process for FHA Mortgages, even though it wasn’t required.  Most lenders, and customers are already having to deal with this change even though it has not “officially” been in place.

Lending A Hand

Scott Wynn

The Wynn Team

Related posts

• Why Buy Now?
• Successful Qualifying – The Three C’s
• Max FHA Origination Fee – ELIMINATED
• Home Valuation Code of Conduct – Conventional Mortgages
• Government Mortgage Loans
• FHA Streamline Refinance
• FHA Short Sale Warning

However, and most pertinent, Section 1006 (e) of ARRA also eliminated the prohibition of the Borrower’s access to the federal First-Time Home Buyer Tax Credit if their loan was financed with Mortgage Revenue Bonds (MRBs).

The CHFA FirstStep and CHFA FirstStep Plus programs, made available on February 1, 2010, are funded with MRBs. Many ARRA or federal First-Time Home Buyer Tax Credit-related websites have not been updated to highlight this specific provision of the law; however, the actual IRS Form 5405 has been updated to reflect this change. Click here to read complete ARRA bill as written.

The Wynn Team has found that the National Association of Home Builders website created for the First Time Home Buyer Tax Credit has the most comprehensive information and the best FAQ page of any other site.  By the way, they have updated the MRB inclusion.

This is important because qualified first time home buyers who need down payment assistance and want to take advantage of the First Time Home Buyer Tax Credit before it goes away can finance a home with competitive market rates.

Lending A Hand

Marla Wynn

The Wynn Team

Related posts

• Don’t have a lot of money for down payment?
• Tax Credit for Down Payment…..the Rest of the Story!
• Tax Credit for Down Payment
• Money for Buying a Home
• Drop Your Rate from 5.5% to 4% – NO JOKE!
• CHFA Changes
• Why Buy Now?

We received a call from a potential customer, referred to us by a real estate agent we work with, who was looking to get qualified for a home price of about $400,000. He had just received a large inheritance and was debating on exactly how much to put down on the home. He had a figure in mind but wanted to run the numbers. Here is how the numbers played out at his figure of $250,000 down:

Pretty good payment for a $400,000 house!  Now that we know what it would look like based on the number in his mind, we started to play with the numbers a bit.

First let’s look at how much you can save for every $1,000 you put down.  Through a simple mortgage calculator you can calculate how much $1,000 over a 30 year loan, fixed at 5% will change your monthly payment.  It comes out to $5.37/mo.  What this means is that for every $1,000 you put down your principal and interest payment will decrease about $5.37/mo.  In this example, he is putting $250,000 down or $236,000 more than the minimum (minimum is 3.5% or $14,000).  That means that the monthly principal and interest savings is about $1,267.32 (236 X $5.37).  5% is a great rate and historically very low, so let’s look at some other examples based on average 30 year fixed mortgage rates from Freddie Mac:

• 2009 Average= 5.04% or $5.39/mo per $1,000 down
• 2000 – 2009 Average = 6.29% or $6.18/mo per $1,000 down
• 1972 – 2009 Average = 9.28% or $8.25/mo per $1,000 down

When people see these figures they are normally very surprised how little $1,000 down will impact their payment.  There are certainly other factors to consider though.  Probably the biggest factor to consider is mortgage insurance. Mortgage insurance protects your lender and is required when you put less than 20% down on a mortgage.  There are 2 main types of mortgage loans and the monthly mortgage insurance amounts vary for each:

• FHA – 1.75% Up-Front Mortgage Insurance Premium (Changing to 2.25% Apr 5)
  • .55% of loan amount divided by 12
• Conventional
  • 5.00 to 9.99% Down Payment = .94% of loan amount divided by 12
  • 10.00 to 14.99% Down Payment = .62% of loan amount divided by 12
  • 15.00 to 19.99% Down Payment = .38% of loan amount divided by 12

These mortgage insurance factors add a level of complexity to calculating the savings of putting more down.  Let’s look at the monthly payment of principal, interest and mortgage insurance at different amounts down:

Based on this table you can see that by putting down an additional 5%, or $10,000, you save more than just the $5.37/mo, calculated in the first example. The difference between Conventional 5% and Conventional 10% is $109.51 instead of the $5.37/mo per $1,000 down calculation of $53.70. This is because of the drop in the MI factor dropping from .94% to .62%.

Getting back to our example with this gained knowledge we know that a 20% down payment should be the least amount the customer should consider.  This will allow him to avoid paying mortgage insurance and provide him the biggest bang for his buck.  From there it became a decision of personal choice and calculating whether to put money down or invest with a better return on his money.

Rather than redo all the calculations on this question, I will direct you to check out Get Rich Slowly who wrote a post titled Ask the Readers: Is it Better to Invest or Prepay a Mortgage.  The great thing about this post is that it not only gives you great resources for making this decision but also gives you the calculations and opinion of others.

My customer decided that even though he may be able to get a better rate of return in the stock market or other investments he still wanted to put the full $250,000 down.  Ultimately you are the one that needs to determine what is best.  Mathematical calculations will likely show it is better to invest than to buy down the mortgage but the emotional side of having the security of a low monthly mortgage payment can weigh heavily on this decision.

Lending A Hand

Scott Wynn

The Wynn Team

Related posts

• Don’t have a lot of money for down payment?
• Tax Credit for Down Payment…..the Rest of the Story!
• Tax Credit for Down Payment
• Paying Down Your Mortgage
• Money for Buying a Home
• Is it Double Dipping?
• Getting Started with a Pre-Qualification

• Long term mortgage rates are at 20-30 year lows
  • According to Freddie Mac, in a press release yesterday, the average rate on a 30-year fixed mortgage was 5.01% this week, up from 4.98% last week.  Last year at this time, the average rate for a 30 year fixed mortgage was 5.25%.  Rates fell to a record low of 4.71% average in early December
• FHA allows 6% seller concessions (may decrease to 3% this summer)
• FHA up front mortgage insurance is currently only 1.75% (set to increase to 2.25% on April 5)
• FHA 90 day flipping rule waiver is in effect until February 1, 2011
• CHFA (Colorado Housing and Finance Authority) has financing for buyers with credit scores as low as 580
• CHFA has down payment assistance programs available
• CHFA can offer loans with market interest rates and down payment assistance with the FirstStep Program
• CHFA MCC (Mortgage Credit Certificates) are available
• Fannie Mae is offering 3.5% incentive to buyers purchasing Fannie Mae owned properties
• HomePath financing is available for Fannie Mae owned properties
• The First Time Home Buyer Tax Credit is available
• Move Up Buyers receive a $6,500 tax credit
• Home values expected to increase from November 2009-2010

If you were on the fence before reading this, we hope this spurs you into action and clears up any confusion or questions about the benefits of purchasing now.  If you have any questions, please contact us.

Lending A Hand

Marla Wynn

The Wynn Team

Related posts

• Fannie Mae Announces 3.5% Seller Assistance
• Money for Buying a Home
• Max FHA Origination Fee – ELIMINATED
• Is it Double Dipping?
• HVCC on FHA Loans
• Government Mortgage Loans
• FHA Streamline Refinance