Improving home buyer credit scores

home buyer credit scores
Credit scores (infographic from visual.ly)

There’s been a lot of anticipation about the new credit scoring model by VantageScore (vantagescore.com).  It’s supposed to increase the availability of credit to many consumers.  Launching this fall, VantageScore 4.0 is touted to be a more accurate scoring system that uses trending data instead of “snapshots.”  This credit scoring system is also supposed to help those with limited credit, and incorporates the improved credit reporting standards included in the National Consumer Assistance Plan.  This and other new scoring systems have a lot of promise, but will improving home buyer credit scores help the mortgage process?

Let’s take a step back to see how home buyer credit scores reporting has evolved in recent years.  The National Consumer Assistance Plan (nationalconsumerassistanceplan.com) was launched in 2015 as a result of an agreement between the credit reporting agencies (Equifax, Experian, and TransUnion) and New York Attorney General Eric Schneiderman.  The agreement stemmed from Schneiderman’s investigation into the credit reporting agencies’ practices including (but not limited to) the accuracy of collected data, the practices in handling consumer disputes, and the reporting of medical debt.

The National Consumer Assistance Plan’s focus is to improve the consumer’s experience as well as increase data quality and accuracy.  Consumers will have increased information related to credit report disputes, including instructions on what to do if they’re dissatisfied with the result of their dispute.   Additionally, there is an “enhanced dispute resolution process” for fraud victims.

Among the many changes made by the National Consumer Assistance Plan to increase accuracy and quality of data includes: issuing consistent standards for those who report data to the credit agencies; medical debt won’t be reported during a 180-day waiting period so as to allow for insurance payments to catch up with billing; and the elimination of reporting of debts that were not contractual (such as parking tickets).

From The National Consumer Assistance Plan:

Consumers visiting www.annualcreditreport.com, the website that allows consumers to obtain a free credit report once a year will see expanded educational material.

Consumers who obtain their free annual credit report and dispute information resulting in modification of the disputed item will be able to obtain another free annual report without waiting a year.

Consumers who dispute items on their credit reports will receive additional information from the credit reporting agencies along with the results of their dispute, including a description of what they can do if they are not satisfied with the outcome of their dispute.

The credit reporting agencies (CRAs) are focusing on an enhanced dispute resolution process for victims of identity theft and fraud, as well as those who may have credit information belonging to another consumer on their file, commonly called a “mixed file.”

Medical debts won’t be reported until after a 180-day “waiting period” to allow insurance payments to be applied. The CRAs will also remove from credit reports previously reported medical collections that have been or are being paid by insurance.

Consistent standards will be reinforced by the credit bureaus to lenders and others that submit data for inclusion in a credit report (data furnishers).

Data furnishers will be prohibited from reporting authorized users without a date of birth and the CRAs will reject data that does not comply with this requirement.

The CRAs will eliminate the reporting of debts that did not arise from a contract or agreement by the consumer to pay, such as traffic tickets or fines.

A multi-company working group of the nationwide consumer credit reporting companies has been formed to regularly review and help ensure consistency and uniformity in the data submitted by data furnishers for inclusion in a consumer’s credit report.

Recent credit reporting changes are sure to make an impact for home buyer credit scores.  But, you may still have impaired credit that would make it difficult for you to buy a home.  So how can you improve your home buying process?  Be proactive!

A credit report contains a lot of information about you.  It reveals your personal information, including where you’ve lived and worked.  It indicates the credit cards and other loans you have, and how you pay on them.  It may also include any collection activity against you, as well as bankruptcies, liens or judgements.  Know what’s being reported about you by obtaining your free annual credit report (annualcreditreport.com) and dispute discrepancies.  Successful disputes should improve your credit score.

However, if your home buyer credit scores are impaired as the result of poor habits, don’t despair.  You can improve your credit report and score on your own by creating “good” credit habits.  First: make sure you pay your bills on time.  Planning specific times each month to pay bills will make it hard to miss a payment.  Second: reducing credit card balances may improve your credit score.  And third: be mindful of how many credit cards you maintain.  Having too many credit cards could lower your credit score.  Also, be careful to not apply for too much credit at any given time, as these “inquiries” could lower your score as well.

To learn more how a credit report functions, affects you, and how improve your home buyer credit scores, visit the Consumer Financial Protection Bureau (consumerfinance.gov), the Federal Trade Commission (ftc.gov), and the Federal Deposit Insurance Corporation (FDIC.gov).

Copyright© Dan Krell
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Demand better consumer financial protection

consumer financial protection
Consumer Financial Protection and Dodd-Frank (infographic from CreditUnionTimes www,cutimes.com)

In an effort to reform the Consumer Financial Protection Bureau (consumerfinance.gov) to become a better steward of consumer protection, H.R.5983 – Financial CHOICE Act of 2016 was introduced during the last congress.  The effort to compel oversight on the now embattled agency, as well as provide for a panel of decision makers (in lieu of a single chairperson), is unfortunately highly politicized.  As financial consumers, we should demand a better and fair protection agency serving without political motive.

From the Executive Summary of the The Financial CHOICE Act
Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs:

SECTION THREE: Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors.

  • Change the name of the CFPB to the “Consumer Financial Opportunity Commission(CFOC),” and task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis.
  • Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations.
  • Establish an independent, Senate-confirmed Inspector General.
  • Require the Commission obtain permission before collecting personally identifiable information on consumers.
  • Repeal authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration.
  • Repeal indirect auto lending guidance.

Some have hailed the CFPB because it was created out of good intention. There is no question that the CFPB has done a great job in collecting and publicizing consumer complaints.  The announcements of consumer complaints seem to be a public airing of consumer grievances, which sometimes signaled forthcoming action from the agency in a specific financial sector.

However, critics contend that the CFPB rules have made lending more burdensome for both lenders and consumers by increasing bureaucratic red tape.  It has also increased the cost of lending to consumers by adding levels of compliance measures that are now embedded within the lending process.  Critics have also complained that the CFPB’s enforcement is not fair and unequal in focus.

Critics are becoming increasingly vocal, not only because of the sometimes invasive rule making, but more recently of how offenders are chosen and penalized.  Jacob Gaffney’s article for HousingWire (Former CFPB attorney pretty much just confirmed the worst fears of the mortgage industry: housingwire.com; January 3, 2017) earlier this year discussed two genuine concerns about the CFPB:

1) “The CFPB targets lenders for enforcement action based on opaque internal decisioning;” and

2) “Monetary penalties seemed determined by revenue, not equalitarian application of said enforcement action.”

Gaffney quoted Ronald Rubin, a former enforcement attorney at the Consumer Financial Protection Bureau, (from a December 21st 2016 piece “The Tragic Downfall of the Consumer Financial Protection Bureau” published online nationalreview.com) as confirming these concerns.  For example, the Wells Fargo fake consumer account scandal, one of the most egregious consumer scandals post financial crises, was not addressed by the CFPB (until it was too late) because Wells Fargo was allegedly “not a target of the agency at that time.”

Referring to the complaint database, Rubin stated:

The CFPB’s complaint database contained grievances against almost every financial business. Enforcement targeted the companies with the most revenue…rather than those with the most complaints.”  He further stated: “Targets (of the CFPB) were almost certain to write a check… Even the size of the checks didn’t depend on actual wrongdoing — during investigations, Enforcement demanded targets’ financial statements to calculate the maximum fines they could afford to pay.

The recent PHH Corp v Consumer Financial Protection Bureau case highlighted some of the alleged abuse of power by an agency with no oversight.  US Appellate Judge Kavanaugh wrote in his opinion:

That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case

…This is a case about executive power and individual liberty. The U.S. Government’s executive power to enforce federal law against private citizens – for example, to bring criminal prosecutions and civil enforcement actions – is essential to societal order and progress, but simultaneously a grave threat to individual liberty.”

We’ve followed the career of the CFPB since it was established in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Shortly after the financial crisis, we eagerly anticipated the new agency to help those who were the target of abusive lending and foreclosure practices.  Since its inception, however, controversy has embraced the agency.

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Make housing great again

make housing great again
“Dodd-Frank Has Imposed Regulatory Costs of $310 Per Household” (infographic from americanactionforum.org)

When President Trump was campaigning, one of his talking points was to “dismantle” Dodd-Frank.  And after a couple of weeks in office, it seems that it’s next on his “to do” list.  While many are already touting the move as controversial and partisan, the reality is that it’s a bipartisan issue.  Even Barney Frank was seen on CNBC this past Sunday admitting that his namesake legislation needs reform (video.cnbc.com/gallery/?video=3000590611).  Reforming Dodd-Frank will make housing great again.

Dodd-Frank is the nickname for Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The purpose, as described in its title, was to “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Dodd-Frank changed the housing industry dramatically.  Besides altering the process of financing and buying homes, critics have claimed that the legislation has also restricted lending.

Dodd-Frank created the Consumer Financial Protection Bureau; which creates and enforces rules and regulations for consumer financial markets.  Besides adding new home buyer and seller disclosures as well as timelines, the “Know Before You Owe” rule changed the home buying process by creating a new level of bureaucracy embedded within the mortgage lending process.

Many critics of the CFPB also claim that it has too much power with little oversight, and point to last year’s Appellate opinion on PHH Corp v. Consumer Financial Protection Bureau as confirmation for necessary reforms., where Judge Kavanaugh wrote:

“…the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law…That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.”

One of the unintended consequences of Dodd-Frank was the restricted lending atmosphere in the mortgage industry.  Besides the overwhelming increase in rules and regulations as a result of Dodd-Frank, there has also been insufficient private portfolio and securitization of mortgages; which further limits access of funding to many home buyers.

Prior to the financial crisis, private mortgage securitization was prevalent; which provided a multitude of lending products, including “Alt-A” and subprime.  The wide access to private mortgage funding contributed to the homeownership rate to peak close to 70 percent (The most recent homeownership rate reported by the US Census was 63.7 percent, a forty year low).  Since the crisis, a majority (estimates were as high as 95 percent) of mortgages are insured or purchased by the government.

Before the financial crisis, Alt-A and subprime mortgages were widely available to give home buyers options to finance their homes, especially when they didn’t fit the underwriting guidelines for a conventional loan.  Many of these home buyers were self-employed or small business owners, whose financial picture was outside of the box of the requirements for a conventional mortgage.

Of course, FHA is an alternative to conventional mortgages.  FHA has lenient underwriting guidelines, like subprime mortgages; but is insured by the government.  However, the upfront and annual mortgage insurance premiums can be hefty.  Alt-A and subprime can seem more attractive when purchasing a home beyond the FHA loan limits, and/or when documentation becomes onerous.

Back in 2001, Federal Reserve Board Economist Liz Laderman wrote about the growth of subprime through the 1990’s (Subprime Mortgage Lending and the Capital Markets; FRBSF Economic Letter; December 28, 2001).

“An increase in access to the capital markets through loan securitization also contributed to growth in subprime lending in the 1990s. Securitization is the repackaging, pooling, and reselling of loans to investors as securities. It increases liquidity and funding to an industry both by reducing risk—through pooling—and by more efficiently allocating risk to the investors most willing to bear it. Investors had already become comfortable with securitized prime mortgage loans, and subprime mortgage loans were among various other types of credit, such as multifamily residential mortgage loans, automobile loans, and manufactured home loans, that began to be securitized in the 1990s. Through securitization, the subprime mortgage market strengthened its links with the broader capital markets, thereby increasing the flow of funds into the market and encouraging competition.”

Of course, Dr. Laderman also points out that the increased competition in the subprime market was a concern due to reported abusive lending practices.  However, she concluded:

“…subprime mortgage lending grew rapidly in the 1990s to become an important segment of both the home purchase and home equity mortgage markets. Evidence pertaining to securitization and pricing of subprime mortgages also suggests that the subprime market has become well linked with the broader capital markets, an important first step in the development of a fully competitive environment.”

A 2006 article by Souphala Chomsisengphet and Anthony Pennington-Cross (The Evolution of the Subprime Mortgage Market; Federal Reserve Bank of St. Louis Review; Vol. 88, No. 1) described the history of subprime mortgages.  The authors stated:

“..Because of its complicated nature, subprime
lending is simultaneously viewed as having great
promise and great peril…”

Through it’s history, subprime lending has had crises where this lending sector took pauses to reflect on missteps.  Chomsisengphet and Pennington-Cross described a “retrenchment” of subprime lending in the late 1990’s; but during that time, the facts point to huge losses in the subprime sector due to seemingly rampant illegal flipping and fraud.

Private mortgage funding isn’t entirely Alt-A or subprime mortgages, although there’s a place for responsible Alt-A and subprime lending.  Prior to the growth in securitizing these types of mortgages, banks and financial institutions privately held (portfolio) these loans which increased their institutional risk and provided incentive for originating performing loans.

How can Dodd-Frank be reformed?  One only has to look back to the S&L crisis of the 1980’s and listen to William K. Black.  Black was the Director of Litigation for the Federal Home Loan Bank Board in the aftermath of the S&L crisis.  His conclusions included a list of “Lessons not Learned.”  The focus of his list was fraud and ethics.  Black discussed curbing “control fraud” (fraud perpetrated by CEOs as well as those who are in power) and other types of fraud.  He wrote The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry  first published in 2005, but was recently updated.

Not surprisingly, Mr. Black reemerged after the financial crisis to provide testimony to Congress, including testimony in 2010 to the Committee on Financial Services United States House of Representatives regarding “Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner.”  In a 2010 interview with Bill Moyers (pbs.org/moyers/journal/04232010/transcript1.html), Black discussed CDO’s (collateralized debt obligations), fraud, and their role in the recent crisis.  And although many, including the Financial Crisis Inquiry Commission, cited failures in the financial system as cause for the financial crisis; they all fall short in seeing William K. Black’s “control fraud” in action – Fraud was the vehicle that drove the unrelenting greed in the CDO and mortgage markets.

With regard to housing, there is much potential for reform within Dodd-Frank.  However, maybe begin with SEC. 941 “Regulation Of Credit Risk Retention” of Dodd-Frank.  SEC.941 requires a securitizer of residential mortgages to have skin in the game by retaining some of the risk of any asset or mortgage backed security that is sold, transferred, or conveyed.  Additionally, the securitizer is prohibited from hedging or transferring their credit risk.  Exceptions to this section include federal programs insuring or guaranteeing mortgages; which includes FHA and VA mortgages, as well as mortgages from institutions supervised by the Farm Credit Administration (including the Federal Agricultural Mortgage Corporation).  However, Fannie Mae and Freddie Mac are not exempt.

The President can make housing great again by incentivising private investment in the mortgage industry either through increasing portfolio and/or private securitization in the mortgage markets – along with reducing fraud (and control fraud) while ensuring responsible lending practices.  Private investment in mortgage funding will open the doors for many home buyers and increase homeownership rates.

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Is a negative mortgage rate program in your future?

negative interest rates
from thestar.com

Five months ago I told you about the possibility of negative interest rates. Since then a lot has happened around the world (besides confirming the existence of gravitational waves): the Fed raised the target rate a quarter of a point in December; many are increasingly questioning the viability of the global economy; analysts point to geopolitics as a concern for economic stability; and Japan is the latest country to implement negative interest rates.

An increasing number of economists and financial experts have since openly discussed the specter of negative interest rates here in the U.S, as volatility in financial markets and global economies have many concerned. Such concerns may have prompted Senator Bob Corker (R-TN) to pose this question about negative interest rates to Fed Chair Janet Yellen during her testimony in the February 11th hearing “Semiannual Monetary Report to Congress” (banking.senate.gov); “…people are beginning to observe that the Fed is out of ammunition, unless you decide to go to negative ratesI’m not proposing this, I’m just observing what’s happening around the world and what’s happening here in our own country. I think people are waking up and realizing that the Fed has no real ammunition left…”

Even though the Fed recently raised the target rate from being near zero after almost seven years, the Fed anticipates future increases. However, Dr. Yellen stated in the past that negative interest rates are “not off the table” if the economy falters. This was reiterated (more or less) during her February 11th testimony. Interestingly, Dr. Yellen revealed that the Fed considered negative interest rates back in 2010, but felt that negative interest rates would not have worked well to “foster accommodation” (increase money supply to the markets) at that time. Additionally, Dr. Yellen stated that “…we are looking at them again because we want to be prepared in the event we needed to add accommodation…” However, she also stated that the evaluation is not complete as it is not certain if negative interest rates would work well in the U.S.

Negative interest rates may seem like a good idea to stimulate bank lending; but Christopher Swann’s recent CNBC commentary (The consequences of negative interest rates; cnbc.com; February 16, 2016) indicates there are also unintended consequences. Lending, as a result, could tighten because of bank losses and subsequent liquidity issues. Consumers would bear the brunt of the losses as banks would increase fees. As banks try to recoup losses, depositors will be charged for savings; which may prompt consumers to move their money out of banks. Swann points out how Swiss and Danish banks have “…hiked borrowing costs for homeowners since negative rates were introduced.”

A CNN-Money report shed light on European banks and negative interest rate mortgage programs (The crazy world of negative rates: Banks pay your mortgage for you? money.cnn.com, April 22, 2015). Luca Bertalot, Secretary General of the European Mortgage Federation, stated that “We are in uncharted waters.” He went on to describe how banks dealt with the dilemma of negative interest rates, “…they [Spain’s Bankinter’s] could not pay interest to borrowers, but instead reduced the principal for some customers.”

Housing would undoubtedly boom in a negative interest rate environment. However, rather than paying consumers to borrow, a mortgage’s principal would be reduced over time. Rather than creating a bubble, long term negative mortgage rate programs could possibly devalue real estate; and change how we view it as an asset.

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Beyond the benefits – reverse mortgages have risks

houseYou’ve seen the commercials promoting the benefits of the FHA reverse mortgage for seniors. If you’re 62 years of age or older and have equity in your home, it may seem attractive to get a mortgage that converts your home’s equity into cash and eliminates existing mortgage payments. However, the ads don’t tell you the entire story. In fact, the FHA reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), is probably the most misunderstood mortgage program available today.

from reversemortgagecompanies.com

To educate borrowers of their obligations and how the program works, HUD requires reverse mortgage applicants to go through counseling. Nonetheless, many are still unsure about their responsibilities, as well as the impact on their spouses and how the loan is repaid. Additionally, the equity conversion to annuity payments along with repayment responsibilities has been highly criticized because of the effect on estates and surviving spouses.

On February 9th, the CFPB released highlights of collected complaints about reverse mortgages. Many of the complaints stemmed from misunderstanding the mortgage terms and issues with loan servicing. Many of the issues seem to describe confusion about borrower requirements and difficulty in loan repayment.

Current reverse mortgages ads can be very engaging about the benefits, to be sure. However, what the commercials don’t tell you is that you have some very specific obligations as part of the loan terms, and that you can be at risk of default if you fail to meet those obligations. Because of how the reverse mortgage is structured, you retain the responsibility to: pay property taxes and homeowners insurance, pay HOA and condo fees, and maintain the property. The financed home must also be your primary residence.

And of course, they don’t tell you about the “widow foreclosures” either. Widow foreclosures may be one of the least reported on issues facing seniors who have a reverse mortgage. Ken Stein, writing for HousingWire (Is HUD hiding embarrassing data on widow foreclosures?; housingwire.com, October 6, 2015), described the growing problem of surviving spouses who are at risk of losing their homes to foreclosure because they are not the reverse mortgage borrower. Mr. Stein described a FOIA battle between the California Reinvestment Coalition (with which Mr. Stein is affiliated) and HUD, about disclosing the number of current and impending widow foreclosures.

Joseph Otting, President and CEO of OneWest Bank, stated during a February 26th joint public meeting held by the Federal Reserve and Office of the Comptroller of Currency (about the proposed acquisition and merger of CIT Group and Onewest Bank) that the criticism of their reverse mortgage servicing practices are a “really the criticisms of the regulations” that they are required follow. And that they urge and support a moratorium on foreclosure of non-borrowing spouses of reverse mortgages (federalreserve.gov).

As a result of the recent focus on widow foreclosures, HUD issued new guidelines in January and then again in June to assist non-borrowing surviving spouses who are at risk of losing their homes because of a reverse mortgage. Mr. Stein, in his HousingWire piece, concedes that the new guidelines have potential to help; however, he points out that the new guidelines are optional for lenders.

Additionally, the CFPB issued a Consumer Advisory on June 4th pointing out details about reverse mortgages that the ads omit. The CFPB (consumerfinance.gov) and HUD (hud.gov) websites provide detailed information and considerations about the FHA reverse mortgage.

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