New FICO score may cost you money

 Credit Scoring  Comments Off on New FICO score may cost you money
Jan 292020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Fair Issac Corporation is poised to release a new FICO credit scoring model, and for about 40 million American, the changes could cost them money. The new model, FICO 10, will score consumers more strictly for late payments and rising debt levels.

Fair Issac says the new model will help lenders reduce defaults by up to 10%, but for consumers who see their scores drop, it could mean they receive higher interest rates if they qualify at all.

The company says it has further integrated trended data into the model, meaning the models consider not only a consumer’s current account status, but also the account’s payment history for the last 24 months. This should help consumers who are paying more than the minimum monthly payment to reduce their debt. On the negative side, the new model will treat personal loans more harshly, which could hurt consumers who use those loans to consolidate credit card debt.

If you’re planning to buy a home this spring, take a deep breath. It’s highly unlikely you’ll encounter the model while applying for a mortgage. Most of the mortgage industry is stuck in a time capsule – using FICO 4, a model released in 2004. Changing the model requires approval from the Federal Housing Finance Agency, which moves at glacial speed.

While that may sound like good news, keep in mind that FICO 4 has its own issues. FICO 4 scores, what I call “mortgage scores,” tend to be lower than just about any scores available to consumers. Fair Issac has improved its models over the years in ways that also help consumers, and none of those changes are available for mortgage applicants.

FHA changes aim to deny riskier borrowers

 Loan Guidelines, Residential Mortgage  Comments Off on FHA changes aim to deny riskier borrowers
Apr 272019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Late last month, FHA made some changes to its automated underwriting system that may prevent as many as 50,000 potential borrowers from qualifying for an FHA loan. FHA said the changes are meant to limit exposure of its insurance fund from higher risk situations.

According to the agency’s annual report to Congress, it’s seeing a concentration of mortgages with high debt-to-income ratios and low credit scores. It also reported a 60% increase in cash-out refinances. (This isn’t an issue in TX as TX homeowners cannot take cash out using an FHA loan.)

An FHA official told The Wall Street Journal that the system changes will affect 40,000 to 50,000 loans each year, which is 4 to 5% of all loans FHA insures.

The changes will flag loans with a combination of higher debt-to-income ratios and lower credit scores for “manual underwriting,” which means underwriting performed by a human being. Unfortunately for borrowers, manual underwriting also means more stringent loan guidelines, and many of those who qualified before the system changes no longer will qualify.

Mortgage insurance companies tighten credit

 Loan Guidelines, Residential Mortgage  Comments Off on Mortgage insurance companies tighten credit
Feb 232018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

As you’re probably aware, when buying a home, if your down payment is less than 20%, your mortgage payment will include mortgage insurance. This insurance is the lender’s way sharing some of the risk associated with more highly leveraged loans.

We call companies that specialize in this form of insurance mortgage insurance or MI companies – pretty clever, huh – and they often have special guidelines that apply to loans that require their product.

Recently, the MI companies expressed concern about Fannie Mae and Freddie Mac increasing the amount of debt they’re willing to accept for a borrower receiving a conventional loan. Both now accept loans for which the borrower’s debts equal up to 50% of the borrower’s gross income.

Four of the MI companies announced that starting next month, they will require a 700 credit score anytime the borrower’s debt exceeds 45% of gross income. One company further is requiring a min 5% down payment in such cases. (Recall that it’s possible to get a conventional loan with as little as 3% down.)

I don’t expect this will affect a huge number of borrowers as most folks having lower credit scores and making small down payments find it more advantageous to use the FHA program. However, it does represent the first tightening of credit standards I’ve seen in a while.

The government wants to know your credit score

 Credit Scoring, Regulations, Residential Mortgage  Comments Off on The government wants to know your credit score
Jan 122018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

If you’ve applied for a mortgage recently, you may remember the government monitoring section of the application. The government asks you to identify your sex, race, and ethnicity so it can watch for patterns of unfair lending.

However, it seems the data the government was collecting didn’t provide enough granularity. The data might show more members of a minority group were denied loans, but it provided few insights into the disparity.

The solution – collect more data. Starting in 2018, lenders are required to report more invasive information for every loan applicant, including your credit score and debt-to-income ratio. In addition, lenders must report property values.

The stated goal of this data collection is to ensure fair lending, but it is a bit disconcerting. The CFPB insists the data is anonymized so that individual borrowers cannot be identified. However, privacy advocates worry that the expanded information collection gives nefarious actors enough hints to disaggregate the data. In addition, the data will be housed on government computer systems that have a history of being hacked.

As a consumer, you have no choice whether lenders collect and report the expanded data when you apply for a loan. Your only choice is whether you choose to identify your sex, race, and ethnicity, but that doesn’t stop the lender from reporting your other private financial data.

Will your credit score rise with new FICO model?

 Credit Scoring  Comments Off on Will your credit score rise with new FICO model?
Dec 012017
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The recent hacking of Equifax data has brought the credit bureaus into the headlines again. While the credit bureaus don’t control the FICO scoring model, the most popular model and the one the mortgage industry uses, the spotlight seems to have brought renewed attention to the fairness of credit scoring.

Yesterday, we discussed how FICO 4, the current model of choice in the mortgage industry, doesn’t seem to align with current credit risk factors. Congress is trying to force the industry to consider newer credit scoring models. So, let’s look at the potentially negative effects of the newer models. There will be winners and losers, and some of the losers may be surprised.

The current model rewards consumers who make on-time minimum payments on all their credit accounts. The account balance only seems to matter if the consumer allows it to exceed 30% of the available credit.

The newer models look at this a little differently. They reward consumers who make larger than minimum payments. They also penalize consumers who have large, unused available credit as that is credit that they suddenly could decide to use.

It may be years before any of these changes affect your ability to qualify for a mortgage. However, you are likely to start seeing them when you apply to other types of credit.

How mortgage credit scores are unfair

 Credit Scoring  Comments Off on How mortgage credit scores are unfair
Nov 302017
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Your mortgage credit score is based on a credit model developed almost 20 years ago, and Federal Housing Finance Agency (FHFA) Director Watt says that’s not going to change anytime soon.

Many in the credit industry acknowledge that the FICO 4 model, the use of which is required by Fannie Mae and Freddie Mac, is deficient. It doesn’t differentiate between paid and unpaid collections. Nor is it able to distinguish medical collections, which seem to have little predictive value of credit risk. It also poorly models student loan debt, which has ballooned in the last 10 years, and only incorporates negative information for rent and utility payments.

Congress is trying to force a change through The Credit Score Competition Act, which would encourage Fannie and Freddie to consider other credit scoring models, including the newer FICO 9 and VantageScore models.

Watt contends that Fannie and Freddie already consider the same or greater levels of credit data in their computer models that determine whether a borrower qualifies. He also notes the change would be quite expensive. He prefers to wait until after Fannie and Freddie merge their investment security platforms, slated for 2019.

However, Watt fails to mention that Fannie and Freddie impose a minimum credit score, which prevents folks from qualifying regardless of how Fannie and Freddie tune their computer models. Fannie and Freddie also use credit score for determining interest rates and mortgage insurance coverage.

Credit bureaus may boost your credit score

 Credit Scoring  Comments Off on Credit bureaus may boost your credit score
Feb 152017
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The three national credit bureaus (TransUnion, Equifax, and Experian) announced that they will change the way they collect public record data. These are items like judgments and tax liens that appear on your credit report. The change is due to concerns the bureaus have with the accuracy of the data. Specifically, the bureaus will:

– require public records to have minimum identifying information including a person’s name, address, and SSN and/or date of birth; and
– require public records to be collected and updated at more frequent intervals.

So, why should you care? The bureaus have analyzed the potential effects of this change and have concluded that:

– approximately 96% of civil judgment records may not meet the new requirements; and
– as many as half of tax lien records may not meet the new requirements.

If a record fails the meet the new requirements, the credit bureaus will not include it on your credit report.

The changes are expected to take effect no later than July of this year.

Will your credit score improve with trended data?

 Credit Scoring  Comments Off on Will your credit score improve with trended data?
Apr 252016
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Fannie Mae has announced that this summer it’s going to require that lenders start using “trended” credit data to qualify borrowers. What in the world is trended credit data and how will its use affect your ability to qualify for a mortgage?

Currently, your credit report is a snapshot in time of your credit usage. The report shows your current account balances, limits, and minimum payments. A trended credit report shows how those amounts have varied over the last two years. Thus, it augments usage with insights into your credit habits. Do you pay off your credit cards each month? Do you pay more than the minimum balance? A trended report will reveal these habits.

TransUnion claims credit scores based on trended data will increase the number of what it calls prime and super-prime consumers by more than 3 million. Analysts expect those who pay off their credit card debt every month will see their scores rise. Other winners may include folks whose trended data shows their revolving balances decreasing over time.

Settlement with banks may raise credit scores

 Credit Scoring  Comments Off on Settlement with banks may raise credit scores
Jul 152015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last week we discussed recent agreements between regulators and the credit bureaus designed to reduce errors on credit reports. A separate agreement in Federal Bankruptcy Court may provide further relief.

Bank of America and Chase have agreed to update borrowers’ credit reports to remove so-called “zombie debts.” These are debts that had been extinguished in bankruptcy but that the banks still are reporting as active debts on consumers’ credit reports. The banks were accused of leaving the debts because they were profiting from the practice. They have agreed to update consumers’ reports within 3 months.

Citigroup and Synchrony Financial (formerly GE Capital) also had been charged in the lawsuit. Citigroup said it has made a proposal to plaintiff’s lawyers that’s consistent with the other banks’ agreement. Synchrony agreed to implement similar terms last year, but only on a temporary basis.

Defanging medical collections

 Credit Scoring  Comments Off on Defanging medical collections
Jul 132015
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

One of the most frustrating consumer credit issues is medical collections. I estimate that half of credit reports I review have at least one medical collection on them. As often as not, the consumer is surprised to hear of the collection, assuming insurance had covered the charge.

Recent settlement agreements between the credit reporting bureaus and 32 state attorneys general may provide some relief. The agreement mandates that the bureaus wait 180 days before reporting a delinquent medical debt on your credit report. This should give you time to work out any issues with your insurance provider. In addition, the bureaus have been instructed to remove a medical debt from your report after insurance pays it.

Another part of the agreements requires the bureaus to have a human review documentation you submit to support a dispute rather than relying on automated systems.

These parts of the agreements may produce measureable relief for consumers, but I’m not so sure about other parts that add reporting requirements. More data may help regulators, but consumers need changes to dispute resolution systems to make the outcomes more accurate and timely. The bureaus have found that credit monitoring services are very profitable, so they benefit from consumer fear of inaccurate credit reporting.