Fast Credit Clean Up

The Attorneys Guide To Credit Repair

Repairing your credit can be a frustrating task. But with The Attorney's Guide To Credit Repair repairing your credit is a breeze. Everything is fill-in-the-blanks and it works! As a matter of fact, my credit repair analysts use David's system. Get the e-book, use it and shortly you'll be amazed at what you credit report will look like. Here's What's Included! The most effective way to permanently remove both Chapter 7 and 13 bankruptcy from your credit report! A sure-fire strategy to quickly delete 30, 60, and 90 day late payments from your credit report. The fastest and most effective way to erase charge-offs from your credit report. and how to add tons of points to your Fico Score in the process. A special 'insider secret' almost nobody (except a few 'elite credit repair experts') know about. which makes even the most hard-nose creditors suddenly eager to remove negative information on your credit report. (Note: Once they do you can say goodbye to your credit problems forever!) A simple yet powerful strategy to get rid of judgments and liens. (Note: This strategy works in record time and has Nothing to do with sending dispute letters to the credit bureaus. How to get your creditors to settle your debts for 5 to 10 cents on the dollar. and report the debts in 'Paid As Agreed Never Late' to the credit bureaus. You (save thousands of dollars) in the process, and your Fico Score increases automatically! The undisputed best way to clean-up defaulted student loans. this approach removes negative information on your credit report. and adds tons of points to your Fico Score. How to get the Federal Trade Commission to accelerate your results Credit bureaus not taking your disputes seriously? No problem! Use the Ftc to make the bureaus work faster. I'll show you exactly how. You'll see super fast results when you use this technique. An almost unheard of strategy to quickly delete repos. This techniques works so fast you'll be able to buy a brand new car in 60 days. at an excellent interest rate. How to stop collection agency harassment. Are collection agencies calling you everyday? Do you screen your calls before you pick up the phone? Are you tired of the aggravation? No problem! Here's a 100% legal tactic that will put an end to their nuisance calls in 24 hours. A proven way to get rid of foreclosures that almost nobody (except savvy real estate investors) know about. which works fast. It doesn't matter when you went you went into foreclosure or what bank you're dealing with. How to use small claims court to remove bad credit Have the credit bureaus stopped responding to your disputes? Read more...

The Attorneys Guide To Credit Repair Summary


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My The Attorneys Guide To Credit Repair Review

Highly Recommended

I usually find books written on this category hard to understand and full of jargon. But the author was capable of presenting advanced techniques in an extremely easy to understand language.

This e-book served its purpose to the maximum level. I am glad that I purchased it. If you are interested in this field, this is a must have.

Background On Credit Scoring Issues Examined

In developing credit scoring policies, a lender may neglect to 3. Some third-party brokers who fail to comply with fair lending laws may be censured or have their lending licenses placed in jeopardy. It is important that lenders monitor the practices of their third-party brokers, especially for compliance with fair lending laws, pricing policies and the use of credit scoring models. Lenders who knowingly work with noncompliant brokers (and take no action) may be liable as co-creditors. 5. Lack of information regarding the credit (application) process and available loan options could dissuade an applicant from completing the application process. Loan officers who fail to notify the applicant of the nature of a credit rating, and the important role it plays in the approval and pricing of a loan, could unfairly deny or overcharge an otherwise worthy applicant. 6. Credit mortgage scoring systems are only as effective as the data fed into them. Inaccurate or incomplete data regarding an...

Internal Credit Enhancements

Internal credit enhancements come in more complicated forms than external credit enhancements and may alter the cash-flow characteristics of the loans even in the absence of default. Credit enhancement levels (i.e., the amount of subordination for each form of enhancement used within a deal) are determined by the rating agencies from which the issuer seeks a rating for the tranches. This is referred to as sizing the transaction and is based on the rating agencies' expectations for the performance of the loans collateralizing the deal in question. Typically, a triple- or double-A rating is sought for the deal's most senior tranches. The type and amount of credit enhancement used in a deal represent the intersection of the issuer's need to maximize deal proceeds and the rating agencies' judgment with respect to how much credit enhancement is required to bestow the desired rating on the senior tranches. The most common forms of internal credit enhancements are senior subordinate...

External Credit Enhancements

External credit enhancements come in the form of third-party guarantees that provide for first-loss protection against losses up to a specified amount. Historically, the most common forms of external credit enhancements have been (1) a letter of External credit enhancements do not materially alter the cash-flow characteristics of a structure except in the form of prepayment. In case of a default resulting in credit losses within the guarantee level, investors will receive the principal amount as if a prepayment has occurred. If the credit losses exceed the guarantee level, investors may realize a shortfall in the cash flow. A bank letter of credit (LOC), one of the oldest forms of credit enhancement but one that has been used rarely in recent years, is a financial guarantee by the issuing bank. The financial guarantee specifies that the issuing bank is committed to reimburse credit losses up to a predetermined amount. In the case of nonagency MBS products, a top-rated international...

Credit Scoring And Fair Mortgage Lending

Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Used for several decades to underwrite certain forms of consumer credit, scoring has come into common use in the mortgage lending industry only in the past 10 years. Scoring brings a high level of efficiency to the underwriting process, but it also has raised concerns about fair lending among historically underserved populations. The purpose of the Federal Reserve System's Mortgage Credit Partnership Credit Scoring Committee is to collect and publish perspectives on credit scoring in the mortgage underwriting process, specifically with respect to potential disparities between white and minority homebuyers. The introductory article provided the context for the issues addressed by the series. The second article dealt with lend-ing-policy development, credit-scoring model selection and model maintenance. The topic of the third article is how lenders oversee the practices of their...

Credit Enhancements For Nonagency Mbs Products

The investor in nonagency mortgage-backed securities products is exposed to credit risk. Because there is no explicit or implicit government guarantee, all nonagency securities are credit enhanced in order to obtain a specific credit rating for each tranche in a deal. Credit enhancement mechanisms can take various forms, both from external parties and within the structure of the deal. External credit enhancement mechanisms are third-party guarantees. Internal credit enhancement mechanisms are forms of self-insurance. In addition, derivative instruments, specifically interest-rate swaps and interest-rate caps, can be used as a form of credit enhancement. The credit enhancement mechanism(s) used are those that provide the seller with the best execution. That is, it will maximize proceeds from the sale of the pool of mortgage loans after credit enhancement expenses (implicit and explicit) are taken into account. This chapter examines and explains the various forms and usages of credit...

Bankruptcy Chapter doesnt necessarily ruin your credit

Many hapless borrowers are talked into ill-fated debt management repayment plans including Chapter 13 bankruptcy. They are told that bankruptcy (Chapter 7 liquidation) will ruin their credit. It stays in the credit file for 10 years. In response, these troubled debtors quake with the fear of stigma and the thought of becoming a credit leper. While it is true that both Chapter 13 (debt repayment) and Chapter 7 (liquidation) show up in your credit report for 10 years, it does not follow that Chapter 7 bankruptcy ruins your credit for 10 years, or even 2 years.

Can I improve my credit score by paying off delinquent credit cards

Most everyone understands that if you don't pay your bills on time, your credit score suffers. There is a com mon misperception, however, that if you pay off these accounts, all will be forgiven since the lender has been paid, the credit score will return to what it was before the delinquency. But it doesn't work that way. Delinquencies reduce your credit score because the credit-scoring genie views delinquent accounts as evidence of a weak commitment toward meeting your obligations. The evidence is not wiped away when you repay the accounts. The delinquencies are still there, impacting your score. The only thing that will wipe them away is the passage of time and a better payment record. A similar misperception is that consolidating credit card accounts into a smaller number of cards will improve the credit score. It will not if the consolidation of balances significantly raises the ratio of balances to available credit lines on the remaining cards. While the credit-scoring genie...

Discover your credit scores

In the late 1990s, when mortgage lenders began widespread use of credit scores, the credit score providers told lenders to keep the scores secret from the borrowers. The score providers would otherwise cut off the lender. This secrecy created a howl of protest. 4 Unless, perhaps, your credit score makes you look better than you deserve. Nevertheless, braved the storm and began releasing scores to its customers. True to their word, the credit score providers threatened to throw out of the fraternity. Not only did refuse to buckle under, the California legislature entered the fray and mandated release of credit scores to all Californians. Shortly thereafter, Fair, Isaac (FICO) set up its web site, Now, for around 50, anyone can learn their FICO scores as created from credit data held by the three major credit repositories (Equifax, Experian, and Trans Union).

Analyzing Grading Credit History

Most conforming and many non-conforming lenders today do not perform the detailed analysis of the credit report that they did during the 1990s. Mortgage lenders are more frequently relying on the consumer credit scores, although some review of the credit details are still performed. The future trend, as the mortgage industry becomes even more automated, will be an even greater reliance on credit scores. Nevertheless, credit scores are derived from the applicant's recorded credit history. This article section will analyze credit grading in detail, starting with the nuts and bolts and concluding with interpretations of credit scores. When analyzing the credit report, mortgage lenders concentrate on the negative entries. Specifically, lenders look for five types of potentially adverse entries Credit grade If any of the above are found in an applicant's credit report, the applicant must provide a letter of explanation with supporting documents, if necessary before the lender can give full...

Structure of the Credit Report

Credit reports normally contain the following sections 2. Credit score 3. Credit history The background information section occupies the upper portion of the front page of the credit report and usually contains the following data Subject identification. This section identifies the applicant's full name, home address and social security number. The credit report will also list other name arrangements and social security numbers used and previously recorded by the applicant. Employment. This section identifies the applicant's current employer, position and income level this information is normally obtained from the application form completed by the applicant. Previous employers, positions, income and dates of employment are also provided, if they have been previously reported to the credit bureau. Credit score The first page of the credit report usually indicates the borrower's automated credit scoring. Each of the three major consumer credit repositories (TransUnion, Experian TRW and...

Credit Scoring Amd Fair Mortgage Lending

Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Utilized for several decades in granting certain forms of consumer credit, scoring has come into common use in the mortgage lending industry only within the last 10 years. Scoring brings a high level of efficiency to the underwriting process, but it also has raised concerns about fair lending with regard to historically underserved populations. To explore the potential impact of credit scoring on mortgage applicants, the Federal Reserve System's Mortgage Credit Partnership Credit Scoring Committee has produced a five-installment series of articles. This is the second. An important goal of the series is to provide the industry and concerned groups and individuals with the opportunity to comment on issues surrounding credit scoring. This installment incorporates statements requested from representatives of three organizations, who were selected because of their interest in and...

Perfect Your Credit Profile

Today, if your credit score sits above say, 720, you might whiz through the loan underwriting process. As a borrower you can choose from among the lowest-cost, lowest interest-rate mortgages. The lender may ask for relatively few documents and verifications, it may waive mortgage insurance, and perhaps even loan you the amount you need for a down payment. If instead your credit profile ranges somewhere between bottom of the barrel and looks decent, lenders have created loan products, interest rates, closing costs, down payments, and documentation to fit you, too. But the more risk the lender sees, the more onerous the terms, fees, costs, and paperwork. For each 100,000 borrowed, higher-risk borrowers (especially when they choose higher-risk loans) might pay interest costs of 5,000 to 10,000 more per year, plus an additional 2,000 to 6,000 to cover origination points, fees, and expenses. That's why it pays to perfect your credit profile. In today's world of mortgage lending, credit...

Improve your credit scores

When credit scoring caught the public's eye, credit score providers not only refused to tell borrowers how they rated in the system, they also refused to tell precisely how the system itself operates. Today, that refusal still stands. Until Congress or state legislators force the issue, credit scoring remains a black box operation. Credit scorers enter your credit data into their programs and out pops a number, but they won't reveal how or why they calculated that figure. You're left in the dark. (Credit scorers defend their secrecy for two reasons (1) They don't want you to game the system and (2) they don't want to tip off their competitors as to the techniques they are using.)

Will my credit score fall if I shop many loan providers

Credit inquiries impact credit scores negatively because statistical studies show that multiple inquiries are associated with high risk of default. Distressed borrowers often contact many lenders hoping to find one who will approve them. On the other hand, multi- To avoid catching shoppers in his net, the genie who scores credit ignores inquiries that occur within 30 days of a score date. Suppose, for example, I shop a lender on May 30 and the lender has my credit scored that day. Even if I had shopped 50 other lenders in May and they had all checked my credit, none of those inquiries would affect my credit score on May 30. Inquiries from April and back 11 months would, however, be counted on May 30. To avoid biasing the credit score from earlier shopping episodes, the scorers treat all inquiries that occur within any 14-day period as a single inquiry. If you shopped 50 lenders during April 1-14, they would count as one inquiry. If you spread them over April 1-28, they would count as...

Analyzing Credit Reports

Lenders and creditors analyze an applicant's credit history to forecast the likelihood that the prospective borrower will repay the requested loan amount. The theory is that credit histories demonstrate the consumer's ability to manage debt and that past history is a strong predictor of future performance. Lenders accomplish this by grading the applicant's credit history. A sample credit report is available for review and comparison. This article contains two parts 1. Structure of the credit report. The first half reviews the contents of a credit report. 2. Grading a credit report. The second half discusses how a credit report is graded. Credit reports display the applicant's recorded history for up to ten years. By law, consumer credit may remain on a consumer's credit report for only seven years. Judgments such as bankruptcies, foreclosures and lawsuits and debts owed to the government usually remain for up to ten years. When grading an applicant's credit history, mortgage lenders...

Save Money on Your Credit Reports

If you don't want to pay for your credit information, you have several alternatives. This web site operated by Experian will give you a free credit report, but it also will automatically enroll you in a 79.95 credit-monitoring service. Cancel this service within 30 days and you owe nothing. Free reports. Various states require credit bureaus to provide reports for free, or at nominal cost. Also, under federal law, you may receive free reports from each of the repositories if you're unemployed and looking for work, you're on welfare, or you've been turned down for credit during the past 30 days. General commentary. For the latest (usually critical) commentary about credit scoring and credit reporting, go to www. and Also, the Federal Trade Commission maintains consumer information on all types of credit issues at

Most credit repair firms or deceptive tactics cant fix your credit or boost your credit scores

Erase bad credit the credit repair ads say. The Federal Trade Commission (FTC) says something quite different. Don't be misled by credit repair ads. . . . Promises to repair or clean up a bad credit file can almost never be kept. How do these firms get away with making false promises They just operate until the government shuts them down then they open shop again under a new name. Even worse, many tactics these firms promote could land you in jail. For example, one trick they pull is to get you a new credit file under a different (false) social security number or business tax number. If caught (and you will likely get caught in our ever-more-automated, no-privacy world), the Feds can prosecute you for identity fraud or obtaining credit through fraudulent misrepresentations. Anytime you fib, deceive, mislead, omit, You can improve your credit record and scores when you follow the steps outlined in Mortgage Secrets or other books by reputable authors and publishers. Countrywide...

How your credit affects qualifying

Similar to a conventional mortgage, both equity lines and installment second mortgages have credit and other requirements. An A credit rating and low debt-to-income ratio will allow you to do pretty much anything you want. Most lenders will allow borrowers with a FICO score (a credit rating) of 720 or above to borrow up to 100 percent of the loan to value of their homes (all of the equity available, in other words). Scores between 620 and 680 generally get you 80 to 90 percent of your equity, whereas scores under 600 may get you 60 percent of the equity or may get you turned down altogether. Don't get discouraged, though, if you have less than Spartan credit. Few of us have perfect credit scores. If your credit rating is not good enough for the loan you desire, you may want to consider an installment second from a sub-prime lender. Again, the interest rates on these loans are high, but at least you'll get your money, and you'll create a nice tax deduction, in doing so. Once you've...

What Is Credit Scoring

Through credit scoring, lenders try to push personal judgment away from credit evaluation. Credit scoring data from auto loans, department store accounts, and credit cards prove that computer statistical programs can distinguish platinum, gold, copper, lead, and plastic far better than backoffice loan clerks or front-office loan reps. To create these credit-scoring programs, math whizzes study the credit profiles, borrowing habits, and payback records for millions of people. Then they search for statistically significant correlations that tend to rate borrowers along a continuum from walk-on-water (say, 800 or higher) to neck-deep (say, 550 or lower). Credit scores range from 350 to 850, but more than 80 percent of Americans score between 600 and 800.

Credit scores influence but do not determine the terms and costs of your loan

As emphasized, most mortgage lenders assess your creditworthiness through credit scoring. Fannie Mae, Freddie Mac, FHA, VA, and portfolio lenders such as Washington Mutual all follow some form of this so-called black box credit evaluation. If your credit score pops out at, say, 720 or higher, problems are not likely. Just make sure you've not messed up any of the other Cs of credit approval, and you're home free at (or near) the lowest interest rates and costs available (provided that you understand the mortgage process and don't let some sharpshooting loan rep get you in his sights). If your score totals between 660 and 720, however, you may not get the best terms with the least amount of hassle. And if your score falls below, say, 620, some lenders will push you into subprime (much more expensive) mortgages unless your other Cs tell a persuasive story. Below 600 or so, watch out for predators or try for protection with FHA or VA.

One Borrower Multiple Credit Scores

Earlier, Mortgage Secrets discussed the fact that any given borrower will receive a credit score from each credit repository. Should the credit data in these files materially differ, the corresponding credit scores will differ. This fact brings up the question Which score will the lender choose to use if one or two of your scores fall below program minimums To a certain extent, it will depend on the persuasive story you tell. In most instances the lender selects the lowest middle score of all applicants. If you and your co-borrower (spouse, relative, partner), respectively, show these scores, 580, 610, 655 and 720, 730, 760, the lender might very well use 610 as the relevant credit score for underwriting.

Credit Scoring Is Spreading

If you've received a preapproved credit card in the mail or obtained instant credit at Sears, Home Depot, or Best Buy, you've been run through a credit-scoring program. That's why the store could quickly decide with only slight information from you (social security number, name, address). Even insurance companies (especially auto) now turn to credit scores to decide whether to insure you and, if so, at what price. Employers, too, have started running credit scores on job applicants and, in some cases, current employees. You must do all you can to bolster your score. And if your score now shines platinum keep it there. In the United States of tomorrow, Mensa will become old hat. It's far more prestigious and practical to get invited into the FICO 800 club. (Fair, Isaac and Company FICO is the leading supplier of credit scoring software programs.)

Credit Scores May Adjust Slowly

Your credit score may take 30 to 60 days to incorporate new or changed credit file data. In the meantime, if your loan program requires a 660 score and your uncorrected score stands at 648, you could be out of luck. (Some mortgage lenders use the lowest middle score of all loan applicants. Most lenders do not merely average credit scores. So, ask your loan rep in what precise way the lender weighs the individual scores of a single borrower as well as the multiple scores of two or more co-applicants.) won't work when the creditor fails to respond in a timely manner and it doesn't work to achieve the score boosts you could achieve through savvy credit management.

Credit Scores Adjust Like Molasses to Changes in Credit Management

To improve your long-term credit score, change your credit profile. Pay your bills conscientiously close excessive accounts reduce the amount of your outstanding balances but total payoffs of all accounts may hurt because you want to maintain an active credit experience and resolve disputes, liens, judgments, and write-offs. No one can quickly overcome the stains that soil a credit report when they lawfully belong there. Just clean them up as best you can. At the same time, manage your credit as if the FICO folks were looking over your shoulder because they are.

Fair Credit Reporting

A 1977 federal legislation that regulates credit reporting agencies and the access to and use of consumer credit data. Credit bureaus can only provide access by court order or, with the consumer's permission, for credit, insurance and employment. Also, credit bureaus must correct or remove errors brought to their attention and provide file data to the consumer. Lenders who reject an application because of adverse credit information, must inform the borrower about the source of that information and make credit information on file available.

The Nature of the Credit Decision and the Role of Credit Scoring

The ultimate decision of whether to lend to any specific applicant, is not a science involving strict mathematical formulas. Rather, it is an art that relies heavily on various underwriting factors that are assigned differing weights depending on the experience or risk preference of the lender or investor. There are a myriad of factors that come into play in mortgage lending determinations. Some of the more common factors analyzed by underwriters are loan-to-value ratios, debt-to-income ratios, bank reserves, down-payment size, down-payment source, loan type, loan duration, among many others. Credit scoring is just one factor in the analysis. The art of underwriting does not lie in assigning numerical values to any of these factors, along with pass or fail ratings. Underwriting requires that each factor be accounted for and interpreted in light of the other factors and in the context of each applicant and property. In the end, the final decision is based on a judgment call regarding...

Credit counselors and debt management firms do not improve your credit record or boost your credit scores

Why go to a credit counseling-debt management service Three reasons To get help with budgeting to seek legal advice about bankruptcy and creditor collection practices and to prevent or stop creditor collection efforts. If you've got good credit, budgeting assistance can help you retain it. If you've bruised or busted your credit, however, debt management or consolidation plans will not redeem you anytime soon. To most creditors, you either pay your bills on time or you don't. They may agree to accept less money than you owe on revised terms as the best outcome for a bad situation, but your credit file will still get hit with a write-off unless you negotiate otherwise. If in collection, that, too, will remain. In general, neither Fannie Mae's nor Freddie Mac's underwriting will accept mortgage applicants who currently participate in debt workout plans (including Chapter 13 bankruptcy). Conventional loans have generally required two years of nearly clean payments after completing debt...

Credit Scoring Doesnt Rate You Personally

The credit scorers select certain characteristics that you share with others who have (or have not) paid their bills as scheduled then, based on these selected characteristics, the scorer's mathematical formula assigns you a number. Supposedly, this assessment accurately gauges the risks you present to the lender but it doesn't. Why Because you are a unique individual. Although you share some similarities with this computer sample of borrowers, you also differ in many ways of which the credit scoring programs know nothing. These unaccounted-for differences may give you more (or less) borrowing credibility than your credit score indicates. Credit scores parallel SAT scores and other college admissions tests. If you fail to register a top score, you can kiss Stanford good-bye unless, that is, you write a superlative admissions essay and bolster your application with distinguishing achievements (and, of course, a big donation from your rich uncle wouldn't hurt your chances).

FICO Score

One particular type of credit score, the FICO score, has grown to outsized importance in recent years. Initially, FICO scores were used by consumer lenders and not by mortgage lenders because the score was designed to predict borrower credit behavior over a fairly short period of time (about two to three years). Until several years ago, only a few mortgage issuers used this information to screen borrowers. When investors began demanding more credit information, however, issuers started using FICO scores. Thus, even though FICO was not designed for mortgage credits, it is still a readily available credit score, is widely understood and recognized, and is consistent from issuer to issuer. Additionally, FICO scores are tabulated by an independent credit agency using a model created by Fair, Isaac and Company and not by the issuers themselves. Today, if a FICO score is unavailable on a nonagency deal, many investors will not consider it. FICO score plays a key role in determining credit...

Damaged credit

Seriously damaged credit is normally unacceptable for conforming programs, although occasional exceptions are allowed. Conforming loans must have grade-A credit, although Aminus credit is acceptable when compensating factors are present. Damaged credit borrowers face even higher interest rates than other non-conforming programs. Remember, however, that you should always view high interest rates as short-term. As your credit grade improves, you will be able to refinance to lower rates and better terms. Please consult the Damaged Credit Options and Repairing Damaged Credit articles for more information. Specific articles on borrowers with bankruptcies or foreclosures are also available.

Statement Of Christopher A Lombardo

First, financial institutions increasingly rely on fee income. Interest rate spreads are, and are likely to remain, razor thin. Second, automation (including credit scoring), securitiza-tion and specialization have revolutionized who does what and how they do it. Third, financial institutions rely on independent mortgage brokers to maintain a steady supply of loan originations. Employees in financial institution branches typically no longer generate the business. Call this progress-in-action in a free enterprise system or call this a recipe for disaster. In reality, the system is far from free It is heavily regulated. With the scourge of predatory lending, personal and individual disasters have become more common or at least more widely recognized. Systemic disasters remain rare. The compliance examiner assesses how well a financial institution manages its compliance risks and responsibilities. Regarding relationships with mortgage brokers, this most notably includes compliance with...

John M Robinson Iii And Ken Dunlap

The allegation that white and minority mortgage applicants received differing levels or quality of assistance in preparing mortgage applications. These terms were used primarily before the advent of credit scoring in mortgage lending. In the current mortgage market environment, credit and mortgage scoring have taken a front seat to judgmental systems. With greater reliance on these automated systems and less human judgment in the decision process, the quality of assistance provided applicants is even more important. or prospective applicants to improve their credit score is offered equitably. Applicants have a clear understanding of the importance of their credit score to the approval and pricing processes.

Calvin Bradford And Associates

A variety of research studies, emanating from the Federal Reserve System, other regulatory and government institutions, and private research organizations, have suggested unexplained variances in mortgage acceptance rates and pricing between majority and minority mortgage applicants. Though not uniformly the focus of these studies, credit scoring is now a commonly used tool in the mortgage underwriting process. Credit scoring advocates maintain that as an underwriting tool, credit scoring has allowed the underwriting function to be streamlined for highly creditworthy applicants, allowing human underwriters to allot more time to applications where credit issues are present, and has reduced overall costs of underwriting. Detractors claim that factors considered within statistical credit scoring models, even if not intended, favor majority applicants and create a new barrier to home-ownership for minority mortgage applicants. Please describe, from your perspective, fair lending issues...

Statement Of Dan Immergluck

As a researcher and an advocate for fair lending and community reinvestment, I have shared the concerns of many over the ubiquitous use of credit scoring in the mortgage lending process. Many of my concerns have been articulated by others in earlier articles in this series. For example, in the first installment, community reinvestment consultant Cal Bradford points to the disparate impact of credit-scoring systems and questions where the threshold be set in determining whether a scoring system meets the business necessity test under the Equal Credit Opportunity Act and Regulation B. If lowering the threshold for approving loans reduces disparate impact but increases loan losses, what standard is to be used to determine whether such losses have increased too much Lenders may argue that pressures for ever-increasing earnings force Previous contributors have pointed to other important issues, such as the lack of transparency in scoring models and the focus on correlation over causation....

Statement Of Chris Aldridge

Tions, and it has refocused attention on the impact of credit scoring on the availability of prime-rate products in certain markets. The perceived negative impact of credit scoring is counterintuitive if the tool is used properly. The reduction in time and resources spent underwriting high-score applicants should expand resources to manually underwrite cases in which the borrower is a good risk but has no credit history or inaccurate information in the mortgage application. More importantly, credit scoring could also free resources to offer more labor-intensive complementary products that use a combination of credit training, rehabilitation and recent payment history to offer prime- or near-prime-rate products. Thus, the proper use of credit scoring should increase properly priced credit in all market segments. This series of articles on the use and monitoring of credit-scoring-based origination programs reflects concern about the proper use of credit scores and about policies and...

Statement Of John M Robinson Iii And Ken Dunlap

Given the increased reliance on automated underwriting, what should lenders do to ensure that their lending policy is strictly observed and that any assistance offered to loan applicants or prospective applicants to improve their credit score is offered equitably Lending policies must be observed to ensure sound financial business decisions and to avoid any potential disparate treatment of applicants.1 At the same time, policies must allow lenders to evaluate individual credit needs and varying applicant scenarios. Lenders must be conscious of nontraditional applicants for whom relaxed underwriting may be key in obtaining a loan. For example, Midwest BankCentre offers the FreddieMac Affordable Gold 97 mortgage product for first-time home buyers. This program, in contrast to many others, allows for a 3 percent down payment from any source (e.g., gifts). How a mortgage credit decision is made is one of the two keys of potential discrimination. Prescreening is the other. Underwriting...

Statement Of Stanley D Longhofer

One of the most significant developments in the mortgage market over the last decade has been the formation and growing acceptance of computerized credit-scoring models as a supplement to or a replacement for traditional Instead, these objective standards are used to sort the applications into three groups that we characterize as Yes, No and Maybe. Applications that possess all of the ideal characteristics (the Yes group) are almost universally approved. When they are rejected, it is usually because of a material change in the information that put them into the Yes group to begin with. (For example, the applicant suffered a sudden layoff.) Similarly, the No group consists of applications for which no further analysis is necessary because they clearly represent too great a credit risk. Applicants in this group may have severe blemishes on their credit reports, very unstable income or high proposed loan-to-value ratios. As a practical matter, the No group is generally quite small, as...

The First Installment Of A Fiveinstallment Series

Mortgage Credit Partnership Credit Scoring Committee Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Utilized for several decades to underwrite certain forms of consumer credit, scoring has come into common use in the mortgage lending industry only within the last 10 years. Scoring brings a high level of efficiency to the underwriting process, but it also has raised concerns about fair lending with regard to historically underserved populations. In order to explore the potential impact of credit scoring on mortgage applicants, the Federal Reserve System's Mortgage Credit Partnership Credit Scoring Committee has produced a five-installment series. This first installment provides a context for the subsequent installments. An important goal of this series is to provide the industry, concerned groups and individuals the opportunity to comment on issues surrounding credit scoring. This installment incorporates statements requested from...

Statement Of Edward Kramer

Mortgage brokers, especially for compliance with fair-lending laws, pricing policies and the use of credit-scoring models. The reason lenders know the good guys from the bad guys is that they have dealt with them over a number of years. In a situation where there have been excessive defaults on loans from the same mortgage broker, or if defaults often occur within several months after the loans, it is not difficult for a financial institution to gather evidence of what happened and of potential wrongdoing. There may have been problems with these loans The applications are being falsified, the income levels are being falsified, the credit report has inconsistencies on it or credit scoring doesn't really match. The credit score is not sufficient to justify the loan.

Final Installment Of A Fiveinstallment Series

Mortgage Credit Partnership Credit Scoring Committee The purpose of the Federal Reserve System's Credit Scoring Committee is to publish a variety of perspectives on the credit-scoring process and to identify areas where the use of credit scores may create disparities in the home mortgage process. The first four installments in this series addressed aspects of the use of credit scores and fair-lending concerns, including the maintenance of scoring models, the use of third-party brokers and the provision of assistance in the credit-application process. The fifth and final installment addresses the use of counteroffers, overrides and second reviews of credit-scored decisions. We have solicited feedback from industry, consumer and academic representatives to ensure a variety of perspectives on these topics.

Statement Of Kevin Stein

The use of credit-scoring models to evaluate creditworthiness has become widespread, even finding its way into the insurance arena, despite serious concerns about the fairness and utility of these models. Credit-scoring models were developed and adopted primarily as a means of helping financial institutions manage credit risk. The California Reinvestment Committee (CRC) believes financial institutions should be working instead to develop and adopt innovative methods of safely extending low-cost credit to underserved borrowers and communities. Most observers accept that the use of credit-scoring models has had a disparate impact on people of color. Following are various reasons to question whether heavy reliance on credit scores furthers the nation's interest in fair lending and equal access to credit, as well as the safety and soundness of financial institutions. The Larry Rule. In early 1996, an unlikely report came out that then-Federal Reserve Board Governor Larry Lindsey, now...

Statement Of Calvin Bradford

The wide-scale use of credit scoring represents a significant efficiency in the competitive world of mortgage finance. Both the Federal Reserve, by its regulations, and lenders, who use credit scoring, refer to it as an objective process as opposed to judgmental systems. The largest purveyor of credit scores, Fair, Isaac and Company, Inc., has continually maintained that its scores could not be discriminatory because they do not contain race as an explicit variable. All of these statements appear to support a confidence in the fairness and equality in the use of credit scoring that is, in fact, unwarranted. Credit scoring has not been intentionally discriminatory in its typical uses. Nonetheless, regulators, researchers and the developers of credit scoring systems have all recognized that, on average, minorities have lower credit scores than majority populations. Therefore, the use of credit scoring systems will frequently have an overall discriminatory effect. Such an effect,...

Statement Of Michael Lacourlittle

Wells Fargo Home Mortgage strongly believes that credit scoring has provided significant net benefits to both the mortgage industry and the public. Credit scoring has helped to make mortgage credit more widely available to all households, including traditionally under-served market segments, and it has helped to fuel the growth in homeownership that has occurred over the past decade. We welcome open public dialogue about credit scoring and second reviews and, thus, we are pleased to address the following questions. Credit scores can incorporate only a limited set of factors. Overrides tend to occur most frequently when certain important risk factors are omitted from the credit score. Consequently, a high rate of overrides may indicate that it is time to redevelop the credit score. In addition, lenders should, as part of a comprehensive fair-lending program, institute procedures to monitor the incidence of overrides to ensure they do not favor or disfavor any class of loan applicant...

Statement Of Ellen P Roche

An increasing number of consumers have benefited from the speed, accuracy and fair treatment provided by the use of credit scoring and automated underwriting over the last several years. In addition to summarizing these benefits, we describe how automated underwriting and credit scoring benefit the consumer during the mortgage application process. Manual underwriting characterized the mortgage market before the 1990s. This slow process provided only a limited ability to analyze multiple risk factors and sift through layered risks. Without the ability to precisely measure distinctions in risk with speed and accuracy, lenders and investors developed guidelines that broadly defined creditworthiness. For decades these guidelines served well the vast majority of mortgage borrowers in what came to be known as the prime market. Over the years, easier access to credit and a rising bankruptcy rate meant that an increasing number of borrowers with blemished credit histories fell outside the...

Statement Of William N Lund

As a regulator enforcing Maine's credit reporting laws, I have tried to learn as much as I can about credit scoring. The ingenuity of the scoring models and the complexity of the applied mathematics are very impressive, and I have no doubt that use of such scores permits creditors to make fast decisions on consumers' applications. However, from the consumer's perspective, I harbor great concerns about the exponential growth in the use of such scores, not only for credit decisions but also for seemingly unrelated charges, such as automobile insurance premiums. I can summarize my concerns as follows Concern No. 1 Credit scoring has led to a re-mystification of the credit reporting system. In 1969, during the debate on the original Fair Credit Reporting Act (FCRA), Wisconsin Sen. William Proxmire spoke of the congressional intent behind the law The aim of the Fair Credit Reporting Act is to see that the credit reporting system serves the consumer as well as the industry. The consumer has...

Statement Of Josh Silver

All of us have credit scores, but most of us don't know what they mean. If we knew what they meant, would we be more likely to get approved for a low-cost loan The answer is probably, but the disclosures of credit scores have to be meaningful if they are to be helpful to the borrower. Credit scores are numbers ranging from 300 to 800 that are supposed to reflect the risk that we, as borrowers, pose to banks. The higher the score, the less risky we are and the less likely we will be late on loan payments or default on the loan altogether. Credit scores are calculated on the basis of a credit history that is collected and stored in three major credit reporting agencies or private sector credit bureaus. The record of paying on time or paying late, the amount of debt compared with the amount of available credit on credit cards, and the length of time using credit are major factors that contribute to the score. Credit scores have been used for decades for consumer and credit card lending....

Statement Of Peter L Mccorkell

During the 1970s and 1980s, credit scoring and automated underwriting became widely accepted for most forms of consumer lending, other than mortgages. Mortgage lenders began using credit scoring much later, starting around 1995. Lenders have widely accepted scoring technology because it allows for expanded lending while maintaining or even reducing loss rates. During the years that credit scoring technology was being developed, there were few, if any, serious concerns on the part of regulators or consumer activists that scoring might somehow restrict access to credit for any significant subset of the population. However, during the past four or five years, such concerns have been raised more and more frequently. Most regulators and consumer activists accept the claims of lenders and scoring-system developers that credit scoring provides an effective and cost-efficient decision tool for the general population of borrowers. But, when it comes to traditionally underserved segments of the...

Statement Of Alexander Ross

When credit scores are used to accept or deny, the broker's obligation is the same as it would be with manual underwriting. If the broker (a) fails to obtain documentation or (b) screens out applicants without adherence to the same processes the lender does with its direct applicants, both the broker and the lender are headed for trouble. When credit scores affect pricing, the broker must depend on the full and accurate use of the lender's pricing criteria to avoid surprises and legal problems. For example, if the broker thinks he is presenting a B quality loan and has priced it with the borrower accordingly, the deal may not work if the lender prices it at B-. On the other hand, if a broker knows the borrower has A credit but places the loan with a subprime lender at an unnecessarily high price to increase the broker's profit (when that lender would accept higher broker fees), the broker risks involving himself and the lender in deceptive practices, violations of the Real Estate...

The Fourth Installment Of A Fiveinstallment Series

Mortgage Credit Partnership Credit Scoring Committee Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Used for several decades to underwrite certain forms of consumer credit, scoring has become common in the mortgage lending industry only in the past 10 years. Scoring brings a high level of efficiency to the underwriting process, but it also has raised concerns about fair lending among historically underserved populations. The mission of the Federal Reserve System's Credit Scoring Committee is to publish a variety of perspectives on credit scoring in the mortgage underwriting process, specifically with respect to potential disparities between white and minority home buyers. To this end, the committee is producing a five-installment series of articles. The introductory article provided the context for the issues addressed by the series. The second article dealt with lending policy development, credit-scoring model selection and...

Statement Of Paul Smith

Actually, our bankers tell us that credit scoring, in fact, gives greater access to mortgage credit rather than creating new barriers for minority mortgage applicants. The use of credit scoring models to better predict whether an applicant might default allows the lender more flexibility in making traditional home loans. During the last 10 years, the banking industry has greatly expanded its efforts to make credit available to less qualified applicants. For example, the housing mortgage secondary-market agencies, Fannie Mae and Freddie Mac, have broadened their underwriting criteria to accept alternatives to the traditional qualifications. Banks have started lower interest-rate or no-fee affordable housing programs, created first-time homebuyer programs in which borrower training replaces some of the missing qualifications of the borrower, and expanded the list of qualifications for potential borrowers. Many bankers also have said that credit scoring models have been crucial in...

Issues Identified In The Mcp Process Of National Concern

As an added step to these projects, representatives from the Reserve Banks that conducted MCPs met to exchange their individual findings and experiences and also to discuss areas of common concern. Among the issues of common concern were access to homeowner's insurance, appraisals in redeveloping communities, steering by real estate agents and the use of credit scoring technology in the mortgage underwriting process. The last is the subject of the first installment, which provides the context for the next four installments on fair mortgage lending practices involving the use of credit scoring technology. The Federal Reserve Banks of Boston, Chicago, Cleveland, San Francisco, St. Louis and the Federal Reserve Board have representatives on the research committee, and they all have participated in this series.

Statement Of Kathleen Muller

The use of credit scores alone does not ensure that credit remains available to persons who would qualify for a low-interest loan. Lenders should always have multi-criteria that help to balance or offset shortfalls in a person's credit score, which could be reduced by the use of subprime lenders or by a hesitancy to use credit at all. For example, if a customer scores 10 to 25 points less than the minimum score determined to be necessary for loan qualification but he has three or more years on the job, that strength of character could offset the low score. In addition, third-party mortgage brokers who do not try to look at credit scoring in a flexible way such as looking at work history and rely on poor scores without honest subjective analysis may benefit from higher-cost loans. During a recent training session in Evansville, Ind., on Predatory Lending A Professional Alert for brokers, appraisers, inspectors, title agents all those who deal with the consumer along the path to getting...

Kathleen Muller

While lending institutions may actively review and assess their own credit-scoring models for potential unlawful disparities, it is also important for lenders to monitor their relationships with third-party brokers. Mortgage brokers make credit available in communities that do not have traditional lending institutions. Lenders establish relationships with third-party brokers to reach these markets. Lenders need to consider how their third-party brokers comply with fair-lending laws and use credit-scoring models. Lenders who knowingly work with noncompliant brokers and take no action may be liable as co-creditors. The following situations may lead to increased regulatory risk exposure for the lending institution The lender may build in a high broker overage tied to the credit score. The broker may obtain a credit report or credit score and use it to underwrite and price a proposed deal prior to submitting it to a lender. A broker may screen applicants or steer them to higher-priced...

Stanley D Longhofer

The emergence of credit scoring in the home-buying process has been a significant contributor to the increase in mortgage lending activity around the country. Proponents of scoring systems argue that their purely objective nature constitutes a significant fair-lending benefit by virtually assuring against disparate treatment on a prohibited basis. Others point out that when inaccurate information is contained in the credit report, the consumer may not have the opportunity to rectify the report, and the lending decision will be made with inaccurate data. Another concern that has been raised is that the objectivity of the credit score is lost when a lender supplements the scoring process with overrides, counteroffers or second-review programs that are subjective in nature or in use. Credit-scoring overrides and counteroffers can serve important functions in maximizing access to credit. However, their nature and usage could result in unlawful discrimination. A frequent use of overrides...

General Introduction

Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Utilized for several decades to underwrite certain forms of consumer credit, scoring has come into common use in the mortgage lending industry only within the last 10 years. Scoring brings a high level of efficiency to the underwriting process, but it also has raised concerns about fair lending with regard to historically underserved populations. The Federal Reserve System's Mortgage Credit Partnership Credit Scoring Committee has produced a five-installment series, which explores the potential impact of credit scoring on mortgage applicants. This brochure is the introduction to all five installments.

Tougher Credit Standards and Lower Cost PMI

These Fannie and Freddie low-down-payment loans do apply tougher credit standards than either FHA or VA, but their loan limits reach substantially higher. Also, borrowers whose credit scores reach 680 (possibly as low as 620) will probably pay less for private mortgage insurance with Fannie and Freddie loan programs than they would with FHA. On the other hand, borrowers with FICO scores of less than 620 may find that FHA's mortgage insurance premiums (MIP) now fall below the premiums of the private insurers who guarantee Fannie and Freddie's low-down-payment mortgages (i.e., LTVs greater than 80 percent). You'll need to compare costs based on your specific situation. No firm conclusions apply because competition perpetually shifts the pricing landscape. Plus, your full range of underwriting Cs (Secret 40) can influence loan terms and costs.

Figuring out what you can afford

One of the greatest benefits of a Home Keeper for Purchase is that you may be able to afford a slightly higher valued home that you wouldn't ordinarily be able to buy. Because reverse mortgages don't base your loan on credit scores or income levels, the two factors that usually drag a loan value down, you may be able to get more money out of the Home Keeper for Purchase than you would with a regular forward mortgage. But don't start touring mansions quite yet. The operative words here are may be able to afford a slightly more expensive home. The Home Keeper isn't going to get you into a lakeshore condo if you're currently living in a one-room shack, but with the right equity and a decent down payment, you may be able to move up a little in the housing world.

Slash Your ost of Interest

No loan rep can know the interest rate a lender will charge you until after you've submitted your application for a loan. Interest rates for 30-year fixed-rate mortgages will vary according to your credit score, qualifying ratios, cash reserves, amount of down payment, type of property, and other variables the loan reps won't learn until they see all of your financial data. Moreover, mortgage rates change daily. No loan rep can confirm the rate you will pay until the day you lock or the day funding occurs (if you choose not to lock).

What should you do when you cant pay your mortgage

While foreclosure makes the lender whole, it is a disaster for you. Your equity is depleted, you incur the costs of moving, and your credit is ruined. Hence, you must avoid foreclosure, if necessary by selling your house. If your financial reversal is permanent, sell the house before you begin accumulating delinquencies. In a high-equity situation, there is little hope that the lender will agree to modify the loan contract, so don't waste time trying. If you sell, at least you retain your equity and your credit rating. or a deed in lieu of foreclosure. In the first, you sell the house and pay the lender the sales proceeds while in the second the lender takes title to the house. In both cases your debt obligation usually is fully discharged. (They do appear on your credit report, but are not as bad a mark as a foreclosure.) The lender who can get all or most of his money back in these ways probably will not be willing to modify the loan contract.

Collections delinquencies and judgments

Judgments are probably the most serious of the negative credit entries. Bankruptcies and foreclosures are the most damaging types of judgments. Judgments remain on the applicant's credit report for ten (10) years after the discharge date. Other judgments include personal judgments and tax liens. Medical and utility collections are some of the most common type of collections seen on credit reports. Medical collections usually are now counted as seriously against the applicant. Most mortage lenders will require the borrower to pay off the collection and delinquency amounts prior to or duing the closing.

No Endorsement for Bankruptcy

Remember, most reputable not-for-profit credit counseling agencies are funded by banks. Although these organizations employ dedicated people who would like to help you, their jobs depend on encouraging borrowers to elect partial debt repayment rather than Chapter 7. As to the disreputable for-profit and ersatz not-for-profit debt management companies, they reap credit repair fees by taking a slice of your monthly debt management payments. The debt counseling industry does not gain when debtors file Chapter 7.

You can state your assets too

A stated asset program works the same way as a stated income program, and good credit is required for approval in this program, too. If you have good credit, but you don't have the cash reserves you need, you simply ask for a stated asset loan, and the mortgage broker will state enough assets on your loan application to appease the lender.

One secret revealed in this model

Because the market for this model bears an interest rate of 6 , and we're assuming the borrower has good credit (more on credit later). The loan officer could have offered the far better 6 rate, which would create a payment of 829. This is 66 less than the borrower's payment at 7 . Also, the 7 rate will cost the borrower an extra 792 each year ( 66 times 12 months). That is nearly 4,000 over five years All this, just so the mortgage broker could pocket a few hundred dollars more on this one deal.

Mortgage credit rationing in other economies

Moriizumi (2000) considered the case of public corporations in Japan. These corporations lend to individuals for house purchase at low interest rates, but apply credit limits. Thus a household wishing to exceed the credit limit must then borrow from the private banking system. The work again followed the procedure of Linneman & Wachter. Rationed and non-rationed samples are formed and parameter estimates derived from switching regression analysis. Households who do not top up their borrowing from private banks are assumed not to be rationed. Once again the results of the study emphasises that housing and mortgage demand equations that do not explicitly account for rationing criterion will produced biased coefficient estimates.

Whats the Best Outcome

On the other hand, if you want to rebuild your credit as quickly and securely as possible, Chapter 7 can make sense. After you obtain a Chapter 7 discharge, you're debt free, except possibly for past-due taxes, student loans, and some types of judgments. Instead of plugging 300 to 3,000 a month into paying off debt, you can put that money into savings. Within a year or two, you'll be much further ahead financially than if you were still stuck in a payoff plan. As to credit profile, cash in the bank and no (or very limited) debt give you a better credit profile. Fannie and Freddie will each consider Chapter 7 bankrupts two years after discharge. FHA VA will consider such persons after one year. In other words, when you're really drowning in debt, Chapter 7 can put you on the path to mortgage approval and financial stability faster and more effectively than a debt repayment plan.

Why Sellers Are Willing

When I turned age 21, I wanted to build wealth and financial freedom as quickly as possible. At the time I was an undergraduate college student. I had little cash, no full-time job, and no credit record. I knew that back then (unlike today) no bank would approve me for a mortgage. But this small fact didn't crash my goals. No self-defeating self-talk for me. So, I searched for properties that I could purchase from sellers on an installment contract. By the time I completed my PhD, I had bought more than 30 houses and small apartment units. The cash flow from those properties paid many of my college living expenses.

Consider These Programs as Short Term Plans

For example, consider the investor with damaged credit and no money who purchases a property for 100,000 with no down payment. The initial interest rate could be very high, because of that investor's high-risk situation. However, that same investor can refinance to a lower rate once the investor's credit improves or a subsequent appraisal shows some appreciation.

Use compensating factors to justify higher qualifying ratios

After you list your reasons why you can afford the mortgage you want, don't just tell your loan rep. Explain in writing. Get supporting letters from your employer, minister, landlord, clients, customers, or anyone else who can vouch for your good character, creditworthiness, job performance, or personal responsibility.

Lenders set their own standards

Lenders who don't sell their mortgages to Fannie, Freddie, or other players in the secondary mortgage market are called portfolio lenders. Portfolio lenders include many banks, savings institutions, credit unions, pension funds, and life insurance companies. Although Fannie Freddie-affiliated lenders may exercise flexibility if they choose to, portfolio lenders can design any type of loan they like. These portfolio lenders sometimes review Fannie Freddie lending standards. Then they develop differentiated loan products for some targets of borrowers for example, low credit scores, self-employed, no-documentation, low-documentation, stated income, stated assets, jumbo amounts over 417,000 (for single-family residences, multi-units provide higher conforming limits), no mortgage insurance, balloon notes, high qualifying ratios, income properties, farm land, rehab and renovation loans. Some portfolio lenders structure financing to meet the special needs of a single borrower especially for...

Evolution Of Loan And Borrower Characteristics

Exhibit 5-7 also shows that FICO scores have drifted higher in jumbos, rising from around 720 in the late 1990s to around 735 in 2004. In contrast, the alt-A and subprime sectors saw their FICOs decline in the years 1999-2001. This was a period of rising interest rates, and as origination volumes fell, issuers scrambled to maintain market share by lowering underwriting standards. When interest rates fell in 2002-2003, volumes picked up, and underwriting standards tightened once again. This helped raise FICO scores in alt-A back to where they were before the 1999-2001 decline, whereas FICOs in subprime at 624 in 2004 are at a record high level. In part, the increase in subprime FICOs reflects the rapid move by subprime issuers into the lower end of the alt-A market, sometimes referred to as the alt-B or the gap part of the nonagency market. While FICO scores have increased, LTV ratios have risen in alt-A and especially in subprime. Also, loan size has increased in all three sectors,...

The MBS Market Continued

Mortgage Curve

* Other consists of Private Individuals, Finance Companies, MBS deal Inventory, REITs, Federal Credit Unions, HedgeFunds Non-Profits State and Local Gov't * Other consists of Private Individuals, Finance Companies, MBS deal Inventory, REITs, Federal Credit Unions, HedgeFunds Non-Profits State and Local Gov't

Case Study Long Beach Mortgage Loan Trust

Table 10.2 shows that the loans in the pool are high-interest-rate (8.46 percent) loans to deep subprime borrowers (639 average FICO score) who are really stretching to make payments (39.4 percent average debt-to-income ratio and you can be sure many were lying about their incomes). Almost 83 percent are adjustable-rate mortgages, more than half of which reset within two years. More than half are in California and Florida, and almost 48 percent are loans.

The Mortgage Industry

Depository institutions (which include banks, thrifts, and credit unions) collect deposits from both wholesale and retail sources and use those deposits to fund lending activities. Since depositories have both loan and securities portfolios, such institutions have the option of either holding loan production as a balance sheet asset or selling the securitized loans into the capital markets in the form of mortgage-backed securities (MBS). In addition, there is a market for nonse-curitized mortgage portfolios, or whole loans, because there are accounting advantages for depositories to hold loans on their books instead of securities. Nondepository lenders (mainly mortgage bankers) do not have loan portfolios, and virtually all loan production is sold to investors through the capital markets.

Allowing for Interaction Terms

In this subsection we consider a logit regression with the delinquency rate as the dependent variable. As independent variables we use those from the baseline case presented in Table 3, plus the 10 interaction and quadratic terms that can be constructed from the four most important independent variables the FICO score, the CLTV ratio, the mortgage rate, and subsequent house price appreciation. Allowing for the above interaction terms, we take into account the effect of risk-layering such as, for example, the effect of a combination of a borrower's low FICO score and a high CLTV ratio on the probability of delinquency. In the above example, it is a priori not clear what the sign on the FICO-CLTV interaction variable is. A negative sign means that a low FICO and a high CLTV reinforce each other and give rise to a predicted delinquency probability that is higher than when the interaction is ignored. The figure shows the adjusted delinquency rate under two alternative specifications it...

To the Bottom Subprime Loans

Sub Prime Mortgage Default Rate

At the opposite extreme from prime loans are subprime ones, which are given to borrowers with very poor credit histories and low FICO scores, typically below 620 to 660, depending on whose definition you want to use (the average FICO score for securitized subprime loans was 617 as of January 2009). Such borrowers are generally poor, aren 't well educated, have spotty employment histories, and have frequently been late or defaulted on debts in short, precisely the people a lender should be very cautious about.

Generation Of Mortgage Lending Rates

The determination of mortgage lending rates is a complex interplay between levels in the secondary market for MBS, the value of servicing, the pricing of credit enhancement, and the costs associated with generating the loan. In this process, the pricing of different MBS (quoted directly and through the mechanism of intercoupon spreads) is very important in determining the eventual disposition of loans because the MBS market allows providers of funds (investors) and users of funds (lenders) to interact at the national level. Using the MBS market, lenders make loans, package them into securities, sell them into the capital markets, and use the proceeds to make new loans. While certain lenders may hold some loans and products in portfolio, the bulk of production (especially in fixed-rate products) is securitized and sold into the capital markets. As mentioned previously, the examples show the calculation for a loan that is eligible to be securitized in a pool issued by one of the GSEs....

Debtto Income DTI Ratio

Whereas FICO score is used as an indicator of an individual's willingness to repay his or her loan, DTI ratio is a measure of the individual's ability to repay it. (Note that DTI ratios are not provided in Exhibit 5.2.) Two DTI ratios are used commonly in mortgage underwriting, the front end and back end. The front-end ratio divides In the agency market, 28 is an acceptable front-end ratio and 38 an acceptable back-end ratio. Some exceptions may be made for compensating factors, such as a high FICO score. Front-end DTI ratios average around 35 for jumbo and alt-A deals and 40 for subprime. While they vary between issuers, back-end DTI ratios in subprime deals average over 50 .

Home Prices over Time

Prior to 2000, the typical borrower could borrow roughly three times his income to buy a house. Figure 1.3 shows that in January 2000, a person with pretax income of nearly 34,000 (the national average) could take out a mortgage of 3.3 times this amount, or 110,000. Of course, the borrower had to have a 20 percent down payment and a decent credit history, and banks were rigorous about evaluating the ability to repay. But all this began to unravel as the years passed.

Mortgage termination behaviour and alternative mortgage instruments

The essence of the ARM is that interest rate risk is passed on to the borrower. However, the default risk that lenders then face may have a significant impact upon their cash flows. This risk of default might arise out of the characteristics of the borrower (e.g. credit worthiness), or from the specific features of the mortgage instrument (e.g. periodic caps and A concern of early studies using ARM data was the relative importance of the characteristics of the borrower and the features of the ARM contract (SA-Aadu 1988 Cunningham & Capone 1990). The research also used data from a single lender. The results of studies differ with SA-Aadu finding variables reflecting the borrower's credit worthiness generally statistically significant, and Cunningham & Capone finding only the net worth of the borrower to be significant. Cunningham & Capone conclude that differences in default rates between FRM and ARM contracts 'result from the contractual provisions of ARMs . . . and not from borrower...

Defining Characteristics

Exhibit 5-2 presents the main characteristics of the nonagency sectors. It covers such loan and borrower characteristics as lien status, loan size, FICO score, LTV ratio, occupancy (investor versus owner), documentation (full versus nonfull), loan purpose (purchase, cash-out refi, or rate refi), and AAA credit support. Note that the exhibit also indicates how the rating agencies have chosen to identify various parts of the nonagency market when they are included in a collateralized debt obligation (CDO). For example, in rating agency CDO terms, both the jumbo and alt-A sectors are part These are the characteristics that define the major sectors of the nonagency market. However, as shown in Exhibit 5-2, there are other ways in which these loans differ from agency collateral. It is important to understand these differences in order to project prepayment speeds and credit performance. Also, with the advent of automated underwriting, the agencies and mortgage originators consider a large...

Efficient Sensitivity Analysis of Mortgage Backed Securities

Options because of lack of complete and unbiased information, e.g., they may not be able to obtain an accurate home price, unless they are selling it. And there are also some other fixed variable costs associated with these options, such as the commission paid to the real estate agent, the cost to initialize another loan, and the negative credit rating impact when the borrower defaults on a mortgage. All these factors contribute to the complexity of MBS cash flows. In practice, the cash flows are generally projected by complicated prepayment models, which are based on statistical estimation on large historical data sets. Because of the complicated behaviors of the MBS cash flow, due to the complex relationships with the underlying interest rate term structures, and path dependencies in prepayment behaviors, Monte Carlo simulation is generally the only applicable method to price MBS.

Defining Nonagency

In this chapter I describe the loan and borrower characteristics that distinguish the different parts of the U.S. nonagency mortgage-backed securities (MBS) market. I believe that this description is an important first step in understanding the non-agency market not only because these characteristics define the different sectors but also because they determine each sector's prepayment and credit performance. While many types of loans are found in the nonagency market, I shall focus mainly on jumbo, alternative-A (alt-A), and subprime home equity loans.

Agency Expansion Into Nonagency Zones

I have shown how the characteristics that issuers use to define their different shelves determine, to a large extent, the prepayment and credit behavior of the various parts of the nonagency market. These definitions have evolved over time and sometimes differ from issuer to issuer. Even with these changes, though, the definitions presented here are still useful. By examining the characteristics of individual deals, investors can make reasonable estimates of the future prepayment and credit performance of the nonagency MBS they purchase.

Loanto Value Ratio and the Mortgage Rate

15Specifically, we use the FICO score, first-lien loan-to-value ratio, second-lien loan-to-value ratio, debt-to-income ratio, a dummy for a missing debt-to-income ratio, a cash-out refinancing dummy, a dummy for owner occupation, documentation dummy, prepayment penalty dummy, margin, origination amount, term of the mortgage, and prepayment term as the right-hand-side variables.

Non Linearity in the Sensitivity of the Mortgage Rate to the LTV

The figure shows the scaled marginal effect of the first-lien loan-to-value (LTV) ratio on the mortgage rate for first-lien fixed-rate and 2 28 hybrid mortgages, evaluated at a first-lien LTV of 80 (left panel) and 90 (right panel). The effect is determined using an OLS regression with the interest rate as dependent variable and the FICO score, first-lien LTV (and the square), second-lien LTV (and the square), debt-to-income ratio, missing debt-to-income ratio dummy, cash-out refinancing dummy, owner-occupation dummy, prepayment penalty dummy, origination amount, term of the mortgage, prepayment term, and margin as independent variables.

Federally Sponsored Mortgage Passthrough Programs

Government loans may be prepaid at any time without penalty to the borrower. However, in contrast to most nongovernment or conventional loans, they generally need not be repaid in full when the house is sold but instead may be assumed by a new buyer. The objective of the eligible federal residential loan programs is to expand housing finance to targeted groups. The Federal Housing Administration (FHA) program is geared to first-time and other buyers with limited resources for the down payment, as well as those with less pristine credit histories than required by prime conventional lenders. Borrowers may finance approximately 97 of the purchase price in return, they pay an upfront insurance premium (it can be included in the loan) as well as an annual fee. Government loans are subject to dollar limits that are reviewed annually. For example, for 2005, FHA loan limits on one-unit single-family houses range from 160,176 to 290,319, depending on location the maximum original loan amount...

Significance Of Code Section 1245

IRS Audit Techniques Guide, 139 maximum tax deferral, 134 methodology, 142-145 preparation for, 139 quantity take-off estimates, 143 tax benefits, 131, 140 tax regulations, 133-134, 135-137 credit report, 186 credit score, 186 mortgage rate as index, 47 FHA mortgage, 188 FICO score, 186, 188 financing, lining up before property,

Subprime Prime Rate Spread

Subprime Prime Spread Bbb Aaa Spread

19The explanatory factors in the regression are the FICO credit score, a dummy variable that equals one if full documentation was provided, a dummy variable that equals one if prepayment penalty is present, origination amount, value of debt-to-income ratio, a dummy variable that equals one if debt-to-income was not provided, a dummy variable that equals one if loan is a refinancing, a dummy variable that equals one if a borrower is an investor, loan-to-value ratio based on a first-lien, and loan-to-value ratios based on a second, third, etc. liens if applicable. The figure shows the prediction error in the subprime-prime rate spread, determined in a regression of the spread on the prime rate and the following loan and borrower characteristics FICO credit score, a dummy variable that equals one if full documentation was provided, a dummy variable that equals one if a prepayment penalty is present, origination amount, value of debt-to-income ratio, a dummy variable that equals one if...

What Is a Subprime Mortgage and Who Is a Subprime Borrower

National Distribution Fico Scores

By providing loans to borrowers who do not meet the credit standards for borrowers in the prime market, subprime lending can and does serve a critical role in the nation's economy. These borrowers may have blemishes in their credit record, insufficient credit history or non-traditional credit sources. Through the subprime market, they can buy a new home, improve their existing home, or refinance their mortgage to increase their cash on hand. Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. The borrowers may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. OCC, FRB, FDIC, and OTS Federal Register July 12, 2002 The term subprime generally refers to borrowers who do not qualify for prime interest rates because they exhibit one or more...

Equilibrium rationing separating equilibrium and liquidity constraints

Mortgage brokers in the UK have also been a source of controversy, with sub-prime lending attracting increased critical attention, but no substantive academic study as yet.9 The question remains as to whether equilibrium mortgage credit rationing is evident in the sub-prime lending market, in the US or the UK Ben-Shahar & Feldman (2003) noted the signalling effects of credit scoring and the possibility that within each credit scoring category there is a menu of mortgage contracts that screen borrowers. Thus asymmetric information and separating equilibrium with credit rationing might still persist, a theoretical issue that invites empirical research.

Default and prepayment behaviour as competing risks

Some research has indicated that it is useful to stratify the sample under study, for example by wealth or income. Deng et al. (1996) found that in terms of their propensity to default low income households were more sensitive to falling equity values, The 'ruthless' default model appeared most applicable to the very wealthiest households. Deng et al. (2000) note two clusters (high risk and low risk) of unobserved heterogeneity. This might represent the division between sophisticated and unsophisticated borrowers, though again the absence of several key variables (e.g. credit history) must leave the interpretation of this finding open to debate. A further interesting basis for segmentation is households who default for a second time. This group have had their mortgages re-instated only to possibly default again. Ambrose & Buttimer (2000) find that the economic factors that predict first defaults do not have the same influence on second defaults, for example interest rates had opposite...

Pledged Retirement Accounts

In other words, Elmer continues, we'll give buyers a no-down-payment, 100 percent loan, if, say, those buyers (or close relatives) move enough of their 401(k) funds to our bank to offset 20 or 30 percent of the property's purchase price. Last week, we closed a loan for a young couple in their thirties who bought a 365,000 duplex. Between them, they had good credit and earned 90,000 a year, but little savings because they're rapidly paying off student loans. We financed their full purchase price without PMI, and the wife's mother deposited 85,000 of her 401(k) monies with us.

Buying Subject to Assuming Without Consent

Typically, under a lender-approved mortgage assumption, the lender qualifies the buyers of the property. When the buyers gain approval, the lender releases the sellers from liability on the mortgage note. Whatever happens to that mortgage in the future does not concern the sellers or their credit record. Not so with subject to transfers. In those cases, the seller's credit and finances remain at risk for as long as the mortgage remains outstanding. If the buyer pays the mortgage late, the lender forwards scurrilous remarks about the seller to the credit bureau. If the property goes into foreclosure, the lender will chase down the seller for any money (deficiency) judgments the court awards it.

Modelling mortgage demand under credit rationing

Study was that some households continued to be rationed post-financial deregulation. This was also the case for the discrete choice modelled by the probit equation. A log likelihood ratio test of the explanatory power of the double hurdle model compared to a Tobit estimated on this data offered a more powerful explanation of variation in mortgage demand. Thus the null hypothesis of perfect credit markets with no rationing was rejected. However, there was some easing of credit rationing post-1980, though the exact form of the rationing in either period was not identified.

Loanto Value LTV Ratio

For many years, LTV ratio was the principal factor used by rating-agency models in determining expected losses. Today, rating-agency models are much more complex, using FICO scores and other variables to forecast credit performance. However, LTV ratio is a primary variable in credit performance and, to a lesser extent, prepayments. A high LTV ratio typically indicates that a buyer is stretching to make monthly mortgage payments. Hence a high LTV ratio often is associated with a high DTI ratio, as well as other weak credit indicators.

Multiple Borrowers Multiple Scores

Even when you and your spouse (co-borrower) show more than adequate income to buy and finance a property, both borrowers often need credit scores or explanations that surpass lender standards. Without meeting this requirement, the lower-score borrower might have to withdraw as a co-borrower. The lender will then limit the loan amount to the qualifying capacity of the higher-score borrower. You can work around this problem. Buy a two- or four-unit property, or a home with an accessory apartment, and use lease income from the rental units to lift the higher-credit scorer's qualifying income. Also, you could bring in another strong credit person (parent, sibling, friend) to serve as cosigner or co-borrower however, the amount and repayment performance for that mortgage will impact that person's future credit record and borrowing power. If you are asked to help someone qualify for a loan, be wary. Likewise, if you ask someone to sign for you, pay the loan diligently. Otherwise, you risk...

Distribution Of Characteristics

In the preceding analysis I discussed how different loan and borrower characteristics defined the nonagency sectors. For the most part, I focused on minimum acceptable levels and sector averages. However, it is actually the distribution of these various factors that is most important. I say this because most of these variables have an impact on credit performance and speed in nonlinear ways. For example, defaults may increase x going from a FICO score of 700 to 650 but increase 3x moving an equal 50 points from 650 to 600. Thus it is the distribution of variables and, in particular, the lower cutoff point that is as important as the overall average.

The USDA offers a prime choice for low to moderateincome homebuyers

I'd like to write to the president about expanding this program, says Tom Dixon of Catawba County, North Carolina. In referring to the United States Department of Agriculture's Rural Development Administration mortgage, Tom enthuses that, It's a great program . . . this loan can get people into their own houses. This loan makes a tremendous difference to their lives. Under this program, anyone who has a steady job and good credit can afford a house. That's the wonderful thing about this loan.

Prepayment specific studies

Bennet et al. (1998, 2001) estimated a proportional hazard model on 12,835 observations, covering the periods 1984-1990 and 1991-1994. Shifts in the survival curves were interpreted as evidence of a positive impact of structural change on refinancing behaviour. The research confirmed the importance of credit ratings and homeowner equity for mortgage prepayment. The importance of liquidity constraints has been indicated by other work. Peristiani et al. (1997) estimated a logit model and found evidence of credit market constraints. The results highlighted the importance of the homeowner's credit history. Changes in the level of home equity and in the lending environment were also significant.13 Refinancing was less responsive to interest rate falls during the 1990s. This phenomenon might be explained by poor credit histories arising from bankruptcies in the late 1980s. Prepayment focused studies have demonstrated the importance of identifying the motives for refinancing. They have also...

Asymmetric information and equilibrium credit market rationing

Posey And Yavas 2001 Equilibria

In the Brueckner model less risky borrowers signal their default risk by selecting smaller balances at low interest rates. They bear the cost of the signalling of high risk borrowers by being credit rationed. Now consider the symmetrical and completely opposite case where low risk borrowers bear the cost of signalling by borrowing more than they would under full information equilibrium. Low risk borrowers now use this additional borrowing to signal their credit worthiness. This is the outcome of a model recently developed by Harrison et al. (2004) which contradicts what has become the conventional wisdom that risky borrowers borrow more. The model emphasises the impact of income variability, that is, it takes an approach to mortgage default based upon affordability. The Brueckner (1994c) model discussed above, and its counterpart in loan balance space (Brueckner 2000) focused upon the stochastic variation in house prices. Using the same modelling framework and allowing income to vary...

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