Rescoring Credit Reports, What You Need to Know

Posted by JohnUlzheimer | Credit Card Blog | Tuesday 3 August 2010 9:00 am

John Ulzheimer talks about rapid rescoring on the Willis Report on Fox Business:

For those of you who don’t fully understand the mortgage underwriting process, welcome to the club. It’s confusing, cumbersome and produces an enormous amount of paperwork. One thing we do know for certain is the importance of your credit scores in the process.

There was a time when almost anyone with a pulse could qualify for a mortgage. You could lie on your application and claim to make much more than you actually did. No wonder the environment was ripe for abuse. Thankfully, there are now laws on the books that prevent much of the shady dealing.

However, a part of the process that was not addressed by the CARD Act or the FinReg overhaul was the process called restoring. This process, also referred to as rapid update and rapid rescoring, is the act of having changes made to your credit reports in a very short amount of time, normally 48-72 hours, that would result in a higher credit score. The mortgage lender, using some sort of score optimization software, would suggest that you make certain changes to your credit reports, normally a payment on a credit card, and then have the credit report updated quickly to reflect the new balance. At this point a new score would be calculated, resulting in perhaps an approval or better interest rate.

This is deceptive to lenders because it creates a short term illusion that you’re a better credit risk. The changes to your credit report data were not made through your normal credit management practices. They were made for the sole intent on increasing your credit score so that you could get approved for a loan, and the mortgage lender could get their commission. What’s the difference between two consumers both scoring 700? Well, one might have earned it the old fashioned way, by being a pretty good credit manager. And the other could have paid off a few credit cards and increased their 615 from only a few days prior.

The question is how are those two consumers going to perform going forward? The 615 will likely return to his credit usage ways and see his score quickly snap back to the low 600s. And the 700 will likely maintain his or her credit management practices and stay around the 700 mark. The bottom line is that the lender was duped and priced out both loans as if they were equally risky, while anyone who is intellectually honest would have to acknowledge that they certainly are not. But who cares? It’s not my money, right?


John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Don’t Furnish That House Just Before Closing

Posted by credit.com | Credit Card Blog | Monday 7 June 2010 12:47 pm

IStock_000003866174XSmall As part of Fannie Mae's loan quality initiatives, consumers could see their credit reports pulled and scores recalculated a second time just before closing. The idea is to close the credit reporting gap between the date the initial credit reports were pulled and the date of the actual closing, which could be well over a month. Fannie wants to know if you've taken on any new debt, which wasn't disclosed on the first set of credit reports. New debt can change your debt to income ratio so that it becomes unacceptable.

Fannie Mae would also likely take into account any adverse changes to the credit reports and FICO scores caused by new inquiries, new accounts or new debt. And, don’t think it’s just new accounts they’re looking for. If you’ve charged a large purchase on your existing credit card, that’s also going to cause alarms to go off.

The good news is that any credit card debt that has been paid off within the past month would likely be reflected on your credit reports and taken into account in your scores, which could actually lead to higher scores the second time around. Now, whether or not your loan terms would be improved thanks to the second set of data is yet to be determined. It’s certainly much easier to just kill a deal because of degradation in your credit than it is to sweeten the deal because of an improvement.

One thing is for certain, the credit bureaus and FICO should be very pleased with this initiative. This likely means more credit reports and scores would be purchased, twice as many as in the past. And FICO and credit bureau revenue is largely a “units x price = revenue” model. This will certainly increase the units variable.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

What Not To Do When In Escrow

Posted by randy37 | Credit Card Blog | Tuesday 1 June 2010 10:55 am

One of the old home-buying bugaboos from years gone by has reasserted itself.  In the normal course of events, people buy a home and 30 or 45 days later their loan funds and they move in. What happens occasionally is that people will incur additional debts, and the additional payment on those new debts affects their qualifying. 

I can remember one instance where a guy who was marginally qualified went out and leased a new Mercedes Benz with an $800 per month payment. That additional payment almost sank him until we got a letter from his employer stating that it was their intention to reimburse him 100 percent for this expense. One other time, an about-to-be housewife thought of all the furniture she wanted and instead of waiting until escrow closed, went and bought it all.

Most of the time, even if people did this, it wouldn't matter because we had the credit report from before and, frankly, no one knew about it. But cases in which there was a long period between pre-approval and when escrow was ready to close, the credit report would "expire" after 90 days and we'd have to get a new one. The new debts would show up on the new report and we'd have to re-underwrite the file.  Most of the time it didn't matter, but it could.

Fannie Mae has indicated that they will begin requiring lenders to update the credit information right before loan funding. It applies to all laons and I simply cannot imagine that this is a BIG problem. But some bean counter back at Fannie Mae sees that it happens once in a while and all of a sudden they have an opportunity do make a new rule.

It's also not clear who will pay for it because by this time, all the documents have been drawn and the numbers can't change. But the cost is likely to be huge. Even if it's a cheap $10 report, were talking 10 times 10,000,000 loans every year. That's one hundred million dollars and you can bet neither Fannie Mae nor lenders will be eager to eat that! They will pass it on to you.

This also means that some people are going to get caught in a situation where their new debt means they no longer qualify for their mortgage and the deal will blow up. That's a whammy!  In all likelihood, they will also forfeit their earnest money, which will be retained by the seller. That's a double-whammy.

Most people aren't on the edge, but even well-qualified borrowers who incur new debt might find their loan closing delayed as their lender re-underwrites the file. Even this is hard to explain to an anxious seller.

So if you are buying a home, resist all temptations to go open a new account or buy something.  No new cards, no new things, no new debts, no new credit inquiries. Nothing! Zip! Nada! Zilch!


Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

60 Minutes: Strategic Defaults Becoming “Viral”?

Posted by credit.com | Credit Card Blog | Thursday 13 May 2010 4:50 pm

Just three years ago, Chris Deaner paid $262,500 for his Sun City, Ariz., house. Today, it’s worth about $140,000. In a 60 Minutes segment on strategic defaults (which is the term for walking away from a mortgage because your home has greatly depreciated in value, even though you can afford the payments), Deaner says that of the 44 houses on his street, 16 houses went into foreclosure in the past year. He says his house will be number 17. 

He can afford his payments, but has decided to walk away from his "underwater" mortgage, a decision that makes him part of a growing trend: 60 Minutes reports that in the past year at least one million Americans walked away from mortgages they could afford.

He'll take a severe hit on his credit, but he’s decided that’s the lesser of two evils.

“Just the negative equity with it, the $102,000 that I’m underwater right now, it would take about 17 years for me to dig out of that equity, just on the appreciation alone,” Deaner says. “I decided it was in my best interest and my family’s best interest for me to walk from it.”

The segment takes a look at how the strategic default, while still considered by many to be a moral decision, is becoming more widely accepted as a simple personal business decision. Yale Economics Prof. Robert Shiller tells 60 Minutes that he expects the practice to become less stigmatized as more homeowners give up on their underwater properties.

Should I Use a Mortgage Broker?

Posted by randy37 | Credit Card Blog | Monday 10 May 2010 4:53 pm
Over the years, there have been so many misconceptions about the merits of mortgage brokers, but it is worth reviewing again, especially as a number of forces are working to eliminate mortgage brokers on two fronts.

The first is a move by Congress to eliminate "non-bank financial institutions." That certainly includes mortgage brokers. The second is that many major lenders have either eliminated or significantly cut back on their wholesale mortgage operations. Lenders representing two-thirds of mortgage originations either don't do business with brokers or do few loans compared with what they did in the past.

Misconception number one: You can save money going directly to the bank. WRONG!  In fact, loan origination costs are higher at the banks than at mortgage brokers. More important, most bank customers will do business with their bank regardless of the rate so there is little incentive for a bank to try to be "really competitive."  

A mortgage broker can shop a client's loan among many lenders, not just for rate but as to whether they will actually do the loan or not.  You might think that criteria are the same everywhere, but it's just not true. Neither are processing time and other important measures of service that affect you.

Second, when you read about banks talking about improved earnings after rounds of cost cutting, how do you think they cut costs? Banks are highly cost conscious and they have dramatically reduced loan origination costs because the people in those jobs today make a lot less money than the ones they replaced. In part this is because borrowers aren't sufficiently educated to be able to tell the difference between a good loan officer and a bad one. Why waste the money?

Finally, the motivation level of the average mortgage broker is significantly higher than that of the typical bank employee. The commission loan officer is more highly motivated to make sure your loan is approved. The bank loan officer likely gets paid the same regardless of whether your loan is approved or not.

Bottom line, a good mortgage broker can be a great asset to you, but you should shop carefully (and don't ask about rates; the broker doesn't set the rates). Instead, check for the quality of service by getting the names of a few of the broker's recent clients and calling and talking with them. No honest broker will refuse you that.



Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

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