Americans’ credit scores hit record high Kenneth R. Harney on Sep 28, 2018 WASHINGTON – 704! That’s the new, record-high average FICO credit score among millions of Americans, and it’s positive news for home buyers, sellers, lenders and the economy overall. What it signifies, according to Ethan Dornhelm, FICO’s vice president of scores and analytics, is that 10 years out from the housing bust and the global financial crisis, Americans are “making more judicious use of credit.” They’re using less than the maximum amount of credit available to them, paying their monthly mortgages on time, and exhibiting fewer glaring negatives in their credit-bureau files. FICO scores predict the probability that a borrower will default on a loan. They run from 300 – indicating that the individual is extremely high risk – to 850, meaning almost no risk of default. A score of 704 is considered good and, along with other favorable factors in your application, will help get you approved for a mortgage – though not necessarily at the lowest interest rate and fees available. A score of 750 will get you primo rates and terms, but a 450 will probably get your application tossed. In the mortgage arena, FICO scores are used by virtually all lenders, and are the only scores that mega-investors Fannie Mae and Freddie Mac accept. They are also used extensively for credit card, auto loan and other loan applications. FICO periodically studies a 10-million-person sample of the 200 million-plus consumers whose credit histories are on file at the three national credit bureaus. In 2009, the average score of consumers nationwide was 686. Since then, average scores have been improving gradually along with the economy, lower unemployment and rising incomes. The 5-point increase from 699 in 2016 to 704 this year is one of the largest two-year improvements on record. A few noteworthy trends jump out of FICO’s latest data on Americans’ scores- – Age matters. Young people 18 to 29 tend to have lower scores than other age groups – they score an average 659. Part of the reason may be that many of them have so-called “thin” files with relatively few credit accounts or transactions in their histories. When they fail to make payments or pay late on a credit card, the event weighs more heavily on their score than it would if they had longer histories with more accounts. The average score for people ages 40 to 49 is 690, and for seniors 60 and older it’s 747. – Fewer people are hobbled with collection accounts. When you don’t pay back what you borrowed, your lender may hire third-party collectors to track you down. That gets reported to the credit bureaus and can depress your FICO score for years. Twenty-eight percent of all Americans had collection accounts on their credit files in 2015; today it’s just 23 percent. – Rock-bottom FICO scores are fewer. In 2009, 7.3 percent of American consumers had terrible scores, ranging between 300 and 499. Now that’s down to 4.2 percent. In 2009, 8.7 percent of consumers scored between 500 and 549; today it’s down to 6.8 percent. Overall, fewer Americans now have FICO scores below 650 than in previous years. In 2009, just under 35 percent of consumers scored 649 or less; today it’s 28.7 percent. – Super scorers are increasing. A record number of Americans – nearly 22 percent, more than one of every five – now have FICO scores of 800 and higher. Forty-two percent score between 750 and 850. – Mortgage borrowers’ scores are dropping. Though FICO scores for most categories of consumers are up, average scores for people taking out home mortgages are sliding in the opposite direction. In 2009 and 2013, borrowers had average scores of 745; now they’re down to around 733. This may seem odd, but FICO says it shows that lenders are relaxing their approval standards slightly to include a broader range of borrowers – people with thin files, dings in their credit histories and higher debt-to-income ratios. Think millennial first-time buyers and people who hit a rough patch during the Great Recession. What to make of the latest FICO numbers? Lessons learned from the housing bust and the recession clearly are having impacts on consumers’ scores and behavior. Dornhelm believes that more Americans have access to – and understand – their credit scores better than in previous years, and they’re avoiding doing things that can depress them, such as maxing out on credit cards. If you’re smart, you’ve been doing the same.

More borrowers faking their incomes, employment to buy homes Kenneth R. Harney on Sep 21, 2018 WASHINGTON — Prices are up, interest rates are rising, and it’s tough for a lot of people to qualify to buy a home. So what do some of them do? A growing number of them fake it. According to mortgage-fraud researchers, income misrepresentations on home-loan applications were up 22.1 percent in the second quarter of this year compared with the same period in 2017. Ominously, most of it is not traceable to criminals trying to bilk lenders out of tens or hundreds of thousands of dollars through traditional loan swindles. Rather it’s increasingly what researchers call “bona fide” borrowers who don’t have the incomes to qualify but are determined to get a home mortgage, even if they have to mislead the lender. How’s this happening? The Internet makes it easy. Researchers say many applicants can now go online and find sites that will help them create customized pay and employment records, sometimes even confirmable by a phone call by the loan officer to an “employer” that doesn’t exist. Or they borrow thousands of dollars for their down payment but swear to the lender that it’s an interest-free present from a cousin or a brother, documented with a genuine-looking gift letter using a form obtainable online. It’s all part of one of the least-reported issues in the real estate market of 2018: Home-purchase mortgage frauds are on the rise and are posing cat-and-mouse challenges to major players, including banks and big investors like Fannie Mae. Here’s a quick overview:

Hope is on the horizon for home buyers in gig economy

Kenneth R. Harney on Sep 7, 2018

WASHINGTON – Here’s some promising news for self-employed entrepreneurs, “gig” economy workers and small business owners- There’s a bipartisan push underway on Capitol Hill to make the home-mortgage process a lot easier for you.

For years, federal lending rules have favored applicants with easily documentable incomes – people who can show underwriters pay stubs, W-2s and two years of steady income plus the likelihood it will continue. The same rules have made it more challenging for people who work for themselves, earn money at multiple jobs or have big seasonal swings in what they earn.

Say you’re a Lyft driver and you run a cash-intensive food truck business on the side. You earn good money and you have decent credit scores and savings, but your income jumps around from month to month depending on sales. You’re likely to have a hard time convincing lenders about your total income – it’s not steady, and at least some of it can be difficult to document. Your loan officer may end up saying- Sorry, I can’t fit your income pattern into the boxes mandated by federal qualified-mortgage (QM) regulations, so I just can’t do your loan.

This may not knock you out of the mortgage market entirely, but it could force you to pay a higher interest rate or make a larger down payment elsewhere from a lender who offers non-qualified mortgages (non-QM) on less favorable terms.

Enter the “Self-Employed Mortgage Access Act,” co-sponsored by Sens Mark R. Warner, D-Va., and Mike Rounds, R-S.D.. It would expand lenders’ permissible sources to verify incomes beyond the relatively narrow range specified in current federal QM regulations. According to Warner, as many as 42 million Americans – roughly 30 percent of the workforce – are self-employed or in the gig economy.

“Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income – pay stubs or W-2s – as someone who works 9 to 5,” said Warner in introducing the bill.

Mortgage lenders say applications from buyers with non-traditional income patterns are a growing issue. “I deal with a lot of people who fall out of the guidelines,” says Don Calcaterra Jr., owner of Local Lending Group in Troy, Michigan. Calcaterra told me about a recent client who moved from being a W-2 employee to independent contractor status. She couldn’t show two years of steady income in her current role, couldn’t wait for two years to qualify to buy the house she needed, and ultimately couldn’t fit into current federally prescribed income rules.

Calcaterra’s firm does commercial lending as well as home mortgages. He says it’s ironic, but “it’s now easier to do a $5 million commercial loan than it is” to do a small QM mortgage for a person with non-traditional income – even if the home buyer is a good credit risk based on assets and down-payment cash.

Pete Mills, senior vice president for residential policy at the Mortgage Bankers Association, offered an example of how the current “QM” rules are overly prescriptive- An auto-industry worker wanted to buy a home using his full-time employment income and earnings from a small sideline business – a recent partnership he formed with a friend to sell vegetables at a farmer’s market. Because of start-up cost deductions, the partnership claimed a $500 tax loss for its first year on IRS Schedule 1040E. Ultimately, the applicant was forced to only use his regular employment income for the mortgage, because QM-rule paperwork requirements to substantiate the $500 in losses were excessive – two years of federal-tax statements, a year-to-date profit-and-loss statement and a balance sheet for the business.

Mills called the current rules “well-intentioned” but “antiquated.” Prospects for the Warner-Rounds bill? Mills said he expects House sponsors to offer their version of the Senate bill soon. Given the bipartisan nature of the proposal and the breadth of constituents affected, he thinks the legislation has an excellent chance, though probably not until next year’s congressional session.

Meanwhile the two largest sources of mortgage money in the U.S., investors Fannie Mae and Freddie Mac, are actively exploring ways to more fairly underwrite self-employed and gig economy applicants. A Freddie Mac official told me the focus is on automated solutions that would be able to document the incomes typical for self-employed and gig economy workers.

Bottom line- Remedies are in the works – and they could come in the months ahead.