CFPB cracks down on ‘credit-repair’ companies

Kenneth R. Harney on Jul 7, 2017

WASHINGTON – You’ve almost certainly seen or heard pitches for “credit repair” services promising to clean up your credit problems, reduce your debt, or even raise your credit scores by 100 points or more.

Come-ons like these can be especially seductive for people seeking to buy a home and apply for a mortgage who have negative items in their credit reports. In order to qualify for a loan, they’re told, they need to make their credit look better – mainly by neutralizing the bad stuff in their files at the national credit bureaus, whether it’s accurate or not. But mortgage and credit industry experts warn that repair services can be far more harmful to home buyers than they suspect – even get them rejected on the spot.

Two new legal settlements from the Consumer Financial Protection Bureau – involving more than $2 million in penalties against credit repair companies – offer mortgage applicants sobering reminders about what to avoid if you feel you need help with your credit.

The CFPB alleged that the companies – Prime Credit LLC, IMC Capital LLC, Commercial Credit Consultants and Park View Law, along with several executives of the firms – charged home mortgage seekers and other clients illegal advance fees, misled customers about what they could actually do for them, and failed to adequately disclose the limits on their advertised “money back guarantees.” The companies “attracted thousands of customers through sales calls and their websites,” the bureau said, “at times targeting consumers who had recently sought to obtain a mortgage loan” or refinancing. The bureau alleged violations of the Consumer Financial Protection Act and the Telemarketing Sales Rule. The defendants neither admitted nor denied the bureau’s allegations but agreed to the settlement.

Under federal law, credit repair companies are prohibited from requesting or requiring payments upfront until they can document that they have achieved actual improvements to a client’s credit report or score. Up until then, consumers shouldn’t have to pay a cent. The companies involved in the new settlements allegedly sought to evade this requirement by requiring payment of a sliding series of fees – an initial “consultation” charge typically costing $59.95, hundreds of dollars for a “set-up fee” and monthly fees of $89.99.

For typical clients, according to the CFPB, the companies sent “dispute letters” to the national credit bureaus challenging “much of the negative information” in clients’ credit reports, “even if that information was accurate and not obsolete.” The companies then allegedly failed to follow up to see whether the credit bureaus identified the challenged items as being in dispute by the consumer, and never determined whether they had raised clients’ credit scores.

Among other alleged violations of federal law, according to the government, the credit repair companies’ “money back guarantees” were misleading- They were worthless until clients had paid for at least six months’ worth of services.

The repair companies’ targeting of home loan applicants and refinancers came as no surprise to mortgage lenders like Joe Petrowsky, president of Right Trac Financial Group Inc. in Manchester, Connecticut. “People see those cockamamie advertisements” saying they can wipe their credit problems away “and they get hooked,” he told me. “We run into the damage they do every week.” Would-be home buyers pay hundreds of dollars to credit repair companies to dispute debts in their credit reports only to discover that not only have their credit scores not increased but they can’t qualify for a mortgage at all.

“You can’t get a mortgage with outstanding disputes” on your credit files, said Petrowsky. “Not one. It’s got to be zero.” Yet flooding the credit bureaus with dispute letters is a standard technique of credit repair companies.

Thomas Conwell III, president and CEO of Michigan-based Credit Technologies Inc., a company that provides mortgage credit reports and scores for lenders nationwide, says consumers need to know that “there is nothing any credit repair company can do that consumers can’t do for themselves faster and at no cost.” They can order free copies of their credit reports online at www.annualcreditreport.com, contact the credit bureaus if they spot erroneous information, get them corrected by creditors, and work with loan officers on ways to improve their credit before applying for a mortgage.

The takeaway here for mortgage seekers- Be aware of the potential downsides of dealing with “we can fix your credit” outfits. And never pay any credit repair fees up front. That’s the first sign that you’re probably dealing with scammers.

Are home appraisals always necessary?

Kenneth R. Harney on Jun 23, 2017

WASHINGTON – Do we always need an appraiser to tell us what a house is worth? The two biggest sources of mortgage financing in the country – Freddie Mac and Fannie Mae – think not.

With no formal public announcement, on June 19 Freddie Mac began phasing in its plan to transition to appraisal-free mortgage for certain loan applications. Though limited initially to some refinancings, Freddie expects to expand the concept to home purchases in the coming months. Under the program, borrowers no longer will have to pay hundreds of dollars for a professional appraisal – a reversal of long-standing mortgage industry practice. There will be no traditional appraisal charges at closing and lenders no longer will be required to assume responsibility for the accuracy of home valuations. The program currently is limited to refi applicants who have at least 20 percent equity in their homes and are not pulling out cash.

Fannie Mae, the other giant, government-supervised financing company, has been quietly offering no-appraisal refinancings for months. Both companies emphasize that they only permit waivers of appraisals when they have substantial data on the property involved and the local real estate market. Fannie says it has a database containing more than 23 million previously completed appraisal reports and uses “proprietary analytics” to come up with value estimates. Unlike Freddie Mac, Fannie Mae has not indicated whether it plans to expand its “property inspection waiver” concept to loans for home purchases, though industry sources say they expect it.

Mortgage lenders generally are enthusiastic about the two companies’ moves. Dave Norris, chief revenue officer of loanDepot, one of the highest volume retail lenders in the country, says “leveraging technology” to arrive at property valuations “gives consumers certainty” about the status of their application upfront, sharply reduces the time needed to get to closing, plus saves money. Roughly 12 percent of loanDepot’s refinancings through Fannie Mae already are proceeding appraisal-free, Norris told me.

“Consumers definitely appreciate it,” he added. There’s “more cash in their pockets” and the total experience is better.

Pete Mills, a senior vice president at the Mortgage Bankers Association, also welcomed the appraisal-free concept. “If there is a way to use technology to streamline or automate the process while ensuring the same standards of accuracy are met,” he said, “it would benefit both lenders and consumers and should be pursued.” Nonetheless, loan applicants should retain the right to request a full, walk-through appraisal if they want one, added Mills.

Not surprisingly, appraisers view the whole trend as an impending nightmare – potentially sending them to the fate of buggy whip manufacturers, travel agents and others whose industries have been decimated by new technologies. Unlike buggy whip makers in an age of automobiles, however, appraisers argue that they have a legitimate, continuing role. There is simply no technological substitute for what they bring to the table- Eyes, ears, noses and the ability to independently analyze a home, its interior, the neighborhood environment and market conditions, and arrive at an accurate opinion of its current worth. Computer programs may be jam-packed with data and algorithms but they have no clue about what damage – or improvements – may be present inside a house.ds by

“I’ve walked into five-year-old houses that are in such bad shape that they look like they haven’t been maintained for 25 years,” says Pat Turner, a Richmond, Virginia, appraiser. Eliminating appraisals is a “a throwback” to the disastrous practices of subprime lenders during the housing boom and bust, he said. “This is a return to no doc and low doc on steroids.”

Carl S. Schneider, an appraiser in Tulsa, Oklahoma, says the path Fannie and Freddie are on is “fraught with danger,” not only for banks but for the taxpayers who may have to bail them out. The databases Fannie and Freddie are using may contain voluminous appraisal information previously submitted as part of mortgage files. But that “property data will age and change without being refreshed” if large numbers of new appraisals are not being done, he said. Without new professional appraisals that include updated information on the interior conditions of homes – plus observations on the presence of value-depressing environmental features in the area that aren’t likely to be picked up by computers – “where will it all lead?” asks Schneider.

Where indeed? Fannie and Freddie are confident that they are introducing appraisal-free mortgages carefully and responsibly. Appraisers have serious doubts. The jury is out.

Zero-down payment mortgages are back

Kenneth R. Harney on Jun 16, 2017

WASHINGTON They were all the rage then the scourge of the housing boom and bust. Now they’re back, big time Home mortgages that require tiny or zero-down payments from buyers.

Several major lenders are offering 1 percent down payment loans, and now a large national mortgage company has gone all the way, requiring absolutely nothing down. Movement Mortgage, a top 10 retail home lender, has just introduced a financing option that provides eligible first-time buyers with a non-repayable grant of up to 3 percent. This allows applicants to qualify for a 97 percent loan-to-value ratio conventional mortgage essentially zero from the buyers, 3 percent from Movement.

To illustrate On a $300,000 home purchase, a borrower could invest nothing from her or his personal funds, while Movement contributes $9,000 from its resources. The loan terms also permit seller contributions toward the buyers’ closing costs to help swing the deal. Duke Walker, branch manager for Movement for the Washington D.C. area, told me that although the program is brand new, it’s already “going great guns.”

Movement is hardly the only player in this arena. Navy Federal, the country’s biggest credit union, has offered members zero-down mortgages for years in amounts up to $1 million. NASA Federal Credit Union also markets nothing-down mortgages. Quicken Loans, the third highest volume lender according to Mortgage Daily, a trade publication, offers a 1 percent down option, as does United Wholesale Mortgage, another large national lender. The U.S. Department of Veterans Affairs also has been doing federally guaranteed zero-down loans for years.

In the case of Movement’s new plan, the mortgages are being originated for sale to giant investor Fannie Mae, which operates under federal conservatorship. Sensitive to the possibility that critics might perceive it as providing support and ultimately a federal guarantee on seemingly high-risk loans, Fannie provided me with this statement The company “is committed to working with our customers to increase affordable, sustainable lending to creditworthy borrowers,” Fannie said. … “We continue to work with a number of lenders to launch test-and-learn pilots [pilot programs] that require a 97 percent loan-to-value ratio for all loans we acquire.” There “is no commitment beyond the pilots,” the statement went on, and all of them are “focused on reaching more low-to-moderate income borrowers through responsible yet creative solutions.”

Nothing-down loans were among the biggest losers for lenders, investors and borrowers during the disastrous housing bust years, often extended to people whose incomes and debts went undocumented. The latest versions are starkly different. Under federal rules, applicants must demonstrate an ability to repay what’s owed, must have solid if not excellent credit histories and scores, and must document everything.

So how well are these mortgages performing? Quicken says its 1 percent down loans have less than a one-quarter of 1 percent delinquency rate. United Wholesale Mortgage says its version has experienced no delinquencies since its debut last summer. Records like this are possible, the lenders involved say, because 1 percent and zero-down offerings are conservatively underwritten. United’s minimum FICO credit score is 720. Quicken’s posted minimum is a 680 FICO, but the young, mainly first-time buyers who use the program have an average score around 750. Movement’s zero-down loan is an exception Minimum FICO is just 640 in most parts of the country. (FICO scores run from 300 to 850, with higher scores denoting higher creditworthiness.) Maximum debt-to-income ratio for the Quicken program is just 37 percent, well below the 45 percent ceiling for most conventional loans that carry much larger down payments.

Most of the programs also charge higher interest rates. Movement’s rate for the zero-down option in mid-June was 4.5 percent to 4.625 percent, compared with 4 percent for its regular fixed rate mortgages. Navy Federal charges 4.625 percent for its 30-year zero downs.

In fact, the credit standards and higher rates on these loans are attracting some criticism from within the mortgage industry. Paul Skeens, president of Colonial Mortgage Corp. in Waldorf, Maryland, says many of the cash-strapped, moderate-income first-time buyers who really need these programs can’t meet the required standards. “It seems like people without excellent credit scores and three months of [bank] reserves don’t qualify,” he told me.

The takeaway here If you’re interested in pursuing one of these new low or zero-down payment plans, be aware that unlike the bad old days, these come with real qualification requirements and costs expressly designed to minimize defaults and foreclosures.

Condo financing program could be making a comeback

Kenneth R. Harney on May 26, 2017

WASHINGTON – Could condos financed with low down payment government-backed mortgages stage a surprise comeback under the Trump administration, which generally seeks to reduce federal involvement in housing? Would this be promising news for millennials and buyers with moderate incomes looking to purchase their first homes?

You bet – provided you take Housing and Urban Development secretary Ben Carson at his word. Speaking to a Realtor convention last week, Carson said he is “in lockstep” with proposals to revive the Federal Housing Administration’s condo financing program, which has been bogged down with controversial regulations and low volumes in recent years.

Though Carson did not offer specifics, he appeared to endorse some version of proposals made during the closing months of the Obama administration aimed at enabling greater numbers of buyers and condominium associations to participate in FHA’s condo program. One of the changes would give a green light to financings of individual units in condo buildings lacking FHA “certifications.”

Allowing single units to be financed – a return to what once was known as “spot” loans – would have potentially far-reaching impacts across the country since fewer than 7 percent of condo projects or buildings currently have FHA certification, according to estimates by the Community Associations Institute, a trade group. Under current rules, units in non-certified buildings are ineligible for FHA mortgages.

To become certified, condo association boards of directors must submit detailed information regarding financial reserves, insurance, budgets, numbers of renters, and a long list of other requirements. Thousands of condo associations dropped out of the FHA certification process after the Obama administration imposed regulations that were considered overly strict. Though leaders at FHA repeatedly said they recognized the importance of condos as affordable housing options, especially for first time buyers, the agency only began loosening its red tape and regulations last year.

Dawn Bauman, senior vice president of government affairs for the Community Associations Institute, said the return to individual unit financings “will be very helpful” for unit owners, buyers and condo associations themselves. Norva Madden, an agent with Long & Foster Real Estate in Maryland, said low down payment FHA financing on individual units “could work for sellers as well as buyers” and bring more affordable units into the market for sale.

Madden recounted an experience she had last year. An elderly woman listed a condo unit with her that was located in a building that lacked FHA certification. “The listing price was fair market” and affordable, said Madden in an interview, but the fact that the unit was ineligible for buyers using FHA loans was “a serious problem,” since most shoppers wanted to make use of FHA’s low down payment requirement (3.5 percent minimum) and generous approach to credit issues. Ultimately the seller moved out and reluctantly agreed to a lowball price thousands of dollars under list. “Those buyers got a real bargain,” Madden said, but her seller, “who really needed the money,” didn’t do so well – all because FHA’s onerous regulations had discouraged the condo board in the building from seeking certification.

John Meussner, a loan officer with Mason-McDuffie Mortgage in Laguna Hills, California, says the forthcoming rule changes should open “the door to a pool of buyers that may not have a large down payment but may otherwise be qualified.” Renters in high-priced markets will be able to “buy homes (since) they’ll” now have an “accessible and affordable product.”

Christopher L. Gardner, managing member of national consulting firm FHAPROS, LLC, cited federal estimates suggesting that 50,000 additional FHA mortgages could be insured under the revived program in the first year alone. And thanks to competitive loan terms, it should pull in buyers who otherwise might have opted for non-government, conventional financing.

But not everybody is convinced that resumption of spot loans automatically will solve FHA’s – or consumers’ – condo problems. Paul Skeens, president of Colonial Mortgage in Waldorf, Maryland, says the change will only be effective if FHA makes it “very, very simple” for lenders. Under the program, lenders still will need to investigate the financial stability of the underlying condo association and property. If that requires too much time and red tape, it won’t work.

The takeaway- If you’re potentially interested in buying an affordable condo unit with a low cash down, keep an eye on this space. FHA should announce its plans in the coming months, so start scoping out condos in your area – whether they’re FHA certified or not.

Zillow under fire for ‘Zestimate’ system

Kenneth R. Harney May 12, 2017

It was bound to happen: A homeowner has filed suit against online realty giant Zillow, claiming the company’s controversial “Zestimate” tool repeatedly undervalued her home, creating a “tremendous road block” to its sale.

The suit, which may be the first of its kind, was filed in Cook County Circuit Court by a http://www.chicagotribune.com/topic/chicago-suburbs/glenview-CHIS0025-topic .html> Glenview real estate lawyer, Barbara Andersen. The suit alleges that despite Zillow’s denial that Zestimates constitute “appraisals,” the fact that they offer market value estimates and “are promoted as a tool for potential buyers to use in assessing (the) market value of a given property,” meets the definition of an appraisal under state law. Not only should Zillow be licensed to perform appraisals before offering such estimates, the suit argues, but it should obtain “the consent of the homeowner” before posting them online for everyone to see.

Andersen said she is considering bringing the issue to the Illinois attorney general because it affects all owners in the state. She also has been approached about turning the matter into a class action, which could touch millions of owners across the country.

In the suit, Andersen said that she has been trying to sell her townhouse, which overlooks a golf course and is in a prime location, for $626,000 – roughly what she paid for it in 2009. Homes directly across the street, but with greater square footage, sell for $100,000 more, according to her court filing. But Zillow’s automated valuation system apparently has used sales of newly constructed houses from a different and less costly part of town as comparables in valuing her townhouse, she said. The most recent Zestimate is for $562,000. Andersen is seeking an injunction against Zillow and wants the company to either remove her Zestimate or amend it. For the time being she is not seeking monetary damages, she said.

Emily Heffter, a spokeswoman for Zillow, dismissed Andersen’s litigation as “without merit.” A publicly traded real estate marketing company based in Seattle, Zillow has been offering Zestimates since 2006. Currently it provides them for upward of 110 million houses – whether for sale or not. Type in almost any home’s street address and you’ll likely get a property description and a Zestimate. The value estimates are based on public records and other data using “a proprietary formula,” according to Zillow. A Zestimate “is not an appraisal,” the company says on its website, but instead is “Zillow’s estimated market value” using its proprietary formula.

The Zestimate feature is the cornerstone of Zillow’s business model since it pulls in millions of home shoppers, allowing the company to sell advertising space to realty agents. Zillow makes big money with the help of its Zestimates: In the first quarter of this year, it reported $245.8 million in revenues – a 32 percent jump over the year before – including $175 million in payments from “premier” agents, who pay for advertising.

But there’s a flip side to Zestimates. Homeowners, realty agents and appraisers have been critical for years about the valuation tool, citing estimates that too often are far off the mark – sometimes 20 or 30 percent too low or too high – and misleading to consumers. Zillow itself acknowledges errors. Nationwide, according to Heffter, it has a median error rate of 5 percent. Zestimates are within 5 percent of the sale price 53.9 percent of the time, within 10 percent 75.6 percent of the time and within 20 percent 89.7 percent of the time, Zillow claims.

Another way of looking at the Zestimate error rate: Roughly one-quarter of the time, the value estimate is off by 10 percent or more of the selling price, and wrong by 20 percent or more 10 percent of the time. Though the 5 percent median error rate sounds modest, when computed against median sales prices, the errors can translate into tens of thousands of dollars – hundreds of thousands in high-cost areas. Also, in some counties, error rates zoom beyond the 5 percent median – 33.9 percent, for example, in Ogle County, Ill., and 10 to 20 percent in a handful of counties in Ohio, Maryland, Florida, Oklahoma and Illinois.

Some appraisers are cheering Andersen’s suit and welcomed the idea of state-by-state legal challenges.

“They’ve been playing appraiser without being licensed for years and doing a bad job,” said Pat Turner, a Richmond, Va., appraiser. “It’s about time they got called on it.”