House panel considers ways to boost credit scores, but complications come to light

By Kenneth R. Harney September 19 at 7:45 AM

Do you think you’d have a better chance to qualify for a home mortgage if negative items in your credit files were erased after four years rather than the current seven?

How about if your credit reports included information on your utility bills, rent, cable, mobile phone and other monthly payments? Wouldn’t this give a nice jolt to your credit scores, assuming you’ve paid these bills on time? Shouldn’t this be federal law?

Millions of Americans have stakes in the rules governing credit – especially people who could use a little credit help to qualify for a mortgage.

A hearing before the House Financial Services Committee last week touched on these and other possible legislative fixes to the national credit system. But some of the answers that emerged weren’t as straightforward as you might guess.

Start with removing negatives from credit reports. A new legislative proposal from Rep. Maxine Waters (D-Calif.) would amend the federal Fair Credit Reporting Act to require the national credit bureaus to delete most negative information – delinquencies on credit cards, mortgages, foreclosures and short sales, among others – within four years. Bankruptcies would remain on file for seven years, rather than the current 10.

In effect, this would erase most traces of the credit troubles many consumers encountered during the housing bust and recession. It would also give adrenaline boosts to their credit scores and create opportunities for huge numbers of renters who would like to buy houses but can’t meet today’s high credit score requirements.

Waters, the ranking Democrat on the committee, said adopting a four-year standard would end “the unreasonably long time periods that most adverse information can remain on a credit report.” Since “the predictive value of most negative information contained on a credit report gradually diminishes after two years,” she said, a change would treat borrowers more fairly and better conform to practices in other major economies. In Sweden, she said, the standard retention period is three years, while in Germany it’s four.

Sounds promising, right? Maybe.

But the credit industry says: No way, it’s a terrible idea. The fact that you experienced a serious delinquency or foreclosure is still relevant – and statistically predictive of future delinquencies – for more than four years. Dumping information too early would hamper lenders’ capacity to evaluate the true risks posed by loan applicants. Ultimately it would be harmful to everybody, lenders and borrowers alike.

Stuart K. Pratt, president and chief executive of the Consumer Data Industry Association, testified that although a handful of developed countries have more lenient rules, “82 percent of credit systems” worldwide require credit bureaus to retain negative data for anywhere from four to 10 years.

Following the hearing, Pratt told me that “it doesn’t seem right to us coming out of the great recession that we would erase predictive data” that lenders now use to carefully underwrite applications for mortgages and other credit.

What about including in credit reports rent performance, utilities bills, cable and other services requiring monthly payments and factoring them into scores? As a general rule, few if any of these payments – though they are directly related to consumers’ creditworthiness – are given any weight in your credit scores. Wouldn’t mandatory consideration of them help people who pay their bills on time but don’t have extensive credit files?

Sounds like a no-brainer. But it isn’t. Though the national credit bureaus generally favor supplementing their own information with “alternative” credit data such as rental payment histories, some consumer groups think it’s not a great idea.

At the hearing, Chi Chi Wu, staff attorney for the National Consumer Law Center, said her group opposes inclusion of utilities payments in credit reports because it could actually depress many consumers’ scores, especially those with lower incomes.

Studies have shown, she said, that many consumers prioritize their monthly energy payments, and when money is tight, between 20 percent and 30 percent of them choose to pay utilities late rather than the rent or other bills. They make it up subsequently, but if utilities reported late payments to the credit bureaus, large numbers of consumers could end up with 30-to-90-day delinquencies in their files and see their credit scores plunge.

Bottom line from the hearing: Congress is beginning what could be an important long-term review of credit reporting and scoring-system practices. But figuring out how to treat everybody fairly could be a challenge.

Underwater homeowners hold their breath

Kenneth R. Harney Sep 12, 2014

WASHINGTON – Congress is back from its summer vacation, so the burning financial question on thousands of homeowners’ minds right now is this- Are you guys finally going to help out consumers who are underwater on their mortgages, many of whom face crushing federal tax bills if they accept – or have already accepted – principal reductions by their lenders?

This question is especially sensitive in the wake of the $16.65 billion toxic loans settlement reached last month by Bank of America and the Justice Department. Roughly $7 billion of the deal is earmarked for direct borrower relief, and a large chunk of that is expected to involve principal write-downs for underwater owners. Earlier settlements with JPMorgan Chase and Citigroup also included debt reductions.

But here’s the problem- Under current tax law, when most of these owners accept reductions in what they owe, the amount forgiven by the bank gets reported to the IRS and the owner is hit with taxes as if it were ordinary income. Congress created a temporary exception to this tax code rule solely for distressed homeowners – the Mortgage Forgiveness Debt Relief Act of 2007 – but that law expired last Dec. 31 and has not been renewed for principal reductions during 2014, whether they are obtained through loan modifications by lenders, short sales or foreclosures.

If Congress does not extend the law retroactively, according to Attorney General Eric Holder, “hundreds of thousands” of underwater owners could be hit with tax burdens they may not be able to handle. Equally troubling, the nine-month lapse in the debt relief act already has prompted large numbers of owners to avoid the possibility of a huge tax bill altogether. Deeply in the hole on their mortgage debt, they have opted for bankruptcy rather than trusting Congress to renew the law.

“I’m seeing a lot more bankruptcies because of [the expiration],” says Kevin B. Tolbert, a realty agent with Keller Williams in Port St. Lucie, Fla., who has specialized in helping underwater owners do short sales. Tolbert estimates that he handled more than 300 short sales from 2010 through 2013, but he has avoided them this year. With the potential for heavy tax levies on clients who opt for principal reductions, Tolbert says, until Congress renews the law “I really can’t recommend” that owners take the chance. Nor can he recommend that they declare “insolvency” under the tax code to avoid having to pay money to the IRS.

So back to the main question- What’s happening in Congress on mortgage debt forgiveness? It’s complicated. Before heading out for summer vacation, it appeared that action was imminent in the Senate. The Finance Committee approved a so-called “extenders” bill that would have renewed the debt forgiveness law along with 50-plus other expired tax code programs such as credits for alternative energy and for research and development.

But before a vote was taken by the full Senate, Majority Leader Harry Reid, D-Nev., prohibited consideration of a Republican-backed amendment that would have repealed an excise tax on medical devices that is a source of funding for the Affordable Care Act. That knocked the entire extenders bill off track. Sources on Capitol Hill say Reid now wants a vote on the extenders – and is willing to take up the Obamacare amendment – but plans to delay action until the lame-duck session after the November elections. Since the extenders bill has bipartisan support, it has a good chance of passage then.

On the House side, Ways and Means Committee Chairman Dave Camp, R-Mich., is not likely to schedule a separate vote on mortgage relief, sources say, but he won’t block a short-term extension of the program if the Senate passes the extenders bill in its current form and sends it to the House.

So what’s the outlook for owners scheduled to receive principal debt reductions from banks in the coming months, along with others who have completed short sales or loan modifications this year? Thousands of Bank of America borrowers covered by the August settlement have some little-publicized special protection- The settlement requires the bank to set aside $490 million to help defray portions of customers’ tax bills in the event Congress fails to extend the relief law.

For most other underwater borrowers who plan to receive principal reductions this year or already have, it’s still nail-biting time. But the odds for eventual renewal by Congress – yes, even this Congress – appear to be a little better than even.

A policy switch at FHA

Kenneth R. Harney

Sep 5, 2014

WASHINGTON – Hundreds of thousands of home sellers have had their pockets picked at closings during the last decade – they’ve been charged interest on their mortgages after their principal debts had been fully paid off.

This practice, endorsed by a federal agency, cost consumers staggering amounts, with estimates ranging into the hundreds of millions of dollars a year during periods when mortgage rates were high.

But thanks to a policy switch made final last week, charging extra interest payments on loans insured by the Federal Housing Administration (FHA) will soon be banned. FHA, which traditionally has served as a major source of financing for moderate income first-time buyers, many of them African-American and Latino, for years has allowed lenders to charge borrowers a full month of interest when they sell or refinance a home. This has been the case even when borrowers pay off the mortgage weeks in advance of the end of the month.

Picture this. Say you went to closing on an FHA loan Sept. 3. Under standard industry rules followed by Fannie Mae, Freddie Mac and the Dept. of Veterans Affairs, your interest charges cannot extend beyond that date. But under FHA’s long-standing policy, lenders have been allowed to hit you with interest charges through Sept. 30.

Why? Good question. The Consumer Financial Protection Bureau essentially posed it to FHA last year- Aren’t you allowing lenders to soak hapless consumers with post-payment penalties at closings when they have no alternative but to pay up? And, more to the point, didn’t the Dodd-Frank financial reform legislation of 2010 prohibit penalties of this sort? How is your policy, which sometimes results in unexpected extra charges of hundreds of dollars, legal?

FHA argued that the bond investors who buy packages of insured mortgages expect full-month payments of interest plus principal, and that in any event, FHA lenders charge borrowers slightly below market rates to help compensate for the post-closing payments. But critics said there was no way this alleged bargain favored borrowers, who inevitably paid far more in extended interest than they ever received in hair-splitting “reduced” interest rates.

The National Association of Realtors, which had railed against FHA’s policy for more than a decade, estimated that during 2003 alone, sellers and refinancers were forced to pay nearly $690 million in extra interest charges. Realtors in Maryland even persuaded Sen. Ben Cardin, a Democrat and ally of the Obama administration, to introduce legislation that would have prohibited the extra interest fees. But FHA didn’t like the bill and it died without getting even a hearing in the Senate.

Asked for comment on FHA’s policy change, Realtors association president Steve Brown said he applauded the move, which was “long overdue” and should “result in cost savings for millions of Americans who rely on FHA-insured loans to purchase their homes.”

Here are the details of the policy reform- Starting Jan. 21, new FHA mortgages will require lenders to collect interest only on the balance remaining on the date of closing for a home sale or refinancing. Under the revised policy, if you’re selling your home and you have a $150,000 balance left on your FHA loan, the lender will have to stop charging you interest on the date of the closing, not compute the interest charges that would be due through the end of the month and roll them into your bottom line.

In guidance published in the Federal Register, FHA urged lenders not to find new ways to penalize borrowers. The agency said they should “look elsewhere” to recoup whatever revenues they expect to lose by virtue of the policy change, and continue “to offer [consumers] the same interest rates that they offer now,” rather than finding some way to tack on a premium.

So could these changes make FHA more attractive to borrowers compared with the alternatives? Yes, but there are two caveats- Sellers and refinancers who currently have FHA loans and expect to close before Jan. 21 won’t likely see much benefit. Plus FHA’s other current negatives – super-high mortgage insurance premiums that are non-cancellable for extended periods – won’t be disappearing.

Nonetheless, FHA remains the go-to choice if you have minimal down payment cash (3.5 percent), issues in your credit files and you are not eligible for a VA loan, which is the best deal around with zero down and generous underwriting.

Wake-up call on title insurance?

Kenneth R. Harney

Aug 15, 2014

WASHINGTON – A new federal court suit alleging kickback violations by one of the countrys top-producing real estate sales teams raises an unsettling question for homebuyers- Could your agent or broker be pocketing under the table large chunks of what you pay for title insurance?

Some legal analysts say the litigation should be a wake-up call for realty brokers and their customers nationwide. It focuses fresh attention on the often murky financial relationships that exist between title insurance agencies and realty firms – relationships that have been drawing increasing scrutiny from the federal Consumer Financial Protection Bureau.

The suit, which was filed in U.S. District Court in Baltimore earlier this month, alleges that the Creig Northrop Team P.C. – a real estate group ranked among the highest-grossing nationwide in recent years – received payments totaling $1.3 million between 2001 and 2014 from a title insurance company, which the complaint characterizes as illegal kickbacks that were never disclosed to buyers. The plaintiffs also allege that the defendants used sham employment and marketing agreements to disguise the true nature of the payments.

The Northrop team is affiliated with Long and Foster Real Estate Inc., the largest independent brokerage in the country. Timothy Casey, an attorney representing both the Northrop team and Long and Foster, said he had no comment on the case, pending authorization from his clients to do so. Lakeview Title Insurance Co., which allegedly paid kickbacks in exchange for referrals of business by the Northrop team, did not respond to a request for comment. The defendants answer has not yet been filed.

The filing seeks class action status, $11.2 million in compensatory damages for the plaintiffs, plus potentially millions more in other damages. A related suit sought and was granted class action status by the same federal court earlier this year. In that case, the Northrop team and Long and Foster denied any wrongdoing. The court ultimately dropped Long and Foster from the class action, having found no evidence that Long and Foster had participated in the Northrop teams alleged actions.

The new suit, brought by Nancy Wade and Janice Rulli, who purchased a home in Ellicott City, Md., through the Northrop team, seeks to reinstate Long and Foster as a defendant with new allegations that an employee of the brokerage firm not only was aware of the allegedly illegal payments, but “admonished and disciplined” sales agents when they did not steer business to the title agency.

The complaint alleges that Carla Northrop, vice president of the team, received $775,000 from Lakeview Title over a six-year period under an employment arrangement that required little or no work – she had no office space, no set hours, no cellphone or business cards – yet was compensated with one-half of the title insurance premiums charged to home purchasers who were referred by the Northrop team.

No one can predict how the court system ultimately will rule on the allegations in the Northrop case. But real estate industry experts say it highlights an area of growing sensitivity for brokers and agents- Though federal prohibitions against kickbacks for business referrals have been in place for decades, regulators and consumer attorneys are becoming more aggressive in challenging marketing and employment compensation deals that can add significant amounts to brokers incomes – but discourage their buyers from shopping for lower-cost or better settlement services.

Such arrangements are widespread, says New Orleans attorney Marx Sterbcow, and a lot of them are vulnerable to legal attack. According to Sterbcow, payments for questionable marketing services can range into the hundreds of thousands of dollars a month in the case of large brokers or involve more modest payments to small brokerages or even to individual agents who have negotiated arrangements with title and other vendors.

When there is little or no proportionality in the referral deal – say a broker or agent gets substantial sums of money but provides only vague services beyond the referral of customers – the arrangement is open to challenge, say realty industry legal experts.

The Consumer Financial Protection Bureau has begun stepping up its own investigations and enforcement actions against brokers and title companies – especially on alleged referral-fee arrangements and inadequate disclosures provided to consumers. It recently settled with one large realty broker for $500,000.

Affiliated business arrangements that are disclosed to consumers and follow the regulatory rules are permitted under the law. Though its difficult for most consumers to detect illegal kickback arrangements, its easy to remember this- Under federal law you are free to shop for title and other services. Your realty firm may recommend an affiliated company as the best around, but you are free – and wise – to test that proposition by checking out the competition.

The credit score logjam

Aug 1, 2014 Kenneth R. Harney

WASHINGTON – Are mortgage lenders finally loosening up a little on their credit score requirements – opening the door to larger numbers of home purchasers this summer and fall?

It depends on what type of loan you’re seeking. If it’s a Federal Housing Administration (FHA) insured mortgage, the answer is a resounding yes. The average FICO credit scores for approved applicants for FHA home purchase loans have been dropping steadily this year, according to new data from Ellie Mae, a Pleasanton, Calif.-based company whose mortgage origination software is used by most large lenders.

But if you’re shopping for financing in the much broader conventional market – where most mortgages are purchased or guaranteed by giant investors Fannie Mae and Freddie Mac – scores have not budged for months. They averaged 755 FICO in June, the same as in January, four points below their average for all of 2013. FICO scores run from 300 to 850; higher scores indicate lower risk of default.

Though credit scores represent just one factor that lenders use in determining whether to grant an applicant a mortgage, today’s average scores are far above historical norms and represent a high hurdle for many would-be purchasers – especially first-time, minority and moderate-income buyers.

Phil Bracken, a mortgage industry veteran and founder and chairman of America’s Homeowner Alliance, a nonprofit group that promotes affordable housing, calls current score levels “serious” contributors to a national problem- homeownership is now at 64.8 percent, its lowest level since 1995, in part because so many consumers can’t get past lenders’ severe underwriting tests. The ownership rate for Americans under 35 is 36.2 percent, the lowest on record.

“There are lots of people out there who are creditworthy and should be eligible” to buy a home, Bracken says. Scores are not the only obstacle in their way, but they play a powerful role.

Leaders of both of the country’s major credit score model developers – FICO and VantageScore Solutions, LLC – have confirmed to me that banks could reduce their scoring requirements from today’s highs and not materially increase their risk of delinquencies and defaults. In the process, they would increase the volume of mortgages they make, spur more home sales and stimulate employment.

So what’s holding them back? Interviews with top officials at lending institutions suggest something that may not be widely understood by consumers- Fear and finger-pointing are gumming up the system.

Lenders fear that big investors such as Fannie and Freddie will force them to buy back loans they make that have below-par scores or underwriting. Both companies have required lenders to repurchase billions of dollars worth of defective mortgages. In the process, they’ve made banks and mortgage companies hyper-obsessive about delivering pristine loans, even though that means rejecting borrowers they would have funded in the years before the housing boom and bust.

Anthony Hsieh, founder and CEO of loanDepot, a California-based mortgage company that specializes in conventional loans, says his firm cannot afford the risks of deviating from the Fannie and Freddie guidelines – or even tip-toeing close to the line.

“We have no control over credit scores,” he said in an interview. “Until (Fannie and Freddie) put out a directive telling us to provide credit to more Americans, our hands are tied.”

Spokesmen for Fannie and Freddie say they have tried to ease lenders’ fears about overzealous buyback demands and do not require scores to average 755 or anywhere even close. Both companies do assess higher fees on loans they purchase with credit scores below various thresholds – 740 FICOs and above get the lowest fees – but insist they do not dictate scores. They also point out that many lenders set their own score thresholds higher than Fannie’s or Freddie’s, levying “overlays” that increase costs to consumers.

Despite all this, however, there may be glints of hope on the horizon at Fannie and Freddie on credit scores and other fees. Under its new director, Mel Watt, the Federal Housing Finance Agency, which oversees Fannie and Freddie in conservancy, has reached out to lenders and asked for their advice on where to set some of the fees the two investors charge, including those connected with credit scores. The deadline for lenders to respond is Aug. 4.

Though no one can predict whether this will help curtail the finger-pointing and fears that are keeping scores unnecessarily high, there’s a real possibility. And that could be a big deal for buyers in the months ahead.