Rebuilding scores — if you ask

Some credit experts call it the best-kept secret in home-mortgage finance. Others say, so what?

Millions of Americans whose credit scores have declined in recent years because of economic stresses could start rebuilding their scores if their rent, utilities, cellphone, insurance and other monthly accounts were reported to the national credit bureaus.

But typically they are not, and as a consequence fail to show up as positive factors on credit-scoring systems such as FICO or VantageScore. These on-time payments essentially go to waste for consumers, even though monthly rents often can be as large as mortgage bills, and years of utilities and other payments are widely recognized as strong indicators of creditworthiness.

Now for the best-kept secret: Under federal law, these unreported accounts need not go to waste. You as a mortgage applicant are guaranteed the right to bring evidence of your unreported on-time payments to lenders, and they in turn are required to consider those records in making a decision on granting you a home loan — provided you request it. If a loan officer refuses, he or she could be open to legal penalties.

Though federal financial regulators generally acknowledge the right to present supplementary data that consumers enjoy under the Equal Credit Opportunity Act, only one — the National Credit Union Administration — has published guidance informing lenders they are required to comply.

Factoring in so-called nontraditional credit accounts not only could provide important help to buyers and owners with recession-scarred scores but could also aid the estimated 35 million to 54 million consumers who don’t show up — or barely show up — in the files of Equifax, Experian and TransUnion, the three national credit bureaus. Many of these are young people with so-called “thin” files with just a couple of credit accounts, and many are minorities.

So where’s the disconnect here? Why aren’t more consumers documenting their otherwise unreported monthly payments? And why are loan officers likely to stare at account records and say: Are you kidding? We only look at credit files.

The problem is complex. Almost no one in the consumer-finance field has paid much attention to the Federal Reserve’s “Regulation B” that interprets the rules on treatment of alternative credit. Lenders who know about it don’t want the hassles of sorting through “shoe box” records that may or may not be accurate. Major players in the mortgage market such as the Federal Housing Administration, Fannie Mae and Freddie Mac all say they’ll accept alternative credit data but have restrictions on what they will consider. FHA, for example, does not permit applicants with low credit scores to boost them by adding positive, nontraditional data.

The credit industry is eager to incorporate accurate, nontraditional information but is ill-equipped to deal with sources that cannot provide large and regular amounts of verified reports.

“The [national] bureaus know that alternative data is highly predictive,” says Barrett Burns, CEO of VantageScore, a joint venture created by Equifax, Experian and TransUnion. “We think millions of people could benefit” if it were collected and loaded into scoreable files. Experian already collects positive rent-payment data on approximately 8 million units in large apartment complexes and incorporates the information into its scores, he said.

But Burns noted that the industry has had difficulty accessing information on utilities payments in some states, and collection of cellphone-account records has raised privacy issues. Without accurate information being available in large quantities, he said, it is difficult to assist large numbers of consumers.

Nonetheless, efforts are under way to mine unreported credit data — potentially the untapped shale gas of the mortgage market — and transform it into something useful. A private firm, Trycera Credit Services, has announced an agreement with the National Credit Reporting Association — a trade group representing companies that provide the merged credit-bureau reports and scores used by mortgage originators — to independently verify the accuracy of consumer-supplied payment records. Those records can then be provided to lenders as part of the standard credit reporting and scoring information used in mortgage underwriting.

Michael G. Nathans, president of Trycera Credit Services, says the project is just getting off the ground but that preliminary information is available at the company’s website, www.trycera.com. The service will cost $20 to verify rental and mortgage payments, $15 for other verifications. Trycera also offers Visa debit cards that can help consumers document their nontraditional credit payments in a scoreable format.

Of course there are no guarantees that lenders will accept your alternative credit data. But federal law requires them to at least “consider” it — if you ask.

Source: By Kenneth R. Harney, Syndicated Columnist

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Bailing on Mortgage Not a Good Idea

An estimated 11 million home owners owe more on their mortgage than their property is currently worth. That’s made more home owners consider walking away from their mortgage and home ownership, even those who can still comfortably afford to make their payments (known as “strategic default”).

Walking away from a mortgage usually results in either a short sale or foreclosure. So what are the consequences of walking away? There may be far more consequences than what most home owners ever considered.

The consequences include everything from badly affected credit to potential tax consequences and deficiency risks. There are even possible professional implications, Justin McHood with Academy Mortgage in Chandler, Ariz., warns in an article at Zillow.com.

Home owners’ credit scores will be badly hit regardless of whether they attempt a short sale or have their property foreclosed on. (See How Missed Mortgage Payments Hurt Credit Scores)

There also could be the potential for deficiency risks when walking away from a home, which largely varies from state to state. (View anti-deficiency laws by state.) In some states, lenders may sue you for the difference between what you owe and what your short-sale or foreclosure proceeds are, McHood notes.

Home owners considering walking away also should weigh the potential difficulty they may face from moving too. For example, if moving into a rental property, they’ll have to convince a landlord to rent to them after they have the red flag of missed mortgage payments on their credit record. And paying for moving expenses — which many walkaways fail to consider — can quickly add up too.

Plus, home owners may find professional consequences from walking away from a mortgage, as the number of employers eyeing employees’ credit profiles continues to grow.

Source: “The Consequence of Walking Away,”Zillow.com (April 27, 2011)

Banks Rush to Revamp Foreclosure Rules

The rush is on for banks to meet a mid-June deadline in offering up plans on how they plan to meet a set of guidelines by U.S. regulators to clean up their foreclosure procedures. The banks will have another 60 days after that deadline to implement the changes.

As part of the rules set by U.S. regulators, 14 financial institutions will be required to provide a single point of contact to borrowers trying to modify a loan or in the foreclosure process as well as set “appropriate deadlines” for deciding whether borrowers can get a loan workout. Regulators are also requiring banks to ensure their staffing levels are on par to handle the flood of foreclosures and loan modifications.

Several banks have already taken steps to implement the changes.

For example, J.P. Morgan says it’s developing a software program to make it easier for employees and borrowers to track loan modification requests. It also has started providing borrowers with a “relationship manager” to help navigate the loan modification or foreclosure process.

Citigroup, which already provides a single point of contact, says in the next few months it’ll debut a “concierge” system that will provide a small team of employees to guide delinquent borrowers and home owners at risk of default.

Banks are also making efforts to speed up their loan modifications, after customers have complained of long delays from banks in responding to requests. For example, Los Angeles Neighborhood Housing Services says it takes an average of 141 days for its borrowers to get an answer on an initial loan modification request. Wells Fargo was found to have the fastest turnaround: Initial reviews averaged 79 days. But the bank says now 60 percent of its borrowers receive a decision five days after the company receives the request.

Banks are also increasing their staffing. J.P. Morgan has announced it’ll add up to 3,000 new home-lending jobs, and Bank of America plans to hire about 3,000 employees to focus on its troubled mortgages.

New Incentives From Fannie, Freddie

Banks and mortgage servicers also must meet new guidelines from Fannie Mae and Freddie Mac, announced this week, that aim for more loan modifications and prevent foreclosures from taking too long.

Mortgage servicers will be required to approach borrowers earlier, making contact frequently after just one missed payment.

The GSEs are also offering incentives: They’ll pay $1,600 in incentives depending on how quickly servicers complete a loan workout. They also will impose a $500 compensatory fee on servicers who do not complete loan modification applications within six months after the loan goes delinquent. The changes will go into effect in the second quarter.

Source: “Banks Rush to Improve Foreclosure Practices,” The Wall Street Journal (April 29, 2011)

BofA opens office for foreclosure alternatives

Bank of America announced Wednesday it had opened an office in Seattle to allow distressed homeowners whose mortgages it services to meet face to face with specialists and consider alternatives to foreclosure.

Meetings are by appointment only, available from 9 a.m. to 6 p.m. weekdays and 9 a.m. to 1 p.m. on Saturdays. Bank of America customers can call the office at (206) 358-4338 to make an appointment.

The bank is also holding outreach events from 9 a.m. to 6:30 p.m. May 19-21 at the Meydenbauer Convention Center in Bellevue and the Spokane Convention Center. To register, go to www.bankofamerica.com/outreachevent or call toll-free (855) 201-7426.

More Borrowers Have ‘Strategy’ to Defaulting

More borrowers who can afford their mortgage payments are opting to stop making payments and walk away from their homes. But new research sets out to help lenders pinpoint the behavior that makes up these strategic defaulters.

According to research by FICO, these strategic defaulters pay their bills on time, rarely exceed their credit card limits, hardly use retail credit cards, have a reputable credit score, and tend to have a short occupancy in their current home.

“These are savvy people who organize themselves,” says Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.

Since they know their credit scores will be badly hit after they default, they even tend to open up new credit cards in advance to prepare, according to the FICO study.

“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” Jennings says. Most borrowers who strategically default owe much more on their home than it is currently worth.

But “before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them,” Jennings says.

That’s why FICO is releasing a new technology tool that will help lenders predict the probability of strategic default based on a borrower’s credit score.

“Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future,” Jennings says.

How Many Are Out There?

Just how many home owners are “strategically” defaulting on their mortgage is difficult to estimate since “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to researchers from the European University Institute, Northwestern University, and the University of Chicago. Yet, researchers have estimated about 35 percent of the defaults in September may have been strategic, up from 26 percent in March 2009.

As defaulters continue to weigh on the industry, housing experts say the real estate market will take even longer to recover since foreclosures drag home prices down.

Source: “‘Strategic Defaulters’ Pay Bills on Time and Plan Ahead, Study Finds,” The Washington Post (April 22, 2011) and “New FICO Technology Predicts Strategic Default,” HousingWire (April 20, 2011)

Lawsuit reveals how a middleman is blocking mortgage modifications for homeowners

Pamela Jeter, of Atlanta, Ga., has been trying to get a mortgage modification for more than two years. She seems like an ideal candidate. She has shown she can stay current with a reduction in her monthly mortgage payments. Everybody would seem to win. Even the investors who ultimately own her loan think she should be able to get one. So, why is Jeter facing foreclosure?

A bank that she didn’t even know is involved with her loan has thrown up a roadblock to modifications. At least tens of thousands of other homeowners have shared a similar plight. Jeter’s case is a window into a broken system where even though the actual investors, when asked, say they want to allow modifications, the bank that acts as their representative has refused to allow them.

Two big banks act as middlemen between the homeowners like Jeter who make payments and the mortgage-backed securities investors who ultimately receive them. The banks’ jobs were supposed to be relatively hands-off, devoted more than anything to processing homeowner payments. When the housing bubble burst, they faced new demands.

One of those middleman roles is well-known to homeowners: the mortgage servicer, responsible for collecting homeowner payments and evaluating requests for a modification.

But it’s another middleman that’s proved the real barrier for Jeter: the trustee, who is supposed to be the investors’ representative, making sure the servicer is maximizing investors’ returns and distributing checks to them. HSBC is the trustee for the pool of loans of which Jeter’s is a part — and it’s refused to approve any modifications for loans like hers, saying the contracts around the mortgages simply don’t allow it.

The good news for Jeter is that, in what seems an unprecedented step, her servicer OneWest has taken HSBC to court to allow modifications. It filed suit in June of last year.

But in a sign of just how convoluted the mortgage world has become, OneWest is also pushing to foreclose on her. A recent sale date was avoided only after her lawyer threatened to sue. (One day after ProPublica published this story in March, OneWest postponed foreclosure, saying that it wouldn’t attempt to seize Jeter’s home again for at least two months.)

Bundled loan syndrome

Jeter’s loan was typical of the boom years. To help pay for improvements on her home in 2007, she’d refinanced into an interest-only adjustable-rate loan. That loan was bundled with thousands of others by a Wall Street bank and sold off to investors, such as pension funds, hedge funds and banks.

That’s where the trouble started. In Jeter’s loan pool and nine others, the contracts laying out the servicers’ responsibilities and powers contradict each other. OneWest’s lawsuit seeks to sort out that contradiction.

One document, a private contract between the servicer and the Wall Street bank that bundled the loans, explicitly forbids servicers from modifying loans in the pools in a way that would reduce homeowner payments. But other contracts — that investors could see — explicitly allow such modifications.

It’s become a familiar problem during the foreclosure crisis, dealing with the aftermath of the banks’ corner-cutting and sloppy paperwork of the housing boom.

No one appears to have tried to sort out this mess until 2009, when OneWest requested that HSBC, the trustee, allow modifications. The administration had just launched the Home Affordable Modification Program (HAMP), which pays servicers and investors subsidies to encourage affordable modifications. Under the program, modifications occur only when they will likely bring a better return to investors than foreclosure.

But HSBC refused to authorize any modifications, saying the contracts prohibit them. It’s obligated to act in investors’ interest, and it feared getting sued by those who didn’t want to cut homeowners’ payments. The dispute dragged on for months. Ultimately, HSBC offered to allow modifications only if OneWest accepted the risk of getting sued by investors, but OneWest wouldn’t.

OneWest was in an increasingly difficult situation, it says in its suit. It faced potential suits from investors if it modified loans, and if it didn’t, homeowners in the pool might sue.

In late June 2010, with HSBC still not budging, OneWest filed suit, asking a federal judge to decide whether modifications should or should not be allowed.

Eligible but not allowed

The case suggests that when investors themselves are asked, they will approve modifications. HSBC polled the investors in the 10 pools after the suit was filed. A large majority favored allowing modifications. Based on those results, HSBC said in a court filing in January that it did not oppose OneWest’s request for a judge to intervene and that if the judge declared modifications were allowed, that would be fine with them.

In the meantime, 3,000 homeowners like Jeter whose mortgages are caught up in the dispute have been unable to get any reduction in payments. When OneWest filed its suit, it said at least 800 of the loans seemed eligible for an affordable government-sponsored modification but couldn’t actually be modified because of HSBC’s stance. Those homeowners “are facing the possibility of losing their homes through potentially avoidable foreclosures every day,” it said.

It’s not clear how many of those homeowners have since been foreclosed on. OneWest said in a statement that it had no choice in pursuing foreclosure: It’s “contractually obligated to continue servicing loans in accordance with the terms of the underlying securitization documents.”

Foreclosure crisis

The suit is remarkable not only because it seems unique — close observers said they hadn’t seen another example of a servicer going to court against a trustee — but also because it lays bare a relationship that is usually a mystery to homeowners and investors in securitized mortgages.

It’s often hard for homeowners to tell if a servicer is correctly citing an investor restriction when denying a modification. Servicers have cited investor restrictions when denying modifications for at least 30,000 homeowners, about 2 percent of the 1.9 million total homeowners who’ve been denied, according to a ProPublica analysis of Treasury Department data. A Treasury spokeswoman said auditors examining such denials had found they were almost always legitimate. That’s not an experience shared by homeowner advocates.

In a number of cases, said Jeff Gentes, an attorney at the Connecticut Fair Housing Center, servicer employees have told his clients that there was an investor restriction, when a little bit of digging showed that’s not true. We reported on this problem last year.

Changes not pursued

In the cases when there actually is a restriction in the documents, the servicer is supposed to at least try to get permission. The HAMP rules require the servicer to send a letter to the trustee requesting that modifications be allowed.

In cases where there’s a clear contractual bar to modifications, the servicer and trustee could take the initiative to change the contracts by having the investors vote on it or, if voting isn’t required, amend the contract themselves.

But in general, said Gentes, the housing attorney, servicers are slow to investigate and eliminate bars to modification. Servicers are paid a low, flat rate per loan and are motivated to keep costs down. “The costs of removing an investor restriction are often borne by the servicers, and so extensive amendment rules often mean that servicers won’t pursue it.”

Trustees, who get paid even lower fees, are no different, said Bill Frey of Greenwich Financial Services, which specializes in mortgage-backed securities. “They’re very, very prone to inaction.”

Both, as middlemen, don’t bear the loss when a home is foreclosed on.

Source: By Paul Kiel, ProPublica.com (April 17, 2011)

Fannie Offers Closing Cost Help for REOs

Fannie Mae is trying to lure more buyers to its foreclosure properties by offering to cover 3.5 percent in closing costs for home owners who close by June 30 on its HomePath properties.

Fannie’s HomePath program provides low down payment financing on REO property sales and has no requirements for mortgage insurance or appraisals.

During the fourth quarter of last year, Fannie offered closing cost assistance and was able to recoup 55 percent of unpaid principal balance on defaulted mortgages through the sales.

Source: “To Move REO, Fannie Offers Deals to Consumers,” National Mortgage News (April 12, 2011)