The biggest changes discourage piggybacking and penalizing infrequent delinquencies.

By Renuka Rayasam, Associate Editor, The Kiplinger Letter

December 12, 2008

By next spring, two of three credit reporting bureaus will use a new model. Fair Isaac, the developer of FICO scores, has made the biggest change to its mathematical credit score model since it was introduced in 1989. Scores will still be on a 350- to 800-point scale. But the company estimates that 40% to 50% of borrowers' scores could go up or down by more than 20 points because of how the new model fine-tunes the variables it uses to evaluate consumers' credit use behavior.

For creditors, the new FICO score promises to reduce the risk of defaults, improving the predictability of defaults by 5% to 15%. Delinquencies are at their highest rate since 1992, when the economy was also in a recession. The revised scoring method "has a few more gray areas fleshed out so it gives us confidence in credit scoring models," says Ginny Ferguson, a member of the board of the National Association of Mortgage Brokers.

Equifax and TransUnion will be the first credit reporting bureaus to roll out the changes over the next year. As credit tightens because of the financial crisis, FICO scores are becoming increasingly important for borrowers looking to qualify for favorable terms. That puts high scorers in "even a better position for pricing on loans" as the economy recovers, says Ferguson.

The timing of the new scores reflects more changes in the marketplace, says Careen Foster, senior product manager at Fair Isaac. "Lenders said they wanted a stronger predictive model, but didn't want to change how it is used," she adds.

Fair Isaac has increased the number of groups that customers fall into from 10 to 12, taking into more account the number and magnitude of credit problems. Infrequent problem borrowers will no longer be lumped in with habitual delinquents. With the new model, "there is more forgiveness around people in the middle," says Foster. "If you have one isolated missed payment you won't score as low as before." The new FICO model also focuses less on how many accounts a borrower has and more on the amount of balances carried.

Piggybacking -- upping a score on someone else's back -- won't be ruled out in the new FICO score. But it will make using that route to establishing credit harder and lengthier. The authorized user provision allows young adults to create a credit history by using and paying off accounts held by their parents. But it has also been subject to abuse, with high credit scorers selling their names to borrowers looking to improve scores. Fair Isaac estimates that 30% of U.S. credit card holders, or 60-75 million people, are authorized users. Credit.com says that many of those authorized users are women. Many of them rely on their husbands' FICO scores, and it will now take longer for those women to build up their own credit scores.

The election is behind us!  It may not have turned out the way most Oklahoman's voted on the Presidential election, but it is behind us and we have witnessed history being made.

Several of my friends and clients have called or emailed asking what I think this means for our local Real Estate market.  I'm hopeful that we will experience a rise in activity both in showings and contracts written between now and a few days before Christmas. 

Our local market condition can be much improved if our local buyers and sellers will simply realize that our market is simply not as bad as many think it is.  It really boils down to consumer confidence to a large degree.  Yes, there are some folks who find it difficult to get approved for financing, but there are many, I would assume, that can be approved, but don't realize it.

So, let me tell you what I'm doing and what I want you to do. 

I'm making some changes in my marketing to touch more buyers.  First, I'm changing our Feature Sheets from color to black and white.  I'm doing this to free up marketing dollars to spend on another marketing strategy designed to create buyer interest.  The second benefit of moving to black and white is that it will drive more buyers to our website to view color photos, where they will also see additional photos not on the Feature Sheet and the visual tours.

The new marketing strategy involves marketing to buyers a Free Foreclosed Home List.  Foreclosed homes is such a hot topic in the market, we are picking up buyer leads every day from people interested in learning more about foreclosed properties in our area.  Obviously your home is not a foreclosed home, but you'd be surprised how many opportunities I get to show our listings after a buyer has first thought they were interested in looking at foreclosed properties, but then opens their search to all available properties!

What can you do?  Between now and the middle of December I and my team will be holding Open Houses every weekend.  I will be picking the houses to hold open based upon several criteria, location, price, days on market, etc.  Obviously we can only do a finite number of Open Houses, so, if you can, hold open houses.  Between now and Christmas, please make the effort to do Open Houses as many weekends as you can!  If you can't hold Open Houses let me know and I'll do my best to do an Open House at your home.

Don't get discouraged!  It only takes one Buyer to see your home and decide it's the one for them.  Now that the election is over, lets re-set the counter...de-clutter again...clean like crazy...get the leaves out of the yard...and hold as many Open Houses as we can!!

I don't know about you, but I'm ready to vote.  Not so much that I'm excited about the election; no, I'm tired of it all!  If I see one more ad about one more candidate, I'll scream.  Below is an article from the Tulsa World by Associated Press that you might find helpful; I'm following its advice this weekend!

Make no mistake, I know for whom I'm voting and why.  It's just that I want to get past all the uncertainty and get back to normal life, whatever that is. 

I don't know how much impact the election is having on our business, but I suspect quite a lot.  Many of my REALTOR® friends have commented to me that they think people are waiting to see what the election does before they really start getting serious about buying or selling. 

Whether it's intentional or subconscious thinking, the end result is that the election is having some impact on our Real Estate market.  While the financial market condition, consumer confidence and public perception of lending requirements are larger factors in our local slow down, I'm hoping that getting the election behind us will help us turn the corner to a stronger Real Estate market.  Maybe then we'll take a more serious and attentive look at our situation and begin our recovery.

Yes, our showings are really slow right now, but let's get the election behind us next week and work towards getting back to more normal Real Estate conditions.

In the coming weeks I'll tell you about new Marketing Strategies I've rolled out to increase our contact with Buyers and how these strategies are working.  We'll look at what the feds are doing to turn the Real Estate Market around nationally and what impact that will have on us.

In the meantime, don't lose hope!  Don't let the stress get to you...go camping!

Election stress? Forget campaign, go camping

By Associated Press
10/30/2008
Last Modified: 10/30/2008  3:50 AM

Some advice for coping with the final days of the presidential election and life beyond:

Step away from the computer, TV and newspaper, and avoid vicious political arguments, says Gretchen Rubin, New York-based author of the forthcoming "Happiness Project."

Be pro-active instead of powerless by volunteering or otherwise making your voice heard, Rubin says.

Take care of yourself by getting enough sleep, eating right and exercising. You'll feel better while recognizing those things you can control, says Wilmette, Ill.-based psychologist Nancy Molitor.

Realize that no candidate is as good - or as bad - as you might imagine, Molitor says.

When all else fails, change the subject, says Lisa Miller, associate professor of psychology at Columbia University Teachers College in New York. "Turn to those things which are more eternal and more important, such as nature and family," she says. "It's a great time to go into nature. Go camping."

By Associated Press

I've heard from several people a statement that goes something like "I guess if you don't have a credit score in the 800's and 20% down, you're not buying a house".  While Fannie Mae and Freddie Mac have certainly tightened their lending guidelines for a conventional loan, the above statement couldn't be further from the truth!

First, not all mortgages are going through Fannie Mae/Freddie Mac.  In our area, many home purchases below approximately $271,000 are going through the Federal Housing Administration, FHA. For the Tulsa area, $271,000 is the maximum loan amount allowable through FHA.  While credit scores are important, FHA does not put as much emphasis on credit score as do Fannie and Freddie.  Bob Reidenbach, Mortgage Account Executive in Tulsa with MidFirst tells me that with manual underwriting and the right circumstances, FHA may approve loans with borrower credit scores as low as 580. 

As far as down payment is concerned, an FHA insured loan can be had with as little as 3% down.  Now, the 580 borrower should not expect to qualify for the 3% down, but many borrowers can.  Borrowers in the mid-600's and above should be able to qualify for the low 3% down payment.

What about loan amounts over $271,000?  For loan amounts between $271,000 and $417,000 Fannie/Freddie may be the most viable option.  But even going with a conventional Fannie Mae/Freddie Mac loan does not mean that the borrower must have over 800 scores and 20% down.

Fannie and Freddie require a borrower to have a minimum down payment of 5% but do not require the borrower to have a credit score over 800.  Many borrowers with credit scores in the mid-600's and above may qualify for the minimum 5% down payment. 

Reidenbach says that Fannie/Freddie have recently instituted what they call Loan Level Pricing.  Loan Level Pricing grades the borrower's credit score and may require additional closing costs in the form of Origination Fees, typically .5% to 1.5% of the loan amount.  This fee is collected at closing and sent to Fannie/Freddie.  So, while a borrower with less than best credit scores may have additional closing costs to pay to Fannie/Freddie, the borrow may still qualify and not be required to have a sizable down payment.

What does this all mean?  Put this in the category of perception becomes reality.  While mortgage guidelines are tighter than they were just a few months ago, many people can still qualify for home loans.  My fear is that many potential buyers are staying out of the market now, not because the guidelines are too restrictive, but because they perceive the mortgage guidelines are too restrictive, excluding them from the home buying process.  For many, many buyers this is simply not the case.

So, do what I'm doing.  Spread the word!  Tell everyone you know that before they make assumptions about their ability to purchase a home in today's market, talk to a qualified, reputable mortgage loan officer.  They may find out that they in fact can qualify!

Mortgage rates see record jump

As people wait for the federal government's various bailouts and rescues to trickle down and stabilize the economy, they got more bad news: The cost of financing or refinancing a home purchase has gotten more expensive.

The average interest rate on a 30-year fixed-rate mortgage jumped to 6.74% (6.4% for a 15-year), the biggest weekly increase in 21 years, according to Bankrate.com's survey of lenders. Last week's Bankrate benchmark was 6.2%.

According to Bankrate, the new rate means the monthly payment on a $200,000 mortgage would be $1,295.87, about $70 more than it would be for a buyer who locked in a rate last week. 

So we're right where we were eight weeks ago. Why is this happening? Weren't we  supposed to see help for the housing market?

Part of the reason is that the price of Treasury bonds is falling, which drives interest rates up. Investors are no longer flocking to uber-safe Treasury notes as other opportunities open up. Mike Larson of Interest Rate Roundup also says that investors are dumping Treasury bonds now because the government is going to have to borrow billions of dollars to pay for its bailout commitments. Larson explains:

That means a mammoth flood of Treasury debt is going to wash over the market in the coming year or two. Bond traders know that all of that bond supply will overwhelm bond demand. So they're not sticking around. They're selling bonds NOW, driving prices down and rates up.

Time adds that Uncle Sam's decision to semi-nationalize banks has made bank debt seem even safer than the super-safe bonds of Fannie Mae and Freddie Mac, so people are selling those too.

Lower prices (and thus higher interest rates) for Fannie and Freddie bonds make it more expensive for the government mortgage guarantors to borrow, and that means that Fannie and Freddie have less money to purchase home loans. Which means a lower supply of capital available for mortgage issuers. The result is higher mortgage rates for the average American.

Of course, higher interest rates mean that fewer people can afford to buy a house or refinance a mortgage. That, in turn, hurts a housing market in need of life support. Add to that job losses and the other ills that accompany a recession, and housing values will likely continue to fall.

How high will interest rates go? Nobody really knows, although the figure most often tossed around is 7%. Some good news is that just over half of the experts on a Bankrate panel expect mortgage rates to drop down again within weeks.