Blown Mortgage

If I could of reached my hand through the phone and strangled the representative from FICO on the other end of the phone, I would of.

Got a client – teacher, divorced, been on the job 30 years, good credit except for some minor dings, SFR, trying to do a cash-out conforming refinance to pay off some of her outstanding credit card debt.

Pretty much done deal (even with the lower appraised value) except her mid-FICO score is 679 and we have price bumps for:

<75-80% LTV cash-out refinance

>680 mid-FICO score

So I tell her we have to raise her FICO mid-score by one single point. We sit down and review her credit report in detail. I hand and email her my credit repositories letter detailing how to legally clear up your credit history with Experian, Equifax and TransUnion complete with the three names, addresses, phone number and websites.

It’s the usual stuff we deal with every day with our clients. “I haven’t used my Sears card in over 6 years and Sears is reporting me 2×30 days late last year?” kind of conversation.

So she hits the phones and calls every single one of her erroneous creditors listed on her credit report.

Most of them will only clear the incorrect items with the three credit repositories, which can take 30-60 days.

We were able to do a conference call with Macys who was showing her 6×30 days late last year. She was never late with Macys. Macys doesn’t know how this got reported, so Macys agrees to fax a letter removing all 30-day lates and showing a zero balance.

Outstanding. I forward this on to the credit bureaus and was told to wait 2-3 days for the FICO correction.

Three days later I get the new credit report and her FICO scores have DROPPED 30-35 points after removing the Macys 6×30 day lates from last year and paying off the balance.

So I call up FICO and ask them WTF?

Now I’m told since the 6×30 day lates were removed, FICO’s algorithm credit matrix will now look more heavily at the outstanding credit card debt to high credit limits.

Let me get this straight…

1. We clean up her credit history by removing an error by a creditor in writing.

2. She pays off numerous small credit cards and pays down some of her larger credit card debt.

3. She gets more 30-day late pays removed (but only through the three credit repositories, not by fax on creditor letterhead with name and phone number).

… and you lower her FICO scores across the board?

I’m trying to remain calm with this FICO customer service rep as he is explaining over and over again about FICO’s algorithm credit matrix. That by removing the recent late pays it hurt the client’s FICO credit score.

So I ask him should she not pay a couple of credit cards and get some 30 day late pays now.

He tells me it might HELP her FICO scores to have recent late pays.

If anyone can make sense of FICO please let me know.

As an FYI… per the Federal Trade Commission (FTC), there is only one source for your clients to get a free credit report from all three credit repositories, “annualcreditreport.com”.

Share This

(sung to John Lennon’s “Imagine”)

Imagine there’s no Countrywide
It’s easy if you try
No subprime loans below us
Above us only fixed rates
Imagine all the former mortgage brokers
Living for the huge rebates

Imagine there’s no wholesale lenders
It isn’t hard to do
Nothing to fund your rebates
And no overages too
Imagine all the mortgage brokers
Paying for their leased Beamer

You may say that I’m a dreamer
But I’m not the only one
I hope someday you’ll join Wall Street
As Countrywide’s stock price falls below one

Imagine no stock sales for Angelo Mozillo
I wonder if you can
No need for greed or pride
After the CFC stocks’ wild ride
Imagine all the borrowers
Making their minimum monthly payments

You may say that I’m a dreamer
But I’m not the only one
I hope someday you’ll join Wall Street
As Countrywide’s stock price falls below one

Okay, on a serious note… I happened to pull up my stock charts to see what Wall Street feels about the mortgage lending/real estate business in 2008. I’m talking about the big publicly traded mortgage lenders, investment banks, mortgage insurance companies, title companies, home builders, etc.

It’s not a pretty sight. Most all the players involved in real estate took a serious hit to their stock prices over the past twelve months.

Let’s start with the GSE’s stock price and the decline from their 52-week high:
Fannie Mae (FNM) $32.71, down 54% from the 52 week high
Freddie Mac (FRE) $27.14, down 60% from the 52 week high

Most of the investment banks took a hit:
Bear Stearns (BSC) $74.82, down 57% from the 52 week high
Goldman Sachs (GS) $191.75, down 24% from the 52 week high
Lehman Brothers (LEH) $54.99, down 36% from the 52 week high
Merrill Lynch (MER) $50.48, down 49% from the 52 week high
Morgan Stanley (MS) $47.73, down 48% from the 52 week high
UBS Paine Webber (UBS) $44.54, down 33% from the 52 week high

Now on to the big money center banks:
Bank of America (BAC) $38.74, down 28% from the 52 week high
Citicorp (C) $27.49, down 51% from the 52 week high
JP Morgan/Chase (JPM) $40.26, down 24% from the 52 week high
Washington Mutual (WM) $12.34, down 73% from the 52 week high
Wells Fargo (WFC) $27.04, down 29% from the 52 week high

The large publicly traded mortgage banks:
American Home Mortgage/ABC (AHM) $0 – already filed bankruptcy
Countrywide Financial (CFC) $5.12, down 89% from the 52 week high
IndyMac Bank (IMB) $4.70, down 89% from the 52 week high
Ocwen Financial(OCN) $4.37, down 74% from the 52 week high
PHH Mortgage (PHH) $16.41, down 48% from the 52 week high

Thornburg Mortgage (TMA) $8.78, down 69% from the 52 week high
The regional banks and mortgage banks:
FirstFed Financial of Santa Monica (FED) $33.80, down 52% from the 52 week high
Flagstar Bancorp (FBC) $5.74, down 62% from the 52 week high
Downey Savings & Loan (DSL) $25.63, down 66% from the 52 week high

How about the mortgage insurance companies?
MGIC Investments (MTG) $15.95, down 77% from the 52 week high
PMI Group (PMI) $8.48, down 62% from the 52 week high

Even the title insurance companies were not immune:
Fidelity National Financial (FNF) $13.08, down 54% from the 52 week high
First American Corp. (FAF) $28.10, down 49% from the 52 week high

And let’s not forget the major home builders:
Beazer Homes (BZH) $4.99, down 89% from the 52 week high
Centex (CTX) $19.23, down 65% from the 52 week high
DR Horton (DHI) $10.53, down 66% from the 52 week high

Hovnanian Enterprises (HOV) $4.80, down 87% from the 52 week high
KB Homes (KBH) $16.97, down 70% from the 52 week high
Lennar Corp. (LEN) $13.86, down 75% from the 52 week high
Pulte Homes (PHM) $8.78, down 75% from the 52 week high
The Ryland Group (RYL) $21.89, down 64% from the 52 week high
Standard Pacific (SPF) $2.63, down 91% from the 52 week high
Toll Brothers (TOL) $16.51, down 54% from the 52 week high

What am I trying to say? Nothing. I’m just reporting the facts. Wall Street does not like a whole lot of anything to do with real estate or real estate finance right now.

In 2008 it’s not gonna be just the mom and pop lenders and Realtors that will be suffering. It’s quite possible that some of the major publicly traded names listed above will not be with us in 2009.

Go back to just 18 months ago. How many of us would have ever thought that Countrywide was teetering on the edge? The way Countrywide Financial is burning through cash, it makes one wonder – what would life be like without Countrywide?

Most mortgage brokers I know live and die by Countrywide. I’d recommend you start thinking about new wholesale sources. If they’re available.

Bank of America has already discontinued wholesale lending.
Rumor is Wells Fargo is not far behind. Where does that put WaMu, Citi and Chase?

The problem is that 1099 mortgage brokers originated loans go bad about 4-6 times more than W-2 retail employee originated loans.

Mortgage brokers have no “skin in the game”. It’s all about the origination commissions. What happens after the loan is funded is not their concern. This has to change.

Countrywide is not the problem. The problem is that anyone can become a mortgage broker with zero education, zero training, zero experience, zero oversight and most importantly – no future records of any past misdeeds. All you need is to pass the California Real Estate Salesperson exam. Period.

At least with Wall Street there is the SEC, NASDAQ, NYSE, and corporate oversight in the mode of a “U-5”. It’s your personal record of everywhere you’ve worked on Wall Street and if you ever committed any boo-boos. We don’t have anything like this in the mortgage industry – yet.

Besides increased educational requirements, I see the mortgage industry heading the way of Wall Street with surety bonds, errors & omissions (E&O) insurance, higher balance sheet capital requirements, and the biggie – “buybacks”.

I predict that in the very near future if a mortgage broker originates any fraudulent loans (including appraisals) they will have to purchase them back at PAR.

Wanna take a gander at what the insurance costs will be for a mortgage broker if they are on the hook for a fraudulent loan originated by any of their employees (this includes processors, underwriters, originators and management)?

My other predictions for 2008 are lower LTVs. 100% financing will only be available to full doc borrowers with low ratios, high FICOs and 2 months PITI cash reserves.

HELOCs are heading towards lower CLTVs. The days of 100% HELOCs will be long gone. 90% CLTV is the new 100% CLTV.

Down payments will be making a comeback. A 10% down payment might become industry standard for the next two years.

No income doc loans will only be available at a max 75% LTV and with minimum 680 FICOs. Lenders will want to verify your down payment.

Second home and investor loans will have much lower LTV and tighter underwriting.

And this is just the tip of the iceberg of changes to come.

Watch your daily emails for more of these type changes in the first and second quarters of 2008.

Share This