Southern California Mortgage Blog

Short Sale vs Foreclosure: Impact on Credit Scores

This is an updated version of a post that I sent out earlier in the year:

I have gotten the impression from many real estate agents that they are unaware of the effect of a Short Sale on their clients' credit report. The common belief is that a Short Sale isn't as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have argued with people about this and there is a lot of information out there with claims to the contrary. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is "straight from the horse's mouth."

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that three years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June 2008, that time frame was extended to five years. That is five years from the sale date.

Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families. This information was announced in June of 2008 and the news has become much worse as I write this in October of 2008.

The "Bail Out" bill now being reviewed again by the House of Representatives will give some "bite" to those of us who renegotiate for Loan Modifications. Loan mods are done for a home owner cannot keep up with the current terms of the mortgage. Changes can be negotiated and will keep you in your home.

I am bragging, but 18 months ago, I correctly predicted that short-refis would exist. They do now.....it is called Loan Modification or a "Loan Mod". A new FHA loan to reduce the balance on home loans and make the payments easier was announced yesterday.

I have been able to help quite a few homeowners' mortgages with awesome results! This new bill being passed will bring some order to the process and make it easier to accomplish.

If I had my home on the market because of a bad loan, but felt I needed to sell when I really wanted to stay. If I found out that my agent said a short sale wouldn't hurt me as badly as foreclosure the I would have me gunning for someone to pay.

I would rather it wouldn't be you. You the seller or You the agent who passed on information that will cause serious harm.

Thanks for reading.

History and the "Mortgage Crisis"

Wow! What a week, this past one, the third week of September 2008!

So much has gone on, and frankly, it is very difficult for me to understand a lot of it.

One article that I have read used the phrase, “the credit market has seized up and has made it impossible for anyone to get mortgage loans, etc. (sic).” That pretty much summed it up for me and my business.

Any time that I have a problem getting a loan for a man with 817 middle credit score and 45% down, on the purchase of a single family home in San Diego means that things have gone beyond “hinky”.

With each loan application I take, I summarize with this apology: “I’m sorry. Though I have asked you for everything that my experience tells me we will need, the times are challenging. It is very possible that things that have never had to have been documented before will be asked for before we finish. I believe that we will present a very good loan package. We can get this done if we work together. Please don’t take any additional requests personally. It is simply the need for the underwriter to cover all the bases because he or she fears their own job loss.”

I was very saddened, and then relieved, that the Treasury Dept. had taken over Fannie and Freddie because I believe that those two businesses will become much more predictable as to the standards that must be met for a “good loan”. FHA loans have always made it easier for 1^st time homebuyers to invest in the American Dream and I believe the new standards that will be set for FNMA and Freddie will do the same for all loan programs.

So many people have asked me, “How did all of this happen in the mortgage industry?” I am not qualified to answer that on anything more than my experience in real estate for 26 years and good business sense, but here is my answer:

During the boom there were many nights when I worked very late at the office to keep my loan pipeline on track. I remember thinking many times that “how will these credit scores hold up if a borrower with a 680 credit score buys a home with no money down and loses his job?” If you can’t make the payments, you can’t make the payments regardless of your credit scores.

I also knew that any market that white-hot was going to cool. Sadly, I also knew that many loan officers and real estate agents only look at the “deal” and not how the transaction will play out in their client’s lives.

Then, there is the issue of so many negative amortization loans that were funded where even the loan officer didn’t understand them well enough to explain them to their borrower. I am a proponent of neg-am loans; they definitely have their place. Many, many homeowners, me included, have been able to buy homes and keep them because of this type of loan. As long as the borrower has owned property before and understands how the loan will work, they are good loans.

The final big reason that I could see was that all of the different types of loans that were introduced went far beyond common sense. In terms of the loan programs and the underwriting and approval of those loans, many of this was simply bad business and without common sense. I am and have always been very proud to work with General Mortgage in San Diego. Their level of professionalism has always been superior.

Human nature and/or capitalism will exploit every avenue until it proves harmful and then regulation will bring it back into balance.

In the coming years, I believe that the standard of education for the client and the loan officer and real estate agent will improve. It has to! The price is too high to fail and I am not just talking about money. Our clients trust us with their financial lives which directly affects their quality of life.

The need to prepare the clients’ credit report, carefully consider the loan program being offered, and understand the entire process and teach that will be the professional’s duty to obtain the best results for the client.

I challenge anyone, still in the business, to bring the level of their education up on an ongoing basis. I promise, it will be expected.

Mary Supinger

Copyright 2008 All rights reserved

Fannie Mae & Freddie Mac Taken Over By the Feds

The Federal Government took over control of FNMA and Freddie Mac this morning.(09/07/2008) As I was reading about it last night and again this afternoon, my thoughts go to how this will affect home buyers and sellers, as well as the economy in general.

The bad news is that it will have a huge and prolonged effect. Credit will become even tighter and qualifying for any type of loan will become more difficult.

As I  take a perfect borrowers' credit report these days, I tell them upfront that I will be apologizing to them until the loan is closed. I will be apologizing because even though I have asked them for everything but the proverbial kitchen sink, the loan process will still be met with things not ever asked for before.

Prior to using credit scoring for loan approvals, we had to document and re-document the source of a home buyer's funds, income, job security, bank records, and every other aspect of getting a loan approval. My experience with that enabled me to ask the borrower for all the needed information up-front. Asking for this information up-front is much less stressful for the home buyer and agents, and of course, me.

In the past year, we have entered a completely different mood in the mortgage business. The news today will make the mood even more serious.

I tell all of my loan clients that it comes down to this: the person who is going to sign off on your loan approval wants to cover every possible thing because they don't want to lose their job.

This is the temper and mood of the mortgage industry in a nutshell.

The good news about the take-over is that more people who are having trouble will get help sooner. There will be more consistency in how mortgages that aren't working are modified so that people can keep their homes. This will keep values up and keeping values up is good for every single American.

I will write more in the coming days. I am very good at helping people improve their credit scores so that the cost of credit can be greatly improved.

Please check me out at http://www.creditfitness.net/calc.html

An Alternative When You Cannot Refinance

I have gotten the impression from the many real estate agents are unaware that the effect of a Short Sale on their clients credit report isn't as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have actually seen a lot to the contrary in advertising. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com.

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that 3 years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June, that time frame was extended to five years. That is five years from the sale date. Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families.

A year ago I correctly predicted that short-refis would exist. They do now.....it is called Loan Modification and I can help you with that.

Finding out that my agent said a short sale wouldn't hurt me as badly would have me gunning for someone to pay. I would rather it wouldn't be you.

Please call me at 619-701-4321 to see if I can help you to stay in your home. We can help in most states or know good, ethical professionals if we don't work in yours.

Thanks for reading.

Refinance Without the Typical Refinance Rules

The following article is the contents of an answer that I gave to another blog contributor today.

I would love to hear any comments from other professionals who are helping homeowners to keep their homes by way of a Loan Modification.

A "modification" is the end result of negotiating with the current lender or investor for a home loan that isn't working well for the homeowner.

Those homeowners who are facing foreclosure do have an option that is finally getting some attention from the public and the lenders themselves. That option typically means that the current lender may bring the interest rate down, fix an adjustable interest rate, reduce the amount of the loan, or allow the homeowner to add one to four house payments to the back end of their loans.

Many owners cannot refinance their adjusting ARM loan. They have made their payments on time and have good jobs. However, they've had a few late payments because the house payment soared upward by $600. This homeowner is a great scenario for looking into a load modification. The lender will typically want to avoid foreclosure, so a modification to the original loan is in everyone's best interest. This is just an everyday scenario, there are many others.

I like to recommend that an owner check out loan modification first. If that clearly will not work out, then consider a short sale. If a short sale will not work out, then letting the house go to foreclosure may be the only option available to the owner.

There is a method for dealing with staying in a home during the foreclosure process. That would take another long post.

Back to our original topic:

Hi SoCalGal:

It's great to hear from you. I hope that you will share your experiences in this area with me. I am always interested in knowing what others are working on.

On Sat, Jun 21, 2008 at 8:24 PM, (e-mail address not provided) wrote:

SoCalGal has posted a response to your message titled
Re: Do I tell the bank I want to go in foreclosure???? in Foreclosure Discussion.

The posted reply can be found at the following URL:

http://www.all-foreclosure.com/forums/foreclosures/messages/7710.html

If the reply pertains to an ongoing discussion, it is
requested you go to the above URL to post any response.

The posted reply reads as follows:

Dated  : June 21, 2008 at 20:24:41

Subject: Re: Do I tell the bank I want to go in foreclosure????

Mary, can you tell us under what circumstances the lenders are reducing loan balances?

My response:

Hi SoCalGal:

Thanks for writing!

To answer your question: Any loan balances being reduced are usually due to the property being at the highest risk of foreclosure and what that foreclosure will do to/for the investor. Where it is on the lenders' books is another factor. The number of requests for a reduction will also give the investor the current "climate" of the market.

An example:

A million dollar home that has lost 30% of its' value: a borrower who made the fixed period payments on time, who wants to remain in the home, and who has steady income.

Those factors would make it easier for a lender to write down part of the mortgage loan amount to avoid the average foreclosure costs and to avoid the loss of income on the note for a period of six to 18 months.

Any file submitted to the investor/representative of investor must "stand on it's own". The negotiator for the modification must present a clear picture of where we are today, what the cost of a "No" answer will have on the investor, and what the Borrower can live with.

This is an example of a scenario that did work for a balance reduction. A write down between 5 to 25% of the note with a borrower who is capable of performing NOW keeps a foreclosure off the lender's default list and makes the lender look better to the investor. I am not going to disclose the exact amount of the write down, but it was more than 5% of the mortgage balance. (Your mileage may vary)

This is NOT standard operating procedure. Having said that.......one could act "as if it was" when approaching the lender and being willing to wait for an answer without caving in. In my humble opinion, that is the hardest part for the property owner, which is why a representative for the owner is the best idea. A good one will pay for himself with good negotiating skills and presentation of the borrowers information which will ultimately "pay" or save the owner on his loan.

Our processing unit has been successful in the above scenario. Please remember that this is not a typical case and that each scenario for each homeowner should be reviewed by a professional with a history of mortgage and real estate expertise. This person must also represent a company history of good performance and service.

There are many Loan Modification "experts" popping up to help people with their homes. No license is required. Please check them out before you sign any contract or pay any fee. Don't give your property up to ANYONE without the advice of an attorney that has been referred to you by a trusted source. Remember, that if the homeowner has been advised by their lender with a Notice of Default, that it is a felony to accept a fee from the owner until an agreement has been obtained for a loan modification or forbearance.

Standard Disclosure: Please seek individual, professional advice in your personal situation. This article is not intended to advise or counsel any particular person. It is to be used as notice of current events. The above article is authored by Mary Supinger and is protected by copyright laws. Credit Fitness is a registered trademark of www.CreditFitness.net.

Short Sale vs. Foreclosure: The True Impact On Credit

I have gotten the impression from the many real estate agents are unaware that the effect of a Short Sale on their clients credit report isn't as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have actually seen a lot to the contrary in advertising. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com.

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that 3 years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June, that time frame was extended to five years. That is five years from the sale date. Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families.

A year ago I correctly predicted that short-refis would exist. They do now.....it is called Loan Modification and I can help you with that.

Finding out that my agent said a short sale wouldn't hurt me as badly would have me gunning for someone to pay. I would rather it wouldn't be you. Thanks for reading.

Tougher Standards for Fannie Mae Home Loans

Today was the first day’s use of the new software for underwriting Fannie Mae loans. Version 7 of the Desktop Underwriting® software was upgraded with lenders over the past weekend.

This new version of the underwriting process will take a much longer and more conservative look at borrowers. By longer, I mean that additional documentation will be required in order to get an approval. Fewer approvals will be given as well.

The bar has been raised as to what makes for an approvable loan.

The entire underwriting process for mortgage loans has snapped back into the days prior to any credit scores being used. In those days, a human being reviewed the loan application for the lender. At times, even two humans beings did the underwriting; once for the lender and again for the mortgage insurance company. Those were the days when, as a loan officer, you hoped your underwriter was having a “good” day and wouldn’t hit you with a page long list of conditions for a full loan approval.

This new version of the software is crankier than previous versions. It demands more proof of what is stated in the actual loan application. The loan officer will need to be more careful that information is entered correctly onto the application. This software won’t allow the loan officer to change the information repeatedly based on what one thinks the lender wants to hear. This will prevent a lot of the fraud that has caused some of the problems we are living with today.

This newer, more conservative software will look at the borrower's with a much more critical eye. More will have to be proven. Risks in the file will have to be balanced with additional compensating factors.  As an example, fewer years in a line of work could be balanced with having substantial savings or reserves.

This new software will mean there will be fewer loan approvals.

It also means that the bar for loan officers has also been raised. The average loan officer has less than five years of experience. Many of the “newbies” have left the profession.  I recommend that you “prequalify” your loan officer at the time he or she prequalifies you. Ask how long they have been in business and ask if they are aware of the new underwriting standards.

Doing this will make for an easier loan process during some challenging times.

PMI Tax Deduction Extended Through 2010

On 12/14/2006, I posted an article on Mary Supinger's Credit & Mortgage Blog at RealBlogging.com Tax Deductible PMI:

On 3/20/2007, I updated that article to read that the 2007 deduction for private mortgage insurance had not yet been extended.

I am happy to report that legislation has been passed that will extend the tax deduction for private mortgage insurance through 2010.

The tax deduction is available to a personal residence and a non-rental second home.

The homeowner’s loan that include the PMI must have originated after January 1^st of 2007. It can be for a purchase or refinance, but the loan amount may not exceed the acquisition loan amounts.

In other words, if you bought a house for $100,000 and had a 1^st mortgage for $80,000 and a 2^nd mortgage for $10,000, you could refinance into a new loan with PMI for $90,000. If, you could somehow get a loan for $95,000, you would be able to deduct the PMI for the loan amount up to $90,000 only.

The legislation also carries with it the caveat that your family may earn no more than $100,000 per year or the mortgage insurance will not be 100% tax deductible.  For each $1,000 of annual household income earned in a year, the deduction is reduced by 10%. Once a family’s income is over $109,000, the PMI deduction will not apply.

The household income is determined by the adjusted gross income prior to any itemized deductions. This legislation is aimed at helping first time homebuyers with the purchase of a new home.