Credit Scoring Rules Are Changing

Credit scoring rules are changing.

In the past, your FICO scores were determined by comparing your behavior to others with similar characteristics. If someone with similar demographics who used credit like you went bankrupt, your score was lowered whether or not you were in financial trouble. And vice versa. If they did well, you were scored well, whether or not you teetered on the brink of insolvency.

However, as ABC News reports, banks are using new factors in determining your credit worthiness.  

Since 9/11, new laws and technology make data mining much easier and more efficient. Banks have taken advantage of this by employing behavioral analysis. They’re looking at not only yodur purchasing history now but also where you shop, as well.  

Some consumers have found their credit lines suddenly reduced.

Declining credit lines tend to reduce credit scores. And of course, this effects how you qualify for a mortgage.

When contacting the offending banks, affected consumers only receive the explanation that they were shopping at places where people in financial trouble were, as well.

It remains unclear what businesses are triggering this. Is Walmart a danger spot? Or Amazon.com? Both have been on purchase history lists of those with declining credit lines.

The rules for determining credit scores have gotten more complex and a bit more murky.

More at: New Credit Rules

Mark Zandi of Economy.com Sticks His Neck Out

Mark Zandi, chief economist at Moody's Economy.com, is making some bold predictions for the US housing market and the effects of the Federal economic stimulus package.

On the housing market (Businessweek.com, 1/26/09)

"Moody’s Economy.com Chief Economist Mark Zandi is coming out with a new study on the housing market. He’ll discuss it in a conference call with clients on Feb. 5.
Moody’s offered a sneak peak. Among the conclusions:

· Home prices will stabilize by the second half of this year.
· The national Case-Shiller home price index will decline by another 12% from the third quarter of last year for a total peak-to-trough decline of 30%.
· By the end of this unprecedented downturn, house prices will have declined by double digits peak to trough in nearly 62% of the nation’s 381 metro areas. In about 10% of metro areas, price declines will exceed 30%."

For $250, you can hear it straight from the man himself on Feb. 5.


On the stimulus (The Economic Impact of the American Recovery and Reinvestment Act Mark Zandi - January 21, 2009, Economy.com)

"The fiscal stimulus plan proposed by the House Democrats includes a reasonably designed mix of government spending increases and tax cuts. The spending increases total about $550 billion in 2009-2010, and there are $275 billion in tax cuts. While the timing has yet to be determined, the tax cuts are expected to occur largely this year and much of the spending would begin in 2010... Increased government spending provides a large economic bang for the buck and thus significantly boosts the economy. The benefits begin as soon as the money is disbursed and are less likely than tax cuts to be diluted by an increase in imports. The most effective proposals included in the House stimulus plan are extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to state and local governments. Increasing infrastructure spending will also greatly boost the economy, particularly as the current downturn is expected to last for an extended period. Most of the infrastructure money will be spent on hiring workers and on materials and equipment produced domestically. Tax cuts generally provide less of an economic boost, particularly if they are temporary; on the other hand they can be implemented quickly..."

When your credit score isn't what you thought

Re-fi’s are much the rage these days. We’re getting lots of calls with requests for mortgage quotes. At these times, a loan officer has to ask several questions before he can give an accurate quote. But one of the most important concerns their credit.

Three different consumer credit agencies, Equifax, Experian and Trans Union, dominate in American lending. When someone applies for a mortgage, the loan officer gets permission and then pulls the potential borrower’s credit from these three agencies.

Each of the credit agencies has their own algorithms to perform a statistical analysis of a consumer’s credit worthiness. The generated number varies from agency to agency because each has their own method of collecting data.

In turn, banks make many lending decisions on these scores. Instead of averaging the numbers, lenders tend to use the middle score of the three, somewhat ignoring the top and bottom numbers.

People who thought they had a score in the high 700’s might find their mid-scores in the mid 600’s. And vice versa. This is nothing new. Most people aren’t very good at just guessing their credit score.

A year ago, it wouldn’t have been a huge deal. Consumers basically fell into two camps. Prime and sub-prime. If a person’s FICO mid-score was above 620 they were considered prime. They got the same conventional rate as someone who’s FICO mid score was over 800.

No longer.

Conventional mortgage rates are now partially determined by what is called “risk-based pricing.” Your credit score makes a difference in determining your mortgage rate.

Virginia hits Countrywide

Virginia’s Office of Attorney General announced today that they have joined in the settlement with Countrywide Financial.  Of the total $8.4 billion dollar settlement, 8900 Commonwealth citizens could divide as much as $212,800,000.  Or that works out to $23,000 a victim if evenly distributed.

Attorney General Bob McDonnell, who has a good chance of being the next governor, will also be proposing legislation that will bring mortgage lender under the Virginia Consumer Protection Act.  Currently, only mortgage brokers fall under this law.

He’s asking the legislature to give the AG’s office more teeth in enforcing Virginia laws with national lenders.

The press release is here.

Friday Links 1/09/2009

Life around the office has been busy lately. Understandably, the lowest mortgage rates on record are making everyone want to refinance (and a few to purchase). We're in a "refi boom". And from our perspective it appears to be picking up steam.

But it's also cutting into my blogging time. So here are some links :-)

Mortgage Rates Set Another Low (Housing Wire, 1/08)

Bernanke's buzz killer: China Losing Taste for Debt From US (NYT, 1/07)

Realtors Slam New Fannie Mae Fees, Bloggers (thetruthaboutmortgage.com, 1/05)
"Realtors slam..." is a over reaching and a bit harsh. "NAR has issues with.." is more like it. NAR's "downpayment clarification" from Dec. 31, 2008.

BOE Cuts Rates To Lowest Since Bank's Creation in 1694 (Bloomberg, 1/08)
The Bank of England takes a cue from the FED.

I received an email from Fannie Mae (that doesn't make me special - you can get on their email list if your so inclined) on Thursday. The HVCC, or Home Valuation Code of Conduct, has been amended and will be implemented May 1, 2009. Here's their announcement with FAQs.
Also reported on at the Appraisal Scoop (01/08).

Local:
Some PHA clients escape foreclosure (C-ville Weekly, 1/08)

Jim Duncan on the problems with Charlottesville's housing market (cvillepodcast.com, 1/08)

Video: Today Show on UVA's Ranking (UVA Today News Blog, 1/08)
Meredith Vieira: "... and number one is the University of Virginia, a fantastic school."

The Return of the American Saver?

A couple of articles that caught my eye this week:

Piggy banks fly off shelves in freshly frugal U.S. (Yahoo, 12/31/2008)
"Recession-wary Americans embraced the virtues of thrift this Christmas, with stores reporting a clear rise in the popularity of piggy banks... Personal saving as a proportion of U.S. disposable income rose to 2.8 percent in November compared with zero back in April, but remain well below the 10 percent range it occupied back in the early 1980s."

Savings Are Sexy Again (Time, 12/31/2008)
"One tiny upside to all this economic mess: as finance firms look to bolster their balance sheets by building deposits, the competition is on for your small-potato savings. Even as Treasury yields touch zero, you can still find CDs and money-market accounts paying north of 3.5%."

Of course the media wasn't the first to notice. Dr. Ronald Wilcox of UVA's Darden School noted the national savings rate increase back in October on his Whatever Happened To Thrift? blog.

Savings Rate Increases (10/30/2008)
"It is good — not bad — that Americans have decreased their expenditures on current consumption. Although decreases in current consumption will have a negative impact on the short run prospects of the economy it is a positive development for long run sustainable economic growth. Much like our financial institutions need to unwind their debt (leverage) positions in order to set themselves up for future growth and financial stability, U.S. households need to dig themselves out of debt and create a pool of personal savings in order to put themselves on a firm financial footing."