Fix FICO Fast

Posted on August 11, 2017 in FHA, Government, GSE, Housing, Mortgages | Add Your Voice
A Senate bill would require Fannie Mae and Freddie Mac to use credit scoring models that would make it easier for millennials and first-time buyers to get in on the American dream of homeownership.

Co-sponsored by Sens. Tim Scott (R-S.C.) and Mark Warner (D-Va.), the bill would direct the mortgage giants to create procedures that would allow them to consider credit scores other than the traditional FICO model when deciding to purchase a residential loan.

Such a change would allow lenders to use alternative credit scores, like those from VantageScore Solutions, when determining whether consumers are fit to receive a loan.

“Unfortunately, the credit models that the government uses to gauge creditworthiness are very outdated and don’t do a satisfactory job of identifying qualified borrowers who don’t bank or use credit the way previous generations had,” says the Collingwood Group Managing Director Tom Cronin. “There’s a big disconnect now and, as a result, there are 40 million people who are ‘un-scorable’ and completely invisible to the current mortgage system.”

Legislation to change credit scoring has been circulating in Congress for some time. In February, a bipartisan group of Congressmen reintroduced the Credit Score Competition Act, which contains the same language as the Senate bill.

Also in February, the Consumer Financial Protection Bureau put out a call for feedback on the benefits and risks of alternative credit data. The CFPB has estimated that 26 million people in the U.S. are “credit invisible,” meaning they don’t have a credit history with a consumer reporting agency, while another 19 million consumers don’t have an extensive enough credit history to get a credit score.

Traditional “old school” credit scores, such as the FICO, consider only whether borrowers have repaid debts such as mortgages, credit cards or other loans.

“New school” models like VantageScore, meanwhile, look at a broader range of data to determine creditworthiness. It includes things like cellphone bills, utility payments and rental payments.

Using such credit scores that go beyond FICO would open up access to credit for roughly 72,000 more households each year, according to a 2015 VantageScore study.

That same research found that 16 percent more Hispanic and African-American households would have expanded mortgage access as a result.

Concludes Collingwood Group’s Cronin, “This will certainly give the mortgage and housing businesses, along with the economy, a needed shot in the arm. Adoption of alternative scoring models are arguably one of the best ways to bring more people into the system and expand access to credit. Any delay in adoption of alternative scoring models is keeping millions out of the system and negatively affecting the nation’s economic well-being.”

Millennial Women Have More Debt, But Better Credit, Than Men
As the grade school saying goes “Girls rule, boys drool,” and at least as far as meeting debt obligations, it seems to ring true.

A new Lending Tree survey of about 1,000 millennial men and women found a gender divide within that generation on debt and credit.

“While millennial women had higher levels of student and other types of debt, with an average of more than $68,000 compared to $53,000 for millennial men, the women were better at paying it down, suggesting that they may be more responsible borrowers,” says Situs RERC Assistant Vice President Jennifer Rasmussen.

Rasmussen, who has a Ph.D. in psychology, says, “The Lending Tree survey found that millennial women, on average, earned lower wages than men, despite being more educated. With larger debt loads, millennial women may be more anxious than millennial men about their financial futures. Perhaps this uncertainty is leading millennial women to take a more active role in allocating resources to debt repayment.”

New statistics on college attendance support the disparity between millennial women and men’s student debt. More women are actually enrolling and going to four-year schools and getting their college education than men.

Refis Power Mortgage Applications Higher
Refinancing performed well during the week ended Aug. 4, pulling the Mortgage Bankers Association’s Market Composite Index higher. The Index, a measure of mortgage application volume, increased 3.0 percent on both a seasonally adjusted and an unadjusted basis compared to the week ended July 28.

The share of refinancing applications rose to 46.7 percent of the total from 45.5 percent the previous week, and the Refinancing Index was up 5.0 percent.  Purchase mortgage activity was also slightly higher, the Purchase Index gained 1.0 percent seasonally adjusted and 0.3 percent on an unadjusted basis. The unadjusted Purchase Index was 7 percent higher than the same week in 2016.

Average interest rates were lower for all fixed-rate mortgages (FRM) and the effective rate was lower across the board.

  • The average rate for 30-year FRM with conforming loan balances of $424,100 or less was 4.14 percent, down from 4.17 percent the previous week. Points increased to 0.38 from 0.36.
  • The jumbo 30-year FRM, loans with balances higher than the conforming loan limit, had an average rate of 4.07 with 0.26 point. A week earlier the rate was 4.11 percent with 0.25 point.
  • The average contract interest rate for 30-year FRM backed by the FHA decreased to 4.02 percent from 4.07 percent. Points rose to 0.38 from 0.35.
  • Fifteen-year FRM loan rates averaged 3.41 percent with 0.41 point. The prior week the rate was 3.45 percent with 0.44 point.

Applications for adjustable rate mortgages (ARMs) increased slightly to 6.8 percent from the previous weeks 6.6 percent share. The average contract interest rate for 5/1 ARMs ticked up 1 basis point to 3.31 percent, but a decline in points from 0.29 to 0.21 still kept the effective rate lower than the week before.

Invitation Homes Merges with Starwood Waypoint, Creates $11B Home Rental Company
Invitation Homes (INVH), which went public in February, is merging with StarWood Waypoint Homes to create a company with a combined market value of $11 billion.

The two companies, which both own and operate single-family rental homes in the U.S., have signed a definitive agreement to merge in a 100 percent stock-for-stock transaction, with each Starwood Waypoint Homes share converted into 1.614 Invitation Homes shares.

The new company will still have the name Invitation Homes, with Fred Tuomi, the current chief executive of StarWood Waypoint Homes, as CEO.

Bryce Blair, the CEO of the current Invitation Homes, will be chairman.

The combined shares are expected to continue trading under Invitation Homes’ ticker, “INVH.” Invitation Homes also reported second-quarter earnings Thursday, with net income of $5.5 million, or 2 cents per share, after reporting a loss of $19.7 million in the year-earlier period, or a loss per share of 6 cents.

Online Lenders Upbeat about Turnaround Progress, but Worries Linger
LendingClub Corp. and OnDeck Capital Inc. surprised investors on Monday with strong growth forecasts that sent the online lenders’ stocks soaring, but analysts said the sector’s health was still a concern.

Online lenders soared in popularity after the financial crisis when banks pulled back from traditional lending and borrowers sought other options. But rising delinquencies have made it harder to raise funds for fresh loans, prompting the sector to review its business model, which tends to attract borrowers with low credit quality.

LendingClub, which serves individuals, and OnDeck, which caters to small businesses, are cutting costs and trying to attract borrowers with better credit.

Executives of both companies were upbeat about the progress in their turnaround plans after they reported second-quarter results.

“It’s great to be back to growth,” LendingClub Chief Executive Scott Sanborn said in an interview. “We are excited about the momentum building in the business and the massive opportunity that lies ahead.”

Sanborn took on the CEO role last year after his predecessor, LendingClub founder Renaud Laplanche, was ousted in a scandal over disclosures and potential conflicts of interest.

In a post-earnings interview, OnDeck CEO Noah Breslow called it “a positive quarter.”

“We have done a lot of work to restructure the business,” he said.

OnDeck shares closed 18.5 percent higher at $5, and LendingClub ended up 4.8 percent $5.46. The stocks rose in after-hours trading but remain far below their initial public offering prices of $20 and $15, respectively.

On conference calls, analysts probed executives about their forecasts, questioning whether online lenders could deliver on promises for loan growth, credit quality and profitability.

read more: Reuters

Here’s What Happens to ARMs When Libor Goes Away
The Libor index is going away. For U.S. consumers, its demise is most likely to be felt in adjustable-rate mortgages.

So-called ARMs — where the interest rate rises and falls with broader indexes — are often closely tied to Libor, or the London interbank offered rate. While ARMs are out of favor these days, they are still a sizable portion of the mortgage market, and once Libor disappears it is unclear to what those mortgages would be pegged.

U.K. authorities recently said Libor would be phased out over the next five years due to allegations bankers manipulated it, which could prove troublesome for borrowers, lenders and investors in mortgage securities.

“In a fairly short amount of time, no one is going to know how to compute what the next payment is going to be” for this kind of mortgage, said Lou Barnes, a capital markets analyst with Premier Mortgage Group in Boulder, Colo. ”And that’s why it’s important.”

Such mortgages were popular before the financial crisis, when lenders used their low teaser rates to get borrowers into bigger homes. They have been a tougher sell in an era of super low interest rates, but still account for roughly $1.33 trillion of mortgages outstanding, according to Black Knight Financial Services Inc., a mortgage data and technology firm.

That is nearly 14% of the overall market, and lenders had been expecting that share to grow as the Federal Reserve continues to raise interest rates. Banks also favor ARMs for jumbo mortgages, high-dollar amount loans they view as a source of revenue growth.

read more: Wall St Journal

Housing Sentiment Dips as High Home Prices Weigh on Buyers 
The Fannie Mae Home Purchase Sentiment Index declined 1.5 percentage points in July, after matching its all-time high in June.

The net share of people who reported that now is a good time to buy a home fell 7 percentage points, with the share who say it’s a bad time to buy reaching a new survey high and the share who say it’s a good time to buy reaching a new survey low.

The net share of those who say it is a good time to sell a home decreased by 11 percentage points, following June’s survey high.

Americans also expressed a greater sense of job security, with the net share who say they are not concerned about losing their job rising by 9 percentage points. Additionally, consumers continued to express that their current household income is not significantly higher than it was 12 months ago, with that component falling an additional percentage point in July. Finally, the net share of Americans who expect home prices to go up also increased by 1 percentage point this month, following last month’s upward trend.

The decline in selling sentiment was the biggest drag on the index, followed by the drop in buying sentiment. Underlying data showed that economic conditions weighed on the former. Among consumers who believe now is a bad time to sell, the share citing economic conditions as a primary reason posted a sharp rise.  Nearly half of consumers who say now is a bad time to buy cited rising prices as a primary concern — a survey high.

“It’s clear that high home prices are a growing challenge helping to send buying sentiment to a record low,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, we find the notable decline in selling sentiment surprising. If it persists, this month’s decrease in optimism regarding the direction of the economy, which appears to coincide with rising uncertainty regarding the outlook for pro-growth legislation this year, could weigh on overall housing sentiment in the second half of the year.”

Low Down Payments Becoming the Norm
Fannie Mae and Freddie Mac’s low-down-payment loans are apparently beginning to cause some pain for FHA lending. Black Knight’s Mortgage Monitor report, its monthly summary of mortgage performance data, notes that low-down-payment originations, which they define as loans with down payments below 10 percent, currently account for nearly 40 percent of all purchase originations and 1.5 million borrowers have closed on such loans in the last 12 months, a seven-year high.

Low-down-payment loans have historically been the purview of FHA and VA. FHA will loan 97 percent of the purchase price with mortgage insurance, while VA will guarantee up to a loan-to-value (LTV) ratio of 100 percent for an eligible borrower. The GSEs reintroduced a program in late 2014 that would allow as little as 3 percent down, but borrowers must also carry private mortgage insurance.

Black Knight says the increase in low-down-payment loans is primarily a function of the overall growth in purchase loan originations, but such loans declined as a percentage of originations for four straight years. They have now seen their share increase for the last 18 months.

High LTV ratios during the housing boom were more a function of the piggyback second mortgages that boomed during that era rather than low-down-payment first mortgages. Then the low-down-payment share rose through 2010 as FHA lending increased to a 50 percent share, taking up the slack in funding after private money disappeared. As FHA lending returned to more normal levels, the share of low-down-payment lending declined.


Black Knight says the FHA/VA share has declined as the GSEs have expanded their low-down-payment lending.  While very llow-down-payment lending is growing at about the market average, loans with 5 to 9 percent down have been growing at twice the rate of the purchase mortgage market.

read more: Black Knight

NYC Home Market Bubble Popping?
If New York home sellers had big dreams when they listed their properties, now they’re adjusting to reality.

In most Manhattan neighborhoods, at least 25 percent of homes on the market in the second quarter had their prices cut. The share was smaller only at the borough’s northernmost tip, in Inwood and Marble Hill. In prime areas such as the West Village and Chelsea, about half of listings had their prices trimmed.

Even in high-demand Brooklyn, owners realized they’d gotten too ambitious. Forty-one percent of Williamsburg listings saw a reduction in asking price, while in Bushwick, the share was 48 percent. The waterfront area that includes Red Hook had the biggest share of cuts, at 59 percent.

The whittling shows “that even in these areas that are really hot, it’s possible for sellers to be out of sync with the market, and that there is a limit to how high prices can go,” said Grant Long, senior economist with StreetEasy, which provided the data.

read more: Bloomberg

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Lou Giserman
Senior Media Consultant
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