Credit score...

[grislyatoms]

Thanks, Carebear, I am drafting them a letter now. I'm going to send it off in the morning. Would you mind me picking your brain from time to time via PM? At least until I get this resolved?

[Northwoods]

I got to say that I'm with Manedwolf on this topic at least.

Regarding the early development of credit scores for mortgage lending.  It had it's place.  Just like unions had thier place.  Both are now not nearly so necessary and in many respects are now no longer really needed.

Carebear - Those reasons to decline someone for a mortgage should be the same regardless of whether or not a person has a credit score.  I'm sure that if someone came into your office who had essentially no credit score becuase they carried no debt, and hadn't for many years, and the loan they wanted for a house was a 15 or 30 year fixed rate mortgage, they had at least 20% down, and the payments would be no more than 25% of their take home pay, not gross pay, I'm pretty sure you'd approve them.  Maybe at a slightly higher interest rate.  If they can't manage to get within that they probably shouldn't be buying that house in the first place. 

Proverbs 22:7 (NIV) - The rich rule over the poor, and the borrower is the servant to the lender.

Nehemiah 5:1-5 (NIV) - Now the men and their wives raised a great outcry against their Jewish brothers.  Some were saying, "We and our sons and daughters are numerous; in order for us to eat and stay alive, we must get grain."  Others were saying "We are mortgaging our field, our vinyards and our homes to get grain during the famine."  Still others were saying "We have had to borrow moeny to pay the king's tax on our fields and vinyards.  Although we are of the same flesh and blood as our countrymen and though our sons are as good as theirs, yet we have to subject our sons and daughters to slavery.  Some of our daughter have already been enslaved, but we are powerless, becuase our fields and vinyards belong to others."

[Matthew Carberry]

That's all well and good when you can save up that 20%.  But with average housing costs in the area of $200,, that's $40,000.

If someone has shown the historic ability to manage their money and make the regular, timely, reasonable payments (as shown very statistically reliably by credit scoring) on a house payment why should the real mathematical difficulty (and time) of saving 40 grand keep them from a home?

That same $40K, invested wisely as it is saved will pay a much greater long-term rate of return for their retirement than it will provide saved up over the same years to be put down on a house.  Far better to buy with less down and make money at the same time.  It's basic finance, use the other guys money to make money for you.

Credit allows me to judge the risk on a quantifiable basis and allows deserving, less-wealthy people the benefits of home ownership.

As was pointed out, why should quality folks be denied a home?



To directly address the "same reasons" issue.  Credit scoring, like insurance adjusting and the other actuarial sciences, has proven itself to be incredibly accurate as a guage of a person's willingness and ability to pay.  Criticism of it as "arbitrary" doesn't hold water statistically.

The "dangers" in exotic loan products (low/0- down, alt. documentation, etc.) just don't appear in folks with good credit scores, they occur as standards are relaxed to allow lower scores to qualify. 

It's a valid, reliable judge and is still necessary today, if not moreso, to allow home ownership among the majority of Americans, who have shown they can handle and deserve it.

[Matthew Carberry]

Thanks, Carebear, I am drafting them a letter now. I'm going to send it off in the morning. Would you mind me picking your brain from time to time via PM? At least until I get this resolved?

You've got about all my brain has to offer, credit's just an ancilliary part of what I do, but feel free.

I'm sure there're others on here with as much, more or different knowledge.

[Gewehr98]

Interesting.

How does one go from being a former Marine to a credit counselor/loan officer?   

[Matthew Carberry]

I'm a salesman, like my father and his father before him.  I can sell bar-b-ques in Hell or ice makers to Eskimos (I mean, back when it was cold in the Arctic  ).

Grew up in the construction industry and been doing construction-related commercial sales most of my adult life, a little dabbling in real estate, a good head for math and how to play the lending rules and regs, and here I am.

As for the Marine part... in a WWII movie I'da been nicknamed "the Professor" and done a bit of scrounging and horse-trading on the side.  Probably bought it in some suitably dramatic way right before the big push, quoting something literary.

[Northwoods]

Yeah, but what about the risk to the individual when they don't save up that down payment?  Plenty of people that are otherwise doing just fine wind up getting bit when they put little down on a house, the market tanks, and then they have to move due to jobs, or other pressures.  Then they're upside down in the house and they start to face all kinds of pressures that can turn that "dream" of owning that home into a nightmare.  And besides, why does one have to start out with a $200,000 house?  Especially for someone just starting out an "average" house is probably more than is really reasonable for them anyway.  

In a lot of places (and yes I'm well aware of areas where this isn't possible) one can still get a pretty decent house for $100,, and sometimes even less (especially if you're willing to put in the effort to get a deal on a foreclosure).  That cuts the down payment needed to $20k or less.  While you are correct that investing that money in a good mutual fund or whatever can bring the person a lot more income in retirement what is the use of that if all that extra income is still being used to make the house payment.  

Also, think about it this way.  Even if your investment is making 12% each year, unless it's in a Roth IRA (and there's pretty low limits on what you can put in them) taxes will reduce that effective return to around 8-10% depending on whether it's in a tax advantaged account or not.  Inflation will reduce that effective rate of return even further to 5-7%.  That sounds suspiciously like current mortgage rates.  So, unless your mortgage is below that level , or you consistently outperform the 12% you're really not gaining anything by putting that money away for retirement vs. making a larger down payment on the house.

[mtnbkr]

That's all well and good when you can save up that 20%.  But with average housing costs in the area of $200,, that's $40,000.

That's what I ran into 6 years ago when I bought our current house.  My apartment complex wanted to raise my rent from $840/month to $1150/month.  At that point, it was cheaper to buy a house than remain a renter (if you factor in the tax deduction).  However, I didn't have nearly enough saved up for a traditional down payment, but with my credit score, was able to qualify for a 103% loan.  Yup, I even rolled my closing costs into the mortgage.  I had to pay PMI, but after a year, I was able to refinance for a lower interest rate and dump PMI since the increased value of my home meant my equity was much higher than my mortgage.

Had I been forced to save the required 20%, I would have been chasing a moving target that would've been $30k in 2001 and climbed rapidly to a peak of 60k by 2005.  That's the lower end of the market too. 

I didn't buy too much house and could easily afford the mortgage payment back when I had a student loan, car payment, credit card debt, and a salary 23% lower than it is now.  Now, the student loan and credit card debt is gone, my salary is 23% higher, and my current car payment is lower than the previous one (paid off the other one early).  Also, I've managed to put more cash into savings, increase my 401k investments, and live in a house that has doubled in value (did go as high as 2.5x).

So, I'll play the game set up by my corporate masters, it's working for me.

Chris

[mtnbkr]

And besides, why does one have to start out with a $200,000 house?  Especially for someone just starting out an "average" house is probably more than is really reasonable for them anyway. 

They don't exist in this market anymore.  In fact, for a couple years, you could barely find a condo for that price.  Why do you think my commute is 25miles and 1 hour or more?

Chris

[MillCreek]

Somewhat on point to this thread, I just got a letter from a collection agency saying that I owed $ 24 to a publishing company.  I called the agency, and they said that the publisher mailed me a book (which I apparently did not order), and I owed for the book.  Now the sticky wicket here is that I never received said book.  Having said that, our mail service is abysmal, and I frequently receive my neighbors mail, for several blocks and vice versa.  We wander down to the correct mailboxes and deliver it to the right person.  I simply do not know if the publisher actually sent the book or if I just did not receive it.

I have excellent credit with no late or missed payments ever, for the thirty years that I have been using credit.  My employer uses collection agencies, and I know full well that this company is not going to file suit in district court to collect on a $ 24 debt, since they only get 50% of the debt amount.  I am pretty sure that in talking to a live person and taking up their time, the agency just lost their profit. I feel badly about this, but then again, I do pay my debts, and I am not inclined to pay $ 24 for a debt which may not be legitimate. 

I wonder if I should ignore this, ask the agency for proof that the book was delivered or what. 

[The Rabbi]

Ahving worked 9 years in mortgages I absolutely hate credit scoring.  For starters, how they determine the score is in fact a trade secret.  People know in general what will raise and lower a score but not specifics.
Second, I have seen people with really bad/limited credit have scores over 700 and people with long credit histories of good payment have low scores.  It makes no sense.
Credit scoring is meant to provide a cheap capital solution (computerized scoring) to an expensive labor problem (underwriters dont work for nothing).  But there is no substitute for a trained underwriter.  And more and more industries are using it.  My favorite is insurance.  If your score is low you will get charged higher premiums than someone else with a higher score, even if you have never had a claim your entire life.  This seems fundamentally unfair.  And I am waiting for someone to sue the credit companies in a class action suit for just this sort of thing.

[Matthew Carberry]

The presumption is that you are are an adult, so you are either competent at math so you can figure out the tax repercussions yourself (obviously you use a Roth or other tax-avoiding vehicle for post-tax investing  ) and budget for the vagaries of life that would occur with or without a house payment (rent ain't free either and is usually pretty similar to a payment on the equivalent house, unless the landlord is an moron) and/or you have the good sense to get advice from a financial professional to help you with making major investment/purchase decisions.

Would you like me to suggest other changes to our financial system to protect idiots from themselves, or can we agree that idiots are going to blow their money no matter what?  And that such socialist changes unjustly deprive smarter people of options they can use wisely?

If they have neither knowledge or the sense to consult someone with it, no amount of "ending the credit score system" or "tightening mortgage programs" will help folks.  All it will do is hamper the competent and smart.

Yeah, but what about the risk to the individual when they don't save up that down payment?  Plenty of people that are otherwise doing just fine wind up getting bit when they put little down on a house, the market tanks, and then they have to move due to jobs, or other pressures.  Then they're upside down in the house and they start to face all kinds of pressures that can turn that "dream" of owning that home into a nightmare.  And besides, why does one have to start out with a $200,000 house?  Especially for someone just starting out an "average" house is probably more than is really reasonable for them anyway.  

In a lot of places (and yes I'm well aware of areas where this isn't possible) one can still get a pretty decent house for $100,, and sometimes even less (especially if you're willing to put in the effort to get a deal on a foreclosure).  That cuts the down payment needed to $20k or less.  While you are correct that investing that money in a good mutual fund or whatever can bring the person a lot more income in retirement what is the use of that if all that extra income is still being used to make the house payment.  

Also, think about it this way.  Even if your investment is making 12% each year, unless it's in a Roth IRA (and there's pretty low limits on what you can put in them) taxes will reduce that effective return to around 8-10% depending on whether it's in a tax advantaged account or not.  Inflation will reduce that effective rate of return even further to 5-7%.  That sounds suspiciously like current mortgage rates.  So, unless your mortgage is below that level , or you consistently outperform the 12% you're really not gaining anything by putting that money away for retirement vs. making a larger down payment on the house.

[Matthew Carberry]

Millcreek,

It will go on your report and show as a series of 90 day lates.  Either take the time to get it corrected, starting with proof you authorized them to send you something and bill you for it and then that you got it, or just pay it.  If it's the only bad thing on your report you should be okay, but why have it on there?

Somewhat on point to this thread, I just got a letter from a collection agency saying that I owed $ 24 to a publishing company.  I called the agency, and they said that the publisher mailed me a book (which I apparently did not order), and I owed for the book.  Now the sticky wicket here is that I never received said book.  Having said that, our mail service is abysmal, and I frequently receive my neighbors mail, for several blocks and vice versa.  We wander down to the correct mailboxes and deliver it to the right person.  I simply do not know if the publisher actually sent the book or if I just did not receive it.

I have excellent credit with no late or missed payments ever, for the thirty years that I have been using credit.  My employer uses collection agencies, and I know full well that this company is not going to file suit in district court to collect on a $ 24 debt, since they only get 50% of the debt amount.  I am pretty sure that in talking to a live person and taking up their time, the agency just lost their profit. I feel badly about this, but then again, I do pay my debts, and I am not inclined to pay $ 24 for a debt which may not be legitimate. 

I wonder if I should ignore this, ask the agency for proof that the book was delivered or what. 

[K Frame]

"So, I'll play the game set up by my corporate masters, it's working for me."

You foolish tool of the man, you!

[K Frame]

Proverbs 22:7 (NIV) - The rich rule over the poor, and the borrower is the servant to the lender.

Nehemiah 5:1-5 (NIV) - Now the men and their wives raised a great outcry against their Jewish brothers.  Some were saying, "We and our sons and daughters are numerous; in order for us to eat and stay alive, we must get grain."  Others were saying "We are mortgaging our field, our vinyards and our homes to get grain during the famine."  Still others were saying "We have had to borrow moeny to pay the king's tax on our fields and vinyards.  Although we are of the same flesh and blood as our countrymen and though our sons are as good as theirs, yet we have to subject our sons and daughters to slavery.  Some of our daughter have already been enslaved, but we are powerless, becuase our fields and vinyards belong to others."

What the eff?

[Matthew Carberry]

It's an example of people who didn't use good financial practices beforehand, so when trouble came they were forced to mortgage their property to survive.  It has nothing to do with wise investment or proper use of debt as part of a comprehensive financial plan.

 

Proverbs 22:7 (NIV) - The rich rule over the poor, and the borrower is the servant to the lender.

Nehemiah 5:1-5 (NIV) - Now the men and their wives raised a great outcry against their Jewish brothers.  Some were saying, "We and our sons and daughters are numerous; in order for us to eat and stay alive, we must get grain."  Others were saying "We are mortgaging our field, our vinyards and our homes to get grain during the famine."  Still others were saying "We have had to borrow moeny to pay the king's tax on our fields and vinyards.  Although we are of the same flesh and blood as our countrymen and though our sons are as good as theirs, yet we have to subject our sons and daughters to slavery.  Some of our daughter have already been enslaved, but we are powerless, becuase our fields and vinyards belong to others."

What the eff?

[K Frame]

Yeah, but what about the risk to the individual when they don't save up that down payment?  Plenty of people that are otherwise doing just fine wind up getting bit when they put little down on a house, the market tanks, and then they have to move due to jobs, or other pressures.  Then they're upside down in the house and they start to face all kinds of pressures that can turn that "dream" of owning that home into a nightmare.  And besides, why does one have to start out with a $200,000 house?  Especially for someone just starting out an "average" house is probably more than is really reasonable for them anyway.  

And conversely, what about the people who end up saving that big down payment and STILL end up getting bitten by a lost job, a downturned market, a job move, etc.?

The people I bought my house from in 1993 are a prime example.

They paid $173,500 for the house. Market takes a *expletive deleted*it. I end up buying the house after it had been reduced 4 times, for $154,900.

He was being transferred, and both were gainfully employed by the Federal government.


You know what this sounds like?

It sounds like it's time for the Government to get even more involved in the lifes of the average citizen by taking over all mortgage lending in the country.


I'm sorry, you're 73 cents short of the required 99% down payment on your home. For that transgression, the government is confiscating your downpayment and putting you on the permanent "No Buy List."

[K Frame]

It's an example of people who didn't use good financial practices beforehand, so when trouble came they were forced to mortgage their property to survive.  It has nothing to do with wise investment or proper use of debt as part of a comprehensive financial plan.

 

Proverbs 22:7 (NIV) - The rich rule over the poor, and the borrower is the servant to the lender.

Nehemiah 5:1-5 (NIV) - Now the men and their wives raised a great outcry against their Jewish brothers.  Some were saying, "We and our sons and daughters are numerous; in order for us to eat and stay alive, we must get grain."  Others were saying "We are mortgaging our field, our vinyards and our homes to get grain during the famine."  Still others were saying "We have had to borrow moeny to pay the king's tax on our fields and vinyards.  Although we are of the same flesh and blood as our countrymen and though our sons are as good as theirs, yet we have to subject our sons and daughters to slavery.  Some of our daughter have already been enslaved, but we are powerless, becuase our fields and vinyards belong to others."

What the eff?

I'll keep that in mind the next time I take out a mortgage with the "Bible Truth In Lending" mortgage services company.

As the apocryphal book says...

Jesus wept... 

[The Rabbi]

Yeah, but what about the risk to the individual when they don't save up that down payment?  Plenty of people that are otherwise doing just fine wind up getting bit when they put little down on a house, the market tanks, and then they have to move due to jobs, or other pressures.  Then they're upside down in the house and they start to face all kinds of pressures that can turn that "dream" of owning that home into a nightmare.  And besides, why does one have to start out with a $200,000 house?  Especially for someone just starting out an "average" house is probably more than is really reasonable for them anyway. 

And conversely, what about the people who end up saving that big down payment and STILL end up getting bitten by a lost job, a downturned market, a job move, etc.?

The people I bought my house from in 1993 are a prime example.

They paid $173,500 for the house. Market takes a *expletive deleted*it. I end up buying the house after it had been reduced 4 times, for $154,900.

He was being transferred, and both were gainfully employed by the Federal government.


You know what this sounds like?

It sounds like it's time for the Government to get even more involved in the lifes of the average citizen by taking over all mortgage lending in the country.


I'm sorry, you're 73 cents short of the required 99% down payment on your home. For that transgression, the government is confiscating your downpayment and putting you on the permanent "No Buy List."

Yeah, life's a bitch.  I may have mentioned I bought my first house, with 10 3/8% mortgage, in 1990 for 169,000.  I sold it about 1 year later for $129,000.  Between mortgage payments and loss of capital (not tax deductible btw) I figure I lost $50k on the whole transaction.  Big furry deal (it was at the time).  But fortunately I was young (28) and made money on every property I've bought since.  I look at it as tuition, at private school rates.
People ought to plan for "what-ifs" before committing themselves to a purchase that big.  I know they don't but that isnt mine (or anybody else's) problem.

[roo_ster]

I am with The Rabbi in that I am not too keen on being rated on an undefined and secret standard.  Also, that trained underwriters will do a better job at determining credit risk/worthiness than software.

Given that, I can understand why folks want a software solution to a human problem, especially if it is close enough to the mark for most users. 

Given that this number is profoundly significant financially and such an article of faith to some (as we can see in previous posts), opening the algorithms to scrutiny by the scrutinized is a fair request*. 


BTW, my credit score was in the high 700s back in 2001/2002 when we were shopping for a house (my first).



*  Especially, if as Rabbi has suggested, other industries are to use it and consumers sue the pants off the credit scoring companies.  Might as well do willingly, in a display of generosity, what the gooberment will hold a bayonet at your butt to do by force, later.

[charby]

The part I don't understand is how/why auto insurance companies use you credit score to determine your rate for coverage. I'm not a big fan of too much government regulation, but I'd support a bill to make that illegal.

-Charby

[K Frame]

Generally financially responsibility is a strong indicator of a person who is responsible, and safe, overall.

[The Rabbi]

Generally financially responsibility is a strong indicator of a person who is responsible, and safe, overall.

Key word is "generally."  I have personally seen a million exceptions (OK maybe not a million but plenty of them).  Yet there is no appeal with the insurance company t o say "someone ripped off my SS number and thats why my credit looks like that."

[charby]

auto insurance should reflect a person's driving record, not credit score.

I haven't had that taken that much credit extended to me (by choice) in the last five years so I have a lower credit score than I should have. I have no credit cards or a desire to get one to raise my credit, I don't think a credit score in my case reflect very well on how safe I'm behind the wheel. I've had one ticket in the past ten years, and never had a no at fault accident ever.

-charby

[Matthew Carberry]

The Bureaus are going to a common system here shortly, replacing the various Beacon and FICO metrics (there are several different kinds or score, each focuses on different factors and is used by different clients for different purposes).  With the new single metric the only difference in scores should be caused by discrepencies in what is reported to each Bureau. 

As far as it being "secret", they don't publish the exact weight of each factor but if you pay your bills on time, maintain the same 3-4 open credit lines for several years with no lates and don't carry a balance over 20% of each card's limit, you will have a score above 700, which is golden.  It isn't rocket science.

Since you can get free reports showing all content, blaming the Bureaus because you haven't checked for fraud is a little disingenuous.  I assume everyone checks their bank statements for errors every once in a while.

And, like it or not, just like actuarial science on insurance has improved since its beginnings in London 500 years ago, credit scoring has in fact been demonstrated to have statistically significant correlation to other personal risk.  It isn't just "convenience" that makes insurance companies use it, it's proven past performance.

In any event, if you want to have a live underwriter calculate your loan, be my guest.  here's what happens, they take every scrap of paper from your past 2 or 3 year history , chase down any irregularities and in the end apply the strictest standards of whatever investor is actually supplying the money, with very little compensating factors allowed.  The reason?  If they get it wrong and you default the mortgage company has to buy back the loan.

Conversely, if you have a credit score, I plug your info, including credit history, into the investor's Automated Underwriting System, it looks at all the info I provide it and makes the decision.

If it comes back "refer" we can go to hand underwriting.  If it comes back "approve" we're done, no matter how weird the loan looks on the surface.  in some cases, instead of 3 years of taxes and bank statements I get your most recent pay stub, your most recent account statements and we are ready to close.

Astonishingly, both ways have almost identical failure rates, but one is just much faster and efficient.