Mortgage Meltdown and FICO

Many people whom I talk to believe that the mortgage meltdown was brought about by people recklessly buying more than they should. My professional opinion is starkly different.

In 2005, the U.S. Comp controller of the Currency expressed concern that far too many mortgages were based on FICO scores (aka Fair Isaacs credit scores). The Controller stated “it was an unproven derivative”. In fact history has proven him right to say the least. I would term it not as unproven but flawed! The fact still remains that so much is based on FICO and to the public, so little is known. FICO can affect your insurance rate, never mind the fact that you may never had an accident, claim of ticket yet your score indicates that you are a risk. Go figure that one.
Employment, never had a sick day, have letters of commendations and/or awards, it seems that FICO is the best judge of prospective employees…NOT.

The only thing FICO is good at is marketing FICO. This wonderful magical predictor of driving, health, and future employees really missed the boat on mortgages, credit cards and installment loans, the very product that the “unproven derivative” was suppose to be good at.

Let’s first examine sound financial practices and FICO. In a sane world money is earned, saved and once a person or family feels assured of there basic needs, they can spend on luxury items. In the FICO world you are rated adversely for savings and not spending on credit. A person with $2,000,000 in the bank, a paid off mortgage, no credit cards or car payment is rated lower than a person with $10,000 in the bank, $50,000 in available credit cards 50% of which is used and a car lease. In other words in FICO world the most credit worthy person has a lower rating.

So how is that relevant?

Well up to FICO (1999) everything was based on reports. A clear view of the past 7 years (at that time). Mortgages, and while there was a lot of variety in products, for the most part was plain vanilla. 28/32 ratios Conv. and Jumbo, 38/40 FHA and 50/50 VA. After a few years so much emphases was placed on FICO ratios and down payment did not matter, only the scores thus the 100% financing was born. Later came the “No Doc” with a 750+ score (which was No Doc at 650+ score in 2004), after that was a stated income, in which you just stated what your income was and it was not verified with, and guest it 750+ score (700+ in 2004) and later still was “No Income No Asset” verification loan with, yep 750+ score. These are all the loans that consist of the “Sub Prime” mortgage market, the very market that is in the tank today! Not to mention all the “Option Arms” and Alt A loans anticipated to become distressed in 2011. All based on FICO scores.

FICO is “an Unproven Derivative” that we can live without! Later I will tell you all about all the folks that were convinced by lenders that due to their FICO scores, they could get whatever money they wanted, “No problem”. But that is enough for me today.

Short Sales in Fairfax County

Comments from RE/MAX co founder about Short Sales;

It’s important to note that the CDPE program in no way encourages agents to abandon their existing skill sets; it merely expands their reach into the most prominent sector of the current market. Indeed, some of the CDPE material is even applicable for the traditional list-market-sell structure. But that sales model isn’t producing its usual level of activity, having been supplanted for the time being by properties in pre-foreclosure and foreclosure. Short sales are a logical step in the process between a traditional listing and a foreclosure, and too many agents are overlooking that fact.

If timing issues could be mitigated, wouldn’t short-sale listings be quite appealing to house-hunters? Consider who’s out there. First-time buyers are in a strong position right now. Interest rates are at historic lows, prices have declined to 2000-01 levels in some markets, financing is available when the proper affordability conditions are in place, and the up-to-$8,000 tax credit provides a significant financial incentive to act before Dec. 1. First-timers could account for as many as half of the home sales in the U.S. this year. Investors, trying to take advantage of the same factors aside from the tax credit, will also play a large role.

With so many homes in some form of distress, agents who close their eyes to short sales and bank-owned properties can’t adequately serve these buyers. Ignore these options and you’re left with “non-distressed” traditional listings, many of which are overpriced for today’s market.

Agents versed in distressed properties can serve buyers or sellers on both sides of the spectrum. If the traditional listing is the best fit, fine. But if the short-sale listing three doors down is a better bargain, the agent can just as skillfully pursue that option.

This skill isn’t important only in Florida, California and the other states hit hardest by foreclosures. In virtually any market, once you start looking for distressed properties, you’ll see them all over. And once you’ve changed your mindset toward them, you’ll recognize the opportunity they represent.

A coming wave

In fact, as mortgages continue to reset, more jobs are lost and the economy sputters, short sales may become the most important aspect of real estate during the next three to five years. An educated and open-minded sales force could help make that happen.

The feeble attempts of untrained agents to manage and close a short sale generally lead to rejection, frustration and disillusionment. These negative results extend beyond the agent, who feels he or she has wasted time and money on a process that’s too complicated and bureaucratic. They also affect the buyers, who fall short on the house they want, and the sellers, who desperately seek a solution to an unfortunate situation.

CDPE-trained agents, however, produce very different results. Some have short-sale closing ratios of 80%, with each successful transaction adding to the momentum of the concept. The agent collects a commission and looks for more short-sale work. The buyers and sellers talk to their friends. The lender, though incurring a loss, realizes a substantial savings over the cost of foreclosure. And the industry, with one less vacant, damaged house in inventory, takes a step toward normalcy.

Movement in the industry

Thankfully, more mortgage lenders, led by Freddie Mac, Fannie Mae and HUD, are recognizing the wisdom of accepting short sales as a means to stave off massive losses. They know the approach is far less expensive than foreclosure, and the long-term industry benefits are significant. A recent Fannie Mae pilot program in Phoenix and Orlando should produce even more positive movement.

The media is figuring it out as well. A March 15 report by a TV news team in Denver described the trials of several homeowners whose attempts at short sales fell through. The tone of the piece was clear: These people had been let down by the banks, and a golden opportunity for all sides – sellers, buyers, neighbors, lenders – had been missed. Fueled by reports like this, the drumbeat for more effective and consumer-friendly short-sale measures will soon grow louder and louder.

Core understanding

Though short-sale listings are increasingly advertised in the MLS, too few agents understand the process well enough to embrace it. If more agents took the CDPE training and learned how to assemble and submit a package that would spur quicker action by a bank, the collective effectiveness of the real estate community would increase. That’s true in individual RE/MAX offices as well; having 15-20 Sales Associates trained as CDPEs is better than having one or two because these agents can collaborate with one another and lift the firm’s profile as a resource for consumers on either side of a distressed-property transaction. It stands to reason that strong office support for distressed-property experts presents a variety of recruiting and retention benefits.

For more information on Short Sales, go to markhastings.net

Short Sales in Fairfax County

Wow, a lot has changed over a year. Last year real estate agents scoffed at Short sales. One of the surest ways not to sell a property besides noting it had an unrestrained Pit bull in it, was to say “short sale” or “3rd Party approval needed”.

Now and just having completed a certification in short sales, the world has gone upside down. Courts are back up processing foreclosures, banks are overwhelmed with foreclosures, foreclosures are not expected to peak until 2011 and communities, counties and states are all losing big bucks in revenue due to foreclosures.

It was stated that 8.5 Trillion in mortgages are going to foreclosures. Now that is a staggering amount since the M1 money supply (all bank deposits) was 8.3 trillion as of 09 APL 09. WOW!

But now is the time, with the window of opportunity for the Debt Forgiveness act or 2007 running out on 01 Jan 10, Short Sales is the way to go. Yes, yes you heard me right. What, Mark finally admitting to consider short sales as you way out of foreclosure?

The problem is staggering but not overcoming. There are many benefits to it, the least of which is credit rating, credit history, future borrowing ability, and more. Plus, the same information needed in a short sale can be used in a mortgage modification. However, our industry records are showing that 50% of the modified mortgages are in or will be in default.