If there has ever been a time for a real estate home run this is about as good as it gets. Interest rates are near historic lows, home values have yet to return to their 2007 peak and the population has grown by nearly 20 million people in the past eight years. No less important, enough time has passed so that millions of owners who lost homes to short sales and foreclosures can now re-enter the market.
And yet, whiff. Existing home sales in 2014 actually fell while sale activity so far in 2015 seems only marginally better.
Isn’t there something we can do to pump-up the real estate market?
In a word: Yes.
The credit system may seem omnipotent with its measures, formulas and economic models but the reality is that it’s less perfect then many might expect. If we can make the system a little better — and if we can change an assumption or two — the result might be a flood of newly-qualified home buyers flocking to open houses.
Credit Report Errors
Let’s start with credit reports. Credit scores would be higher if credit reports had fewer errors. According to the Federal Trade Commission, one report in 20 is far enough off-base to reduce credit scores by 25 points. That’s a big deal if you go from 724 to 699. It could mean a higher rate or maybe even no loan. Even worse, the FTC says that one report out of every 250 is so screwed up that credit scores are unfairly reduced by more than 100 points, enough to torpedo huge numbers of mortgage applications.
How can you protect yourself against errors? Under the Fair Credit Reporting Act (FCRA) you can request one free credit report every 12 months from EACH of the three major credit reporting companies. That’s three reports per year at no charge. If you get one report from a different company every four months you can continually check your credit standing at no cost. To get your report without hassle or cost just go to: www.annualcreditreport.com
Unfair Credit Dings
Imagine that your credit reports are entirely correct, that no items are out-of-date or factually inaccurate. That’s good news. What may not be so good is how your information is weighed and measured.
There is a certain equality with credit dings. Missing a $25 monthly payment is a problem but so is the failure to make a $250 payment.
Are they really the same? Maybe not, especially in the case of medical bills, a notorious source of credit disputes, inflated costs and bizarre billing practices.
Think about Williams. He pays his mortgage and car loan each month with absolute regularity and never misses a payment. And then, one night, he slips on the ice, goes to the hospital and an x-ray shows a broken foot.
Lots of treatments and bills ensue, but Williams has no worries because he has insurance. The hospital bills the insurance company; the insurance company sends the bills to its department of delays, deductions and arguments; and then — not having been quickly paid — the hospital bills Williams.
Williams, thinking the insurance company is paying the bill, tosses the invoice aside. The hospital then reports non-payments to every credit bureau it can find and turns the bills over to a collection agency.
During this whole process Williams never misses a mortgage payment or car bill. He thinks he has done everything right and that the hospital’s $18 charge for a single baby aspirin will be paid by the insurance company. Unfortunately, his credit score drops dramatically as a result of various late-payment and non-payment claims made by the hospital and his hard-earned credit score tumbles into a financial pit.
But no more. Since last year the largest credit score provider, FICO, has taken “a more nuanced way to assess consumer collection information, bypassing paid collection agency accounts and offering a sophisticated treatment differentiating medical from non-medical collection agency accounts.
“Instead of classifying a consumer as someone who paid or didn’t pay her bills in absolute terms, the various degrees of the consumer’s payment history have been quantified,” says the company.
Translation: Not all debts — and not all credit dings — are the same, something credit scores are finally beginning to reflect.
According to the National Association of Realtors, the new approach — which also includes credits for once-ignored utility and rental housing payments — creates information that better “helps lenders to evaluate younger persons and minorities who might not have a history of credit use.”
Big Savings with Lower Credit Scores
The new credit standards are likely to raise credit scores for millions of borrowers by anywhere from 25 to 100 points, scores which instantly translate into cheaper loans.
For instance, a borrower with a credit score above 740 faces a Fannie Mae “loan level pricing adjustment” of .25 percent — a fee that rises to 3.25 percent for a borrower with a credit score below 620. In dollar terms, says NAR, for a $200,000 loan the borrower with high credit pays a $6,500 charge while the borrower with better credit pays out just $500.
Given the experiences which led to the mortgage meltdown it’s fair to ask if the new credit standards will result in another round of massive foreclosures. The answer is likely to be no for two reasons: First, Credit standards during the last few years have arguably been “too tight” and can safely be adjusted. Second, the new rules in place under Dodd-Frank require lenders to verify that borrowers have the ability to repay the loan, a standard which means that a credit check alone is no longer enough to justify a mortgage approval.