Silicon Valley Mortgage Update FICO Scores_Aug. 9, 2014

Courtesy Tony Guaraldi Aug. 8, 2014

There are a few industry changes that we’ll discuss today including how Fannie Mae will treat people with a Short Sale in the past and a new FICO scoring model that will be implemented this fall.  The new FICO scoring model 9 will help many consumers with collections to improve their credit score and we’ll cover all the details on this.

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First on the Short Sale/Pre-Foreclosure waiting time for borrowers who wish to buy another home after this derogatory event.  The current rule for Fannie Mae are that if the borrower puts 20% down payment the waiting time to buy or refinance after a Short Sale is two yearsCurrently if the borrower puts less than 20% down and at least 10% down the waiting time is four years after a Short Sale.  In the new version of DU to be release on August 16th the standard waiting time will be four years regardless of how much down payment is made.  So if you know anyone who has greater than two years since their short sale but less than four years they have next week to originate a loan with Fannie Mae.  Otherwise after next week they’ll need to wait the full four years.  Fannie does still offer the exception for “extenuating circumstance” to have a two year waiting time rather than four years.  But from experience this “extenuating circumstance” rule is difficult to meet and document.  Feel free to reach out to us with further questions on this.

For a summary of all Fannie Mae’s waiting times see chart below.

Summary_Fannie Mae All Waiting Period Requirements Aug. 8, 2014

Summary_Fannie Mae All Waiting Period Requirements Aug. 8, 2014

Now on to the new FICO Score 9 model to be released this fall by FICO.  In the new model if the consumer has a collect account and they pay it off to zero the collection account will be ignored thus it can substantially increase the FICO score.  In the current FICO models if the collection was paid off the credit score would still count the collect against the consumer.  In fact we’ve seen cases where paying off a collection can hurt the credit score because it would be reported as current at the time its paid off.  An older dormant collection that had a balance still due was scored better than a recent paid off collection.  Ridiculous right!  Well it sounds like they’ve finally got this right by removing the collect once its paid off it incentivizes people to actually take responsibility for them and pay them off rather than ignoring them.

The second big change in FICO Score 9 is that medial collections will be weighted less heavily then in the past.  The most common collection is medial related by far.  This typically happens when a consumer thinks their insurance company has paid a medial bill but the insurance company actually did not pay it.  They often never receive a bill from the hospital and have no idea that its due so thus the hospital sends them to collections.  Often times they do not receive any notice from the collection company either.  Many lenders ignore medial collections in their underwriting guidelines because of this but it was still factored into the FICO score and could disqualify someone from getting a new loan.  In this new model medical collections will have a reduced impact on the FICO Score.

This new scoring model is set to be released this Fall but the big question is when will lenders and Fannie/Freddie chose to adopt this new model.  It could be many months later or even over a year.  We’ll keep an eye on this and let you know if/when lenders are starting to adopt the new FICO Score 9 model.  Here’s a link to an New York Times article on this issue.

http://www.nytimes.com/2014/08/08/your-money/credit-scores-could-rise-with-ficos-new-model.html

The geopolitical events of this week have dominated the stock and bond trends.  Late in the day on Friday there was news from Russia that they were looking to defuse the conflict with the Ukraine.  This caused stocks to gain some strength and bonds lost steam as you can see from the upper tail on the trading box for Friday to the right of the chart.  This is not a good technical sign as bonds were unable to close above the resistance line that has kept a lid on prices since the end of May this year.  With the uncertainty it’s hard to predict where things are headed but in general any news of one Country attacking another will be viewed as uncertainty in the financial markets.  When this happens there is a “flight to qualify” or in other words typically money flows out of stocks and into bonds.  This helps to improve bond prices and interest rates.  Conversely if the conflicts get defused then it can be a positive trigger for stocks and hurt the bond prices and mortgage rates. 

For more information contact:

Tony Guaraldi, VP of Mortgage Lending, Guaranteed Rate Mortgage

o: 408.841.4953 – m: 408.504.3295

tony.guaraldi@guaranteedrate.com

NMLS ID: 293894

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