Fannie Mae Tightens Rules for Mortgages

By JAMES R. HAGERTY- The Wall Street Journal - April 2, 2008

Fannie Mae announced a new round of tightening in its standards for home mortgages it buys or guarantees.

The government-sponsored provider of funding for home loans told lenders Monday it will require a minimum credit score of 580 for most loans it buys on an individual basis. Credit scores, which range from 300 to 850, are designed to measure borrowers' likelihood of repaying loans. In the past, Fannie had no minimum score. The company said it will still acquire loans with lower credit scores in certain circumstances.

Among other changes announced to lenders, Fannie also said it will increase the period needed for borrowers to "re-establish" their credit history after a foreclosure to five years from four years. Fannie said it would allow shorter recovery periods for borrowers with "documented extenuating circumstances" that caused the foreclosure.

Separately, Fannie last week told loan servicers -- companies that collect loan payments -- that they can increase their forbearance period on delinquent borrowers to as much as six months from four months to allow more time to seek alternatives to foreclosure. Fannie hopes that move will reduce the number of loans on which it needs to recognize losses, though it may be only delaying the pain in some cases.

In response to growing default-related losses, Fannie and its main rival, Freddie Mac, have tightened their loan standards and added fees for riskier types of loans in a series of steps announced over the past few months. Those moves have raised costs for borrowers and drawn protests from some politicians and home builders.

Buy-Here, Pay-Here May Grow

Arlena Sawyers - asawyers@crain.com
Automotive News 3/31/08

Home foreclosures. Vanishing jobs. Even good credit histories are at risk. As the economy worsens, people who once had good credit may be unable to get car loans through traditional sources. But one consumer's loss might be a gain to a buy-here, pay-here dealer, industry experts say.

"This is going to be a pretty good growth year for any dealer that's in the buy-here, pay-here business,” predicts Mike Unn, president of the National Independent Automobile Dealers Association. About 1,000 of the association's 20,000 members are franchise dealers who operate standalone used-car lots. Some people, he says, "can't get credit anywhere else."

Buy-here, pay-here dealerships sell older, higher-mileage vehicles to people with bad credit. The dealerships hold the loans and assume the entire risk. They charge interest rates of 25 percent or more, depending on state usury laws. 50 far, there's scant evidence that dealers are having problems obtaining credit for their customers. That could change.

Ken Shilson is president of the National Alliance of Buy-Here, Pay-Here Dealers, an organization representing 10,000 dealers in the United States. He says buy-here, pay-here business may pick up, but not until about a year to 18 months from now.

Last year in Florida, some buy-here, pay-here stores suffered as many of their traditional customers - construction workers in the housing industry-lost their jobs, Shilson says. Now, those same stores are seeing an increase in business from consumers who lost their homes and good credit standing in the home mortgage mess.

Shilson predicts that as other parts of the country are hit by the deep downturn in real estate that has plagued Florida for more than a year, buy-here, pay-here dealers will see their business grow.

"People who are losing their homes are not our customers now," Shilson says. 'The traditional buy-here, pay-here customer rents. He doesn't own a home. All those losing their homes are new customers.”

Beware 'Credit Repair' Scams

Here's what to look out for when you're checking firms online

By ILYCE GUNK Tribune Media Services

Every day, thousands of people type the words "credit repair" into Internet search engines. Thousands more type in phrases like "bad credit" or "bad credit repair."

Figuring out how to repair credit is on the minds of home buyers, sellers and owners who've realized that having stellar credit provides financial options that simply aren't available to those with low scores.

Unfortunately, some of the Web sites that come up in a search for "credit repair" can do more harm than good. They're scams.
The typical credit repair scam works in one of a couple of different ways.

There is the promise that your credit history will be wiped clean. And you'll be asked for a large payment upfront, sometimes as much as $1,000 to $1,500.

In one typical scam, the credit repair organization will tell you that you'll get a new Social Security number. Since the Social Security number is new, it won't have any blemishes on it and your credit will be perfect.

Unfortunately, the Social Security Administration (SSA) almost never gives out new Social Security numbers - even to people who have legitimately had their number stolen and used over and over again.

Another common scam is to dispute all of the negative information on your credit history.

A credit reporting bureau must investigate all disputes within 30 days. If the bureau can confirm the negative information, it stays on your report. If it can't confirm it, the information is pulled off your credit history.

But here's the key: While the information is being disputed, it temporarily disappears from your credit history. So, your credit history looks perfect, even though it isn't. At the end of the 30 days, the credit repair company will dispute all of the charges again.

7 Steps to Take After Bankruptcy

Many bankruptcy attorneys like to call a Chapter 7 bankruptcy a "fresh start" bankruptcy. In a way, it is a fresh start -- you do get to eliminate a great deal of debt.

However, the reality of being bankrupt is not fresh at all. "Bankrupt" is a word with a strong negative connotation. It's often unfair, but there is a widespread perception that if you've gone bankrupt, you've done something wrong.

The truth is that you will need to start working immediately to truly have a positive, healthy life after bankruptcy. Follow these seven steps to give yourself a true fresh start:

1. Reaffirm your car debt.
If you own a car and are still making payments, make sure you sign a reaffirmation agreement with the car lender. A reaffirmation means that you intend to keep the vehicle and continue making payments. If you fail to make payments, your car can be repossessed and sold (with you liable for any deficiency). Signing this agreement is an act of good faith and will give you more leeway with your lender.

Remember: Do not reaffirm the debt if you intend to surrender the vehicle. You will be financially liable for the balance and will not have a car to show for it.

2. Establish new credit lines.
You need to re-establish credit as soon as possible. Most traditional banks and credit card companies will probably not approve you. However, some banks will allow you to deposit money into a savings account and issue a credit card attached to that account. This is called a secured credit card. Another possibility is a passport loan. This is when you deposit money into a savings account, borrow that money and pay the interest each month.

Neither of these options is great; they are, however, crucial. You see, you will have to do something like this eventually in order to be eligible for a credit card with a traditional bank. Getting started early is far, far better for you in the long term.

3. Clean up your credit report.
Make sure all three credit bureaus -- Equifax, Experian and TransUnion -- show that your debts have been "discharged in bankruptcy."

This is important because you want the trade lines (accounts) to accurately reflect that they have been eliminated.

4. Never co-sign for anyone.
If you have just filed bankruptcy you will not be able to eliminate debt in a Chapter 7 for eight years. Therefore, any co-signed loan that goes bad will very likely result in a judgment against you.

The risk is simply not worth the reward. You may not receive an option to co-sign for a few years after filing, but when the option becomes available, you must avoid it.

5. Never intentionally carry a credit card balance.
I know, this feels almost impossible. However, in a world where many of us live paycheck to paycheck, the extra money used to pay credit card balances is often the straw that breaks the camel's back. Remember, 85% to 90% of all bankruptcy filers do so because of incurring costs from loss of employment, illness or divorce. If you don't have a balance, should something terrible happen, you will have the financial cushion to help you cope.

It's not your imagination -- there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.
It's a tough habit to get into, but paying your balances each month is a great way to save money and provide for yourself in case of emergency. If you are faced with a balance, do everything in your power to stop using the card and pay on the balance until paid off.

6. Have a story prepared.
Some people are deadbeats. Some people ran up their credit cards to support a drug habit. You need to make sure others understand that you are not one of these people, that you have legitimate reasons for filing. You want to have a specific reason -- to be stated in less than 20 seconds -- that says why you filed bankruptcy.

More often than not, you will find people more willing to work with you when you have been honest, they see in your face your remorse and they understand that your reason for filing was something out of your control.

7. Stay positive.
Even if you tend to be a negative person, you need to believe that you can get on with life and recover from bankruptcy. I have seen people who are so psychologically devastated after filing bankruptcy that they do not re-establish their credit for years. The result is that it takes them five to 10 years to begin improving their credit score when it only needs to take two years. Please avoid the ostrich approach to life after bankruptcy in which you stick your head in the sand and hope things work out. You must take the aggressive approach, knowing that you will encounter rejection but eventually find success. If you work hard and start immediately, you will soon reach a point where your credit will be strong.

This article was reported and written by Justin Harelik for Bankrate.com.

Thought for Today...

Paycheck Pressure

by Shella Deni, Elizabeth Flech - AP

As the U.S. economy slows, wages can't keep up with inflation, which means less spending power for already troubled consumers. According to the Bureau of Labor Statistics, inflation-adjusted weekly wages in the past four months fell for about 80 percent of workers in non-managerial production and services jobs.

From November through January consumer prices, excluding food and energy, rose at an annual rate of 3.1 percent, according to the Labor Department-higher than the Federal Reserve's unofficial comfort zone of 1 percent to 2 percent. Costs for medical care, education, clothing, and airline fares are dropping, while oil, wheat, soybeans and corn futures have been trading near all-time highs. A Tuesday report showed wholesale inflation for goods bought by producers jumped by 1 percent in January, more than double the increase economists were expecting.

The rise in prices is "a sustained hit on consumers' real incomes and, hence, on their ability to spend on other goods and services," writes High Frequency Economics chief U.S. economist Ian Shepherdson.

For the Federal Reserve, concerns about the sluggish health of the economy have overtaken worries about soaring prices. The central bank cut interest rates five times in the past five months. Lower interest rates typically contribute to inflation, and the Fed recently raised its inflation expectations for the year. Economists anticipate another rate cut at the bank's March 18 meeting.

Consumer spending, which is closely finked to job security and expectations of healthy wage growth, is the single most Important contributor to U.S. gross domestic product and constitutes more than two-thirds of the nation's output, notes National Retail Federation chief economist Rosalind Wells. "Average workers have been faced with erosion in their spending power,· she notes, which is bad for the broader economy and for already struggling retailers.

A Tuesday conference Board Consumer Confidence Index reading dropped to 75 for February, far below a projected reading of 83. Bear Steams economist John Ryding notes the survey indicated a sharp drop in consumers' assessment of labor market conditions in the month. The decline in consumer confidence, including the drop in consumers' assessment of the labor market, has a recession- like feel to it: he writes.

FICO 08 - Understanding the “New” Credit Scores

FICO 08 is coming! FICO 08 is coming! Ready or not, the method which credit bureaus use to determine credit scores is about to change.

Fair Isaac and Co. is introducing FICO 08, an improved scoring model designed to help lenders make a more accurate assessment of risk when accessing applicants. In light of increasing levels of delinquencies, as well as declining recovery values (the amount a lender is able to recover after a reposed vehicle is sold at auction), lenders have been looking for a better model to predict the likelihood of a loan default. According to Fair Isaac, FICO 08 should help lenders reduce their default rates by 5-15%

The fundamental elements that FICO evaluates in computing a credit score will remain largely look and feel the same. Lenders and creditors will continue to look at:

• Payment history: Has the consumer consistently paid their accounts on time in accordance with the terms of their loan or credit arrangement?
• Available credit: What is the total amount of credit currently available to the consumer?
• Credit utilization: How much of the total credit available is currently being used?
• Credit balances: What is the total of current and delinquent account balances?
• Depth of credit: How long is the person’s credit history and what is the mix of credit types?
• Recent credit: How many recently opened credit accounts and credit inquiries are on file?

What will change is how the new scoring system views these elements. FICO 08 will more finely “slice and dice” information, and will do a better job separating the good risks from the bad ones, particularly with regard to subprime borrowers. By dividing the population into 12 segments (8 for “good” credit and 4 for “bad”) instead of the current 10, FICO 08 hopes to make the scoring system more accurate, and lower the risk of assigning a consumer to the wrong segment.

Additionally, FICO 08 will better identify young or thin credit files, who may now have high scores even though they have relatively few accounts, many recently opened. Consumers actively seeking new credit will be more easily identified, allowing creditors to more accurately gauge the potential risk in granting too many new accounts at once.

The major differences will be in how FICO 08 looks at credit files. More points will be given to consumers who maintain a variety of credit, such as a credit card or revolving account, as well as an installment loan or mortgage. This, accord to Fair Isaac, shows that the consumer can manage multiple payments on different kinds of accounts. Additionally, FICO 08 will penalize borrowers who use a high percentage of their available credit. Accounts at or near their limits will generate a lower score for consumers.

The way that FICO 08 will treat delinquent credit will be different as well. It will be harder on “repeat offenders”, those consumers who are consistently delinquent on their accounts, as opposed to those with only an occasional slip up. Consumers who have a number of accounts currently past due will be viewed harsher than a consumer with only one account delinquent, with other accounts current or up to date. A consumer with only one derogatory or delinquent account won’t be dinged as hard as someone who has a number of accounts past due, and in fact, may generate a higher score for a consumer in arrears in one account who also has a number of accounts in good standing. However, FICO 08 will draw a greater distinction for serious delinquencies over 90 days late. Multiple delinquent accounts could significantly lower a consumer’s score.

Perhaps the most significant change coming is that FICO 08 will no longer consider “authorized users” in computing a credit score. This is in response to curtail the use of “credit sharing”, where a creditor with a low score is added to an account of a non-related consumer in an effort to boost the first consumer’s score. In effect, authorized users with no credit history of their own could see their credit score disappear.

Consumers who are accessed as a “lower” risk under FICO 08 may start to get better terms from creditors. A consumer deemed to be a “higher” risk under the new scoring system may find less than favorable terms, or may find it tougher to even get credit. Consumers who occasionally mess up, have a good mix of credit types, with a single delinquent account may actually see their credit scores rise, while consumers who consistently mess up, have balances at or near their credit limits, are 90 days late on multiple accounts or have authorized user accounts in their file, may see their credit scores drop. Additionally, FICO 08 will not “ding” a credit score for multiple related credit inquiries. A consumer shopping for a mortgage or an auto loan who applies to multiple lenders will not see their score drop because of the inquiries.

SO, when will FICO 08 come into play? Experian is expected to begin using the FICO 08 in the first quarter of 2008, while TransUnion believes they will be ready by the second quarter of 2008. At this time, Equifax has declined to offer FICO 08 due to litigation regarding “VantageScore”, which is a joint venture, started by all three bureaus in 2006, to compete with Fair Isaac's FICO scoring system. The lawsuit, filed by Fair Isaac, is based on unfair and anti-competitive practices which are meant to harm the FICO brand. The legal action has caused Equifax’s relationship with Fair Isaac to remain "strained" until the lawsuit is resolved, says David Rubinger, Equifax spokesman, as quoted in the December 19th, 2007 edition of the Wall Street Journal,

Regardless of when FICO 08 is implemented, consumers may not see a significant difference in their scores. According to Tom Quinn, Vice President of Global Scoring Solutions for Fair Isaac, as quoted in the December 19th, 2007 edition of the Wall Street Journal, "Overall, more consumers will see their FICO scores go up slightly than will see their scores drop."