Credit News You Can Use

Lenders Curb New Mortgages In Weaker Areas

Move May Put Added Pressure
On Prices in Hard-Hit States;
Submarket Collateral Damage

By RUTH SIMON
October 23, 2007; Page D1

Some lenders are now making it tougher for borrowers in softening housing markets to get a mortgage.

The policy is designed to keep lenders from holding the bag if home prices in those markets continue to fall -- and highly leveraged borrowers find themselves owing more than their home is worth. But the tighter standards, by discouraging home buyers, could add to downward pressure on home values in already weak markets.

Lenders such as J.P. Morgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are cutting the maximum amount some borrowers can finance in counties or states where home prices are declining. Mortgage companies are also taking a tougher look at appraisals in housing markets with falling prices. Among the areas being hit by the tougher standards are parts of California, Florida and Michigan.

Lenders in the past have come under criticism for their failure to make loans in minority neighborhoods, a practice known as "redlining." The latest round of tightening, by contrast, is broader, and aimed at markets where home prices are falling.

The sharper focus on soft housing markets comes after mortgage lenders have tightened their standards for all borrowers amid a slowing housing market, a widespread credit crunch and rising delinquencies. New national data from Equifax Inc. and Moody's Economy.com show that the mortgage delinquency rate jumped to 3.3% in the third quarter from 2.3% a year earlier.

Because lenders' policies vary, borrowers can often get around the tighter restrictions by taking their business elsewhere. Ritch Workman, a mortgage broker in Melbourne, Fla., says he recently asked Wells Fargo to approve a loan for a borrower with good credit who was buying a new $1.1 million home in Brevard County and wanted to put 10% down. "Wells came back and said they would only [finance] 85%" of the home's value, says Mr. Workman. The borrower ultimately got the 90% financing he was seeking from another lender, according to Mr. Workman.

The impact of such restrictions could grow if these tighter standards become more widespread. It "could significantly impact the ability of even borrowers with good credit scores to buy a home if they don't have a significant down payment," says David Stevens, who runs the mortgage operation at Long & Foster Real Estate, based in Fairfax, Va. Last year, more than one-third of Long & Foster's customers put less than 10% down, Mr. Stevens says.

With house prices falling, lenders are looking to control their risk, says Doug Duncan, chief economist of the Mortgage Bankers Association. But "there's a little bit of a self-fulfilling prophecy," he adds. "If you tighten standards, fewer people can qualify [for a mortgage]. Effective demand is going to be lower, resulting in lower house prices."

The tighter standards are already creating challenges for some borrowers. James DeGeronimo Jr., a mortgage broker in Cleveland, says that Charter One, a unit of Citizens Financial Group Inc., turned down one of his clients who was seeking to refinance a $108,000 mortgage. The lender didn't feel that it could get an accurate valuation of the property, given the high number of foreclosure sales in the neighborhood, he says. Mr. DeGeronimo says his firm was able to find another lender willing to refinance the mortgage.

A spokeswoman for Charter One says the company "has taken a prudent approach to serving the borrowing needs of homeowners" and has an additional appraisal-review process in areas with declining values. "We continue to lend in Cuyahoga County and it continues to be an important market for us," she adds.

Thornburg Mortgage Inc. in Santa Fe, N.M., which specializes in larger loans, has begun looking at median home prices in specific markets when it assesses a particular loan. "If we're making a $2 million loan in Manhattan, we're a lot more comfortable with it than a $2 million loan in Dearborn, Michigan," where prices tend to be much lower, says Thornburg President Larry Goldstone.

RAISING THE BAR ON BORROWERS

• Lenders' latest round of tightening is aimed at markets where home prices are falling.

• If such programs spread, even borrowers with good credit scores could have trouble buying a home.

• For now, borrowers can often get around such restrictions by taking their business elsewhere.

Some of the lenders are reducing the maximum combined loan-to-value ratio, a measure of how much of a home's value a borrower can finance using a mortgage and a home-equity loan. In August, J.P. Morgan Chase's home-equity division cut the maximum amount borrowers in Nevada can finance to 85% of the home's value. The unit won't let borrowers finance more than 90% of their home's value in seven other states -- Arizona, California, Colorado, Florida, Michigan, New Jersey and New York. That compares to a maximum combined loan-to-value of 100% of a home's value in Texas and Washington and 95% in other states. Chase made the move to reduce the chance that the loans it makes will wind up under water, a company spokesman says.

Citigroup this month cut the maximum amount certain borrowers in "depreciating" markets can finance through a mortgage and home-equity loan. The change applies to borrowers in seven states -- including Arizona, California and Florida -- who are buying a home or pulling cash out when they refinance. In most of these markets, Citi is reducing maximum financing to 85% of the home's value. Citi is also reducing by five percentage points the maximum loan-to-value ratio in more than 80 counties in 14 states and the District of Columbia.

"We routinely review our criteria and make adjustments as appropriate according to market conditions," a Citi spokesman says.

Wells Fargo, meanwhile, has expanded a program begun earlier this year that tightened standards in certain "declining" markets. Wells has reduced the maximum amount it will finance by 10 percentage points in markets the company has identified as "distressed." The list includes more than 50 counties in seven states, including parts of California, Florida and Michigan. It also cut by five points maximum financing in more than 125 other counties in a total of 22 states and the District of Columbia. A spokesman says the company is monitoring credit conditions on a "day to day" basis.

In other cases, lenders are giving appraisals closer scrutiny. Bank of America Corp. says it is asking for more detailed appraisals in markets with falling prices. In many cases, appraisers are being told to drive by the property to get a better estimate of its value instead of just running information about the home through a computer model.

In October, SunTrust Banks Inc. published a list of roughly 50 metro areas in 16 states and the District of Columbia that it designated as "declining markets." The declining markets list "was issued to make sure that appraisers in those markets are taking that into account and explaining how it figures into their valuation," a SunTrust spokesman says.

In markets where home prices are declining, IndyMac Bancorp Inc. is telling appraisers to base its assessment of a property's value on comparable sales that are less than 90 days old. It's also telling them to take into account the asking price for at least one comparable home that's currently on the market.

"The lenders are being way more conservative than they were a year or two ago," says John Rooney, an appraiser in Phoenix. In some cases it can be tough to find enough comparable properties that meet lenders' criteria, particularly for higher-end homes, he says.

Write to Ruth Simon at ruth.simon@wsj.com

5 Tips for Boosting Your Credit

Published on: Monday, October 22, 2007
Written by: Trista Winnie

Article not yet rated     

It is not necessary to have a great credit score in order to be a successful investor, but it certainly helps. Those with higher credit scores are rewarded with lower rates when borrowing money, for example, among other things.

But consumers with average or low credit scores often don't know what they need to do to improve their scores, and many do nothing as a result.

"Most people don't try to restore their credit, they just wait until it gets cleaned on its own," Joe Crump, real estate investor and author of How to Clean Your Credit in 60 Days, said. "They need to actually do something."

Further, as of last month, the way credit scores are reported is changing: Authorized users will no longer have the credit histories of the accounts for which they're authorized users applied to their scores. Experian began using the new credit scoring system last month, while TransUnion and Equifax will begin using the new system next year.

Using business credit offers some leverage and asset protectionPeople with limited credit histories on their own, who are taking advantage of the benefits of being an authorized user, could see their scores drop significantly as a result. (For more information on the new credit scoring system, see Credit Boom Turned Credit Bust.)

Below, then, are the top five tips that can benefit everyone looking to boost their credit score:

1) Using business credit:

This is an option available to active investors or those who are self-employed, though many remain unaware of its availability to them.

Using a line of business credit "allows investors to get credit that doesn't show up on their credit report," Swanberg said. Those interested in pursuing business credit should "shop online or ask their banker," she said.

Consumers can also benefit from keeping balances, if they have any, on their business credit lines rather than their personal ones. Business credit lines do not affect personal credit scores.

One way for consumers to take advantage of business credit is through setting up a company—most likely an LLC or corporation—through which to handle their investments. This strategy offers consumers leverage through business lines of credit and the potential for some asset protection. "With a sole proprietorship or partnership, your personal credit information could be included on your business credit report—and vice-versa," according to Entrepreneur.com.

In addition, "At some point, almost every business needs some type of credit," according to Entrepreneur.com. "To avoid having to use your personal credit history or guarantees and to obtain the best possible terms, start the steps necessary to build a business credit profile…before you really need it."

2) Percentage of credit used:

The ratio of credit used to available credit is a key factor in a credit score. The closer a person is to using all their available credit, the more likely it becomes that they will miss payments. Thus, individuals who keep this percentage lower will generally benefit from higher scores.

The ideal debt to credit ratio is 30 percent or below, Katherine Swanberg, a mortgage broker and real estate investor who teaches credit repair classes, said. The ratio is not calculated based on total credit available, but credit card by credit card. Thus, a balance of greater than 30 percent on any one credit card can damage a consumer's score.

One way for consumers to improve their debt to credit ratio is for them to call their credit card companies and ask the company to raise their credit limit. Thus, a consumer who regularly charged $1,000 to a credit card with a $2,000 limit could improve their score by getting their credit limit increased to $3,500, because that would change their debt to credit ratio from 50 percent to less than 30 percent.

Debt to credit ratios of 30 percent or less can improve credit scoresBalance transfers are another quick way consumers can improve their ratio of credit used to credit available. Because credit ratios are calculated on each individual card, it is better to use 25 percent of the credit available on two cards than it is to use 50 percent of the credit available on one card. Any card with a balance exceeding 30 percent of its limit will have a negative impact on a consumer's credit score. It is once an individual card exceeds 30 percent of its individual limit that the greatest negative effect is realized to one’s credit score.

3) HELOCS vs. home equity loans:

While high balances of mortgage debt do not reflect negatively on a consumer's credit score, large amounts of revolving debt do. If consumers plan to take loans out against the equity in their homes, they should be cognizant of the different ways in which home equity loans and home equity lines of credit (HELOCs) can impact their credit score.

Because HELOCs operate like lines of credit, with consumers borrowing money and then paying it back, in some cases, creditors classify HELOCs as revolving debt rather than mortgage debt. If a creditor "reports [a HELOC] as revolving debt, it can likely impact your score negatively," Swanberg said.

Home equity loans, on the other hand, are always reported as either mortgage or installment debt.

4) Careful monitoring:

There is more to this than meets the eye. Through the Fair Credit Billing Act (FCBA), consumers are protected against everything from fraudulent charges to charges for goods that were damaged during delivery. The FCBA is what allows consumers to dispute items and errors by sending notice to the creditor in writing.

Once the creditor receives the written notice, they have 90 days to investigate the claim and report their findings to the consumer.

Disputing items "puts the onus on the shoulders of that person who says you have bad credit," Crump said.

Most people also probably think that paying off everything they owe is the best way to improve their credit score. As it turns out, though, that is not always the case.

"Collections that are over two years [old] have very little impact on your current credit score," George Souto, an area sales manager for McCue Mortgage, said. "In fact, it is better to not pay off a collection that is over two years old, because if you do you will bring the last reporting date current again, which will be a recent late payment."

On the other hand, some lenders will not lend to consumers who have any unpaid collections. And, after a certain amount of time, paid collections are better for a consumer's credit score than unpaid collections. Consumers should decide whether or not to pay off unpaid collections based on their individual situations.

Additionally, consumers have at their disposal a tool called rapid rescore. A rapid rescore is when a consumer pays the credit bureaus to rescore their credit report "immediately after giving them proof that something has changed," Swanberg said. "It takes about five days and costs about $30 per issue per tradeline."

Consumers should be aware of how many lines of credit they have openRapid rescores are most useful for investors who need to boost their credit scores within a short amount of time. This is a particularly useful tool for investors who frequently buy properties, because they need to have the best scores possible in order to get the best rates available to them.

5) Accounts open:

Another key part of a credit score is the number of lines of credit a consumer has available. While it is better to have too many credit cards than too few, those with too many lines of credit can expect their credit scores to a credit score reduction. Credit scoring takes open lines of credit into account because banks run the risk that, at some point, an individual could charge up to the limit of each of those cards.

While there is no concrete number that is best, many experts, including Swanberg, suggest three to five lines of credit.

"I recommend three to five open [lines of credit]," Swanberg said. It "depends on the borrower and the borrower's score."

If consumers have too many lines of credit open and would like to close one or more lines, they should close the newest lines of credit rather than the oldest, because length of credit history is another factor in a credit score. But for those with only a couple of credit lines more than the recommended three to five, closing accounts might turn out to lower their score. A common rule of thumb is to keep lines of credit that have been active for one year or longer open.