Well, we have gone through one of the worst real estate meltdowns we may see in our lifetime. But, as we continue to fight against high unemployment, falling property values and strict lending guidelines not to mention a whole lot of uncertainty. Can we all agree to one thing? We may need to consider using a revised version of our credit scoring system that fits the new conditions of today?
I work with real estate investors, self-employed, first time home buyers (FHA), foreign borrowers and all of the above. We all know that the FHA credit guides are the most liberal. But, just recently FHA has begun to raise their credit score requirements along with creating some other more strict guides to follow. Is this something that we need to all pay attention too?
We all know what happened when things got to loose. What I don't understand is this... Why do we have to "correct" the system in pieces.. If those that make the laws in our country would communicate with those of us that actually work in the industry. They MAY realize that the system we live in today (real estate & mortgage lending) is a machine with many working parts. If the "machine" is not tuned up every once in a while it runs slow, erratic and sometimes may not run at all.
So, when you take your car in for a tune-up, do they just replace the air filter and send you on your way? Not after this type of misfire of systems and departments. Replacing one part at a time only works if your trying to please a portion of your audience or customer. You have to attack the whole system at once understanding how each part feeds and provides information for the other. When you come to pick up your car it runs smooth, quiet and FAST.
WHY? Can't we get all the working parts fixed and communicating together? First we need to understand what is broken.
PRICING is determined by a formulation of FICO scores, which predetermines the borrower credit worthiness. Banks, lenders and even most employers use the credit score as the most important data requirement necessary in order to consider an individuals qualifications. The credit score at the time of loan application will determine the interest rate that individual pays for most likely the next 30 years or a substantial portion of the term of the loan.
How the FICO score is calculated has no simple answer. Every lender must breakdown each trade line. Which includes loan balances, credit limits and many other components. Also, they will consider the size of each payment and balance. Along with timing of opened vs closed accounts. If this is not confusing enough just for me to write. This is no easy task to explain or understand to any borrower. Even some of us very experienced lenders have some challenges with the overall consistency of this process.
Each bureau has complete access to a long list of financial history of each borrowers data. But, each bureau provides a different version of credit history and performance after formulating a score from the same data. This can cause some confusion along with frustration for all parties involved.
What has happened over the past five years during this lending and real estate debacle. Is that most very well qualified borrowers have fell victim to the over cautious, self preserving banks. Due to decreasing borrowers available credit and squeezing borrowers into an unfair "creditworthiness formula." Which was created to protect the banks balance sheets only. Instead of understanding that many good borrowers are being sacrificed for no reason. Today a high percentage of very qualified borrowers have lower scores at no fault of their own.
Come on. I sometimes feel like we have a system that may be to complex for those running it.. That's another subject we can chat about some other time. Just an experienced professional trying to get some others to step back and look at the WHOLE PICTURE...
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