Are You in Shock? Did Loan Forgiveness Affect Your Credit Score?

But not in a postive direction?

A consumer or borrower might think that getting rid of a loan would improve a credit score.  But the reality is that in spite of all the talk about helping students, for example, by helping them obtain cancellation of the school loans, just the opposite happened. In fact, I know of a non-student case where a borrower's second mortgage was voluntarily forgiven by the lender, but then that person went to obtain a new purchase mortgage loan approval to buy a second property, and their credit report now showed a foreclosure. And apparently, according to the New York Times, some student borrowers are finding that their loan servicers are reporting they are delinquent in loan payments,  rather than a debt forgiveness.  The next problem is that the loan servicers seem reluctant to correct these reporting errors, and thus the borrower's FICO score drops, and it may be enough to prevent obtaining a credit card, or a loan.

A mortgage borrower could notify the Consumer Financial Protection Bureau, assuming he/she has the documentation that the loan was cancelled. Also, a dispute concerning the reporting error could also be initiated through the credit bureaus. 



Julia Huntsman, REALTOR, Broker | www.juliahuntsman.com | 562-896-2609 | California Lic. #01188996

FICO Scores May Mean Savings on Monthly Payment of $200

Many buyers, and property owners who want to refinance now, realize that FICO scores are important when it comes to getting a loan. But what exactly is the picture on the benefits to a higher score, and what kind of a difference will it make? Below is a general chart for score categories and interest rates.

The sample breakdown below may not be exactly like this because a borrower's other circumstances with a particular lender or a particular program could vary, so it's important to keep that in mind. But oftentimes prospective borrowers are not aware of how their decision to buy one more piece of furniture, or buying that new car, BEFORE closing escrow, may strongly impact their new monthly payment because they have added more debt.

30 year Fixed Rate Mortgage - $200,000 Loan Amount

FICO Score                APR              Monthly Payment

760-850                     4.466%          $1,009
700-759                     4.688%          $1,036
680-699                     4.865%          $1,057
660-679                     5.079%          $1,083
640-659                     5.509%          $1,137
620-639                     6.055%          $1,206

Chart courtesy of Pat Zaby

For more information on how debt and other credit issues can impact your credit score, I can forward you my Powerpoint presentation.  Also, go to http://www.myfico.com/ for objective information about credit scoring and obtaining a free credit report.

Foreclosure Debt Forgiven; New FICO Score System

The name of the little photo to the right is "holiday deer", and I hope you can also think of it as "Holiday Cheer" with the recent news on debt forgiveness.

At least if you do have to take the bad credit hit for a foreclosure or short pay, the new law signed yesterday by President Bush removes certain taxes that used to apply. So the good news is for renegotiated loans where more was owed than the current value of the home ("short pay'), the borrower will not have to pay income tax on the difference.

A sign of when things are going to bottom out is when there are signs of things getting better, and one of those signs with loans might be that there are more fixed rate loans taken out in the first half of 2007 compared to the first half of 2006. See this Mortgage Bankers Association article. Fixed rate loans are most certainly a sign of better financial health for many borrowers who will thus be avoiding the spiking of their monthly loan payments 1 and 2 years after taking out their loans.

If you're contacted by someone saying he/she will get you out of foreclosure, please read this article about foreclosure scams. This includes DO NOT sign over your property or sign a quit-claim deed, and do not pay someone to renegotiate your loan with the bank (you can do this yourself for free, or ask your REALTOR to help you). Foreclosure in California follow a very specific process--do not allow yourself to be taken advantage. Read my earlier post about knowing your rights if a Notice of Default has been filed on your property.

More news is about your FICO score, as calculated bv the Fair Isaac Company who invented the index most commonly used throughout the loan industry, the insurance industry, the car industry, and anyone else who wants to figure out if you're a good risk or not. Keep your credit as clean as possible, because that will help you get a better loan at a better interest rate if you are trying to refinance or purchase. This new model will be rolling out in the Spring, but may be used before that in the loan industry (it's hard to know), but take a look at the samples in the box under Figuring Your Credit Score as these may be a hint of things to come.

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Volatility in the Credit Markets

The world of loans and finance is like a global pile of pick-up-sticks, and this last week demonstrated how one move rolls everything. On August 9th France's largest bank BNP Paribas halted withdrawals on the investment funds it said could not be fairly valued because they held subprime loans. The European Central Bank and Federal Reserve in the U.S. each added money to their own systems in response to the European banks' sudden demand for cash over the subprime loan market problems here.

The analyst at SCME Mortgage Bankers tells us that actually what you don't hear in your television news reports is that subprime loans themselves are not the problem: subprime loan delinquency rates are close to the delinquency rates on FHA/VA loans. When was the last time you heard about HUD-insured FHA loans in the media?--those low down payment loans which have been around since the Depression. Both types of loans lend to borrowers with lower FICO scores and other credit profile issues.

The difference is that the subprime loans are backed by bonds, and some hedge funds have raised capital to buy those bonds, and also borrow additional funds using that same capital, to buy more bonds through leverage. With a decrease in the value of the bonds, such as is now going on the subprime market, these hedge funds are receiving margin calls, meaning the lender wants its money. If the hedge fund cannot meet the demand, it suspends withdrawals. Some mortgage sources have paid out cash to meet the margin calls, and eventually are having to close their doors, American Home Mortgage--a strong and solid lender--being a good example. Banks which lent money to the hedge funds are now in the last few days backed up by deposits from the country's central bank, thus creating news when we read about the European Central Bank loaning $130 billion to its banks, and the Federal Reserve adding $24 billion to the U.S. banking system.

What has happened in the subprime loan market is a much larger story than a short spot on the 6 o'clock news. It's tied into our system of investing, who is regulated and is not regulated, and what happens when market factors change.

For another look at the current situation, click on this Singapore post.


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What About Taxes on Short Pays And Foreclosures?

In case you're involved in either one of these situations, it's important to know you may be paying the IRS some money.

A "short pay" is where you were soon going into foreclosure, or you knew you were have difficulty in keeping up with your payments, and fortunately, you were able to sell before the inevitable occurred. The bank took back your loan for less than you owed on it, because you just weren't able to sell your property for more than it sold for. So if you owed $400,000 on your loan balance and the bank agreed to settle at $380,000, the bank lost $20,000 on their loan. Or, in the situation where you did go into foreclosure and the bank still lost money on their loan because they couldn't ultimately sell the property high enough to recover their loan amount, they are still faced with a money loss situation.

In either of these events, you could face a capital gain or loss or relief of debt amount for reporting on your tax return. There are many factors involved, such as how the property was held, i.e., whether or not it was your personal residence or held for resale, and what your basis was in the property, will be important information. Whether it was "recourse" or "non-recourse" debt is significant.

The important thing to know is that your tax advisor is all important in this situation. The law requires lenders to issue a 1099, but you shouldn't assume that the amount you see is the full amount of debt that you owe taxes on. This is probably not the time to do your taxes yourself, but instead seek full advice from a competent tax advisor. More information is available from the IRS.

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Lenders Tightening Up--Take Care of Your Credit Ranking

It just can't be emphasized enough to keep track of your FICO score, because the name of the game is the higher your score, the more choices you will have and the better rate at a lower cost you will get. As more subprime lenders change their lending guidelines and cut back, as today's announcement concerning Washington Mutual's subprime division Long Beach Mortgage indicates, buyers who want to buy need to learn about what goes into the FICO score. For instance, length of credit history accounts for 15% of your score, and your payment history accounts for 35% of your score, as the graph shows. Keeping your balance owing on a credit card, for instance, to less than 50% of your total credit allowed is also a scoring factor.

No point in going out and buying that new car just when you want to shop for a mortgage loan, because you could be loading yourself up with too much debt. The mortgage industry started using this scoring system in the 1990's, developed by the Fair Isaac Company, and they have specific score breakdowns showing the likelihood of a 90-day late in the near future according to your credit score. If your score is 700 or over, it's 288 to 1; if your score is 600 the likelihood is 4.5 to 1. There are more features, plus the fact that your score comes from 3 agencies and each may be a little different, so lenders develop loan qualifying criteria based on your high and mid-scores. If you want more information, please contact me.

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