Credit Reporting Companies Implement New Scoring Model


 By: Heather Hill Cernoch

Original Post Date: January 24, 2011

VantageScore 2.0, the latest credit scoring model from VantageScore Solutions, is now fully implemented at all three major credit reporting agencies — Equifax, Experian, and TransUnion — for use by financial institutions. “Given the dramatic shifts in today’s credit environment, lenders need information and tools that reflect these changes to make sound lending decisions,” said Kerry Williams, group president of Experian Credit Services and Decision Analytics. “VantageScore 2.0 delivers an even greater performance lift to provide a higher level of confidence in risk decisions when including the score in the underwriting and lending process.”

According to VantageScore Solutions, VantageScore 2.0 was created in response to the significant change in consumer credit repayment behavior. Sarah Davies, SVP of product management, analytics, and research at the company, said all credit models should be updated regularly to ensure they remain accurate and predictive. VantageScore 2.0, which was launched in October 2010, shows improved performance over VantageScore 1.0, she said.

“VantageScore 2.0 is built on a blend of consumer credit behaviors from 2006-2009, which creates a highly predictive score,” added Barrett Burns, president and CEO of VantageScore Solutions. “We’ve recently experienced a variety of economic scenarios, which have impacted consumer behavior of the past several years. This includes an increase in foreclosures in the housing market and changing payment priorities among consumers.”

VantageScore 2.0 enables lenders to increase populations of target customers while managing appropriate risk. The new credit model’s development sample is compiled from two performance time frames: 2006–2008 and 2007–2009. Each contributes 50 percent of the sample, reflecting more recent credit conditions.

The company explained that this approach reduces the model’s sensitivity to volatile behavior in a single time frame and helps create a predictive score that enables lenders to mitigate risks and make more informed lending decisions.

According to JP Morgan’s Global Equity Research division, “VantageScore is gaining traction. Chase recently adopted VantageScore, becoming one of the first major lenders to replace certain usage of FICO scores with the new model and view it as an important sign of the bureaus’ growing prowess in analytics, modeling, and decisioning.”

Connecticut-based VantageScore Solutions, LLC, is an independently managed company created by the three major credit reporting agencies to provide lenders with a consistent interpretation of consumer credit files across all three companies.

Posted in Uncategorized

Estimate of mortgage interest tax deduction’s effect on federal deficit is lowered


By: Kenneth R. Harney

Original Post Date: January 23, 2011

 Reporting from Washington —

Are you worried about the mortgage interest deduction going away? After all, it’s a high-profile, high-cost target for federal budget cutters — and was prominently featured in the report of the presidential deficit-reduction commission late last year. Reformers have been trying to kill or at least clamp a ceiling on these write-offs for decades.

But here’s an intriguing twist that has just emerged on Capitol Hill and that might bring some encouragement to homeowners, realty agents and builders who strongly oppose any cutbacks in tax benefits. According to new estimates compiled by the nonpartisan Joint Committee on Taxation — Congress’ top technical resource on all tax law matters — the mortgage interest deduction is not quite as big a hole in the federal budget as previously estimated.

In fact, it’s significantly lower — $88 billion less in revenue losses are now projected over the next three fiscal years — than the committee estimated early in 2010. That’s big money, even in an era of trillion-dollar deficits. Why the sudden reappraisal of the revenue losses caused by millions of homeowners writing off their mortgage interest?

For starters, there’s less mortgage interest being written off than earlier statistical models had anticipated. Home values are down in many parts of the country, and lower purchase prices and far stricter underwriting mean smaller mortgage amounts. Interest rates have hit half-century record lows, and have remained at or near those floors for much longer than anyone had estimated.

Thirty-year mortgages at 4.5% obviously require much less in monthly interest payments than do similar loans at 5.5% and 6%. Millions of homeowners who had been paying even higher rates than that have refinanced in the last year — the combined effect of which has been to reduce the estimated amounts of interest being written off now and for the next couple of years at least.

For example, the tax committee last January predicted that mortgage interest deduction losses to tax revenues for fiscal 2011 would total close to $120 billion. Now the estimate is $93.8 billion.

These are brain-bending big numbers, but the fact is this: It appears that the revenue-loss costs of this jumbo-sized tax benefit for homeowners will be less than anyone expected. In the politically sensitive world of federal budget deficit reform, every lower loss is a better loss — and one that presumably needs less reform.

The committee’s new projections have also turned up some other intriguing and previously unreported facts about key tax benefits for buyers and owners. For example, although the popular first-time home buyer tax credit programs of 2008 and 2009 that stimulated millions of purchases were net revenue drains for the government during fiscal 2010, they are morphing into revenue-raisers — to the tune of $6.5 billion from 2011 through 2013.

There are two factors at work: The first credit, enacted as part of the 2008 emergency economic stimulus legislation, was for a maximum $7,500 or 10% of the house price. But it was more of an interest-free loan than a typical credit. Under the terms of the program, buyers are required to make annual repayment installments of 62/3% of the credit they claimed over the next 15 years — and they’re beginning to do so.

But it’s not just those 2008 buyers who will be paying higher taxes. The two subsequent home buyer credit programs enacted by Congress — $8,000 for first-time purchasers and $6,500 for repeat buyers — did not require repayments. But both programs came with strict rules that experts believe will add to revenue collected by the Internal Revenue Service during the years 2011 through 2013.

For instance, Congress required that credits claimed under the $8,000 and $6,500 legislation be repaid if the owners do not continually use their house as a principal residence for 36 months after the purchase. Say you took the $8,000 credit on your 2009 federal tax filing, but then decided to sell the house or turn it into a rental investment in 2011. You owe the government $8,000 the day you make that move — and the IRS says it has increasingly sophisticated audit programs to detect such transactions and to sniff out frauds and other rule violations requiring paybacks and even penalties.

Bottom line, by the committee’s estimates: Homeowner tax benefits will still represent large contributors to the federal deficit. But for a variety of reasons, those costs should be smaller — and, in theory, slightly less vulnerable to attack — for the years immediately ahead.

Posted in Uncategorized

FHA extends suspension of ‘anti-flipping’ rule for another year


Original Post Date: January 16, 2011

By: Kenneth R. Harney

Reporting from Washington —

For years the federal government prohibited the use of Federal Housing Administration mortgage financing by buyers purchasing homes from sellers who had owned the property for less than 90 days. The idea was to prevent speculators from defrauding the government through quick flips of houses — often involving straw buyers and corrupt appraisers — at wildly inflated prices.

One side effect of that policy had been to stifle purchase-and-renovate projects by legitimate, small-scale investors who buy houses after foreclosure or loan defaults and then resell them in substantially improved condition. In many parts of the country, first-time and moderate-income buyers often sought to buy these fixed-up houses using FHA-insured mortgages with 3.5% down payments, but were prevented from doing so by the “anti-flipping” rule.

This left large numbers of foreclosed, vacant houses sitting unsold and deteriorating, with negative effects on the values of neighboring properties.

Last January, FHA Commissioner David H. Stevens announced a one-year suspension of that rule, permitting qualified buyers to obtain FHA mortgages on properties that were acquired by rehabbers less than 90 days before. The plan, set to expire at the end of this month, came with safeguards for purchasers, including inspections and multiple appraisals in some cases to document the amounts spent by investors on the improvements.

Vicki Bott, deputy assistant secretary for single-family housing at the FHA, confirmed in an interview that the agency expects to continue the policy for another year. Not only have first-time buyers responded overwhelmingly to the opportunity to buy “turnkey” renovated homes with low down payments, she said, but they have performed well on their mortgage obligations.

“Obviously we have concerns about flipping in general,” Bott said, but the FHA has seen none of the fraud problems, defaults and re-foreclosures that cost the agency millions in insurance payouts in earlier years.

Investor Paul Wylie, who with a group of partners and contractors specializes in acquiring, renovating and reselling foreclosed and distressed houses in the Los Angeles area, says the government’s policy “has been a very positive approach” because “it recognizes the role that [private investors] can play in helping the housing market get back on its feet.”

In the L.A. market, Wylie said, FHA financing accounts for 40% of all home purchases and 60% of purchases in predominantly Latino and African American communities.

Buying foreclosed houses “comes with a lot of risk factors,” Wylie said. “There’s no title insurance. We don’t have a good idea of the extent of the defects” inside properties that have been sitting vacant or vandalized for months. Some houses come with delinquent property taxes, which Wylie’s group typically must pay.

Then again, the profit opportunities can be significant as well. Most of the Wylie group’s houses sell for more than 20% higher prices than Wylie paid at acquisition — a quick turnaround gain that potentially works for buyers, sellers, neighborhoods and, yes, the FHA itself.

Posted in Uncategorized

Market for Vacation Homes Is on the Rise


Original Post Date: January 10, 2011

By: S. Mitra Kalita

Sales in many vacation communities across the U.S. soared last year to levels not seen since boom times, driven by deep discounts, cash purchases and buyers’ rising stock portfolios.

On Mercer Island, Wash., waterfront sales nearly tripled in 2010, compared with a year earlier, reaching par with 2006 volume there. Sales on Hilton Head Island, S.C., rose 14% for the year. Palm Beach, Fla., experienced a 40% annual increase and a 54% increase in homes under contract, indicating an especially strong fourth quarter. Palm Beach sales volume now is comparable to its 2007 peak. These figures were gleaned by brokers in each locale.

“The proverbial train has left the station,” said Ned Monell, an agent with Sotheby’s International Realty in Palm Beach. “We haven’t felt energy like this in a long time. Buyers sense that they’ve been on the sidelines long enough.”

The question now is whether the momentum will last. The strength of second-home sales paints a stark contrast to the overall housing market, which is expected to worsen in 2011.

Existing-home sales in November rose 5.6% on an annualized basis, according to the National Association of Realtors, a trade and lobbying group. Last month, the Case-Shiller housing index of 20 cities showed prices across the U.S. fell in October, and most analysts predict another 5% to 10% slide in the coming year.

Data for the nationwide vacation-home market aren’t tracked regularly. The National Association of Realtors conducts an annual survey of home buyers, but results for 2010 won’t be out till March.

Yet the market for vacation homes, based on local sales data, appears to be booming. The comeback, NAR economist Lawrence Yun said, has been helped by gains in the stock market and an improving economy, which have made wealthier Americans more upbeat about the future. “It also implies that prices in some markets have come down so much that people are fighting for those properties,” said Mr. Yun, noting that demand is strongest in areas close to stable labor markets.

According to the NAR, one in 10 real-estate transactions in 2009 was for the purchase of a vacation home. And though a small fraction of the overall market, it is significant because vacation homes are often big-ticket properties and attract discretionary buyers. Just four houses sold last year on Madeline Island, Wis., for example, but the island’s average dwelling sells at two to three times the price of the county average, said Eric Kodner, a realty broker on the island.

Sales of second homes are showing an uptick even in more-affordable communities. In some locations, prices are even inching upward. Cape Cod sales climbed nearly 9% in 2010 from 2009, while prices rose 7%. Monroe County, Pa., in the heart of the Pocono Mountains, saw a 3% decline in transactions, but its Lake Naomi resort community was up nearly 15%. A one-acre plot off Lake Naomi recently fetched $1.1 million, a record deal for the area.

Still, in most markets where demand has improved, prices haven’t. For Realtor Andy Twisdale in Hilton Head, S.C., it is too soon to rejoice; prices are down almost a third over the past five years. “People are buying at the very low end of the product,” he said. “The financing is very difficult. Banks are requiring 25% down and crystal clean credit.”

Buyers who qualify or can pay cash say this is the time to take the plunge. On New Year’s Day, the Makarewicz family arrived in Pocono Pines, Pa., to look for a vacation home. They already own their primary residence in northern New Jersey and own a property in Damascus, a northeastern Pennsylvania town along the Delaware River. But the family says the latter doesn’t offer enough things to do: Not enough shopping. Not enough activities for kids. Not even enough fish.

“How’s the bass here?” Joe Makarewicz, a vice president for sales at a financial-services firm, asked Re/Max Realtor Rob Baxter as the two looked at floor plans.

The family plans to sell the Damascus house, which would allow them to pay cash for one near Lake Naomi. The resort community at Lake Naomi boasts pools, tennis courts, a recreation center and a golf course—and is equidistant from New York and Philadelphia.

Some second homes had been stuck on the market because sellers wouldn’t budge on price; unlike owners of primary homes, they often aren’t in a hurry to move.

“Sellers have become aware that they have to price their homes accordingly,” said Harald Grant, a senior vice president at Sotheby’s in New York’s ritzy Hamptons region. “There’s a perk in the market because a lot of prices have come down to where they should be.”

This shift became clear to K. David Hirschey, who runs a consulting business in Minneapolis, as he hunted for a home on Madeline Island.

After competing in a summer swimming competition on the island, Mr. Hirschey decided to buy a home there, perhaps to rent it a few years and maybe retire there eventually. The first offer he made was rejected, he recalled, because the seller said, “We don’t negotiate on properties here.” The same thing happened with his bid on the next house.

Then he found a third property—four bedrooms, three baths—that began as a sale by owner, was taken off the market, then relisted under one broker, then another. It had been initially priced at $1.25 million, and remained on sale for two years.

“When I saw it, it was listed at $687,000,” said Mr. Hirschey, a father of four children. He offered $530,000, furnishings included. “They wanted to negotiate and I said no,” he said.

The tactic—an all-cash offer—worked, and Mr. Hirschey closed on the house in November, just in time for his family to spend the holidays there.

Posted in Uncategorized