How to Increase Your Credit Scores

Credit scoring is quickly becoming one of the most-discussed topics in the mortgage industry and lately it has come under attack by consumer groups and some members of Congress.

Some of the strongest attacks on credit scoring focus on consumers? Seeming inability to change the credit score so as to change a denial into an approval quickly enough to rescue a deal or to keep from having to pay a higher interest rate, since some mortgage loans are now priced according to the borrower's credit score.



Since the score is based on information - positive and negative - in a consumer's credit report, incorrect information - especially if that information is derogatory as defined by the model - can lead to a lower-than- warranted score. But, with the system now in place, correcting and deleting negative and incorrect information can take weeks, and even after the information is corrected by the creditor in its own files, the creditor often takes weeks more to report, via magnetic tape, the new, more-positive information to the credit repository (of which there are three: Trans Union, Experian - formerly TRW - and Equifax, which dominates here in North Carolina).



But congressional, regulatory, and consumer pressure are coming to bear on this cumbersome, paper-based "corrections" system. Recently a credit industry official told me the credit bureaus - which are local that sell reports compiled by the three large repositories and which have the most direct contact with consumers - are negotiating with the repositories to be able to help consumers make changes faster. Under the proposal, the local bureau would check out consumer complaints directly with the creditor and, if the creditor confirms that the information is, indeed, incorrect, the bureau will be able to change the so-called "raw" credit file directly with all three of the repositories without waiting for the creditor to check out the complaint, update its files, and then send the updated information to the repository.



A process that, as I noted, can take weeks - long enough to kill a deal. This is a major development. With the raw file changed, a new, possibly higher, score can be quickly generated, a deal rescued, and consumer and congressional concerns can be addressed.

Additionally, the three repositories continue to attempt to cooperate with one another, in theory sharing any updated, corrected information about consumers to insure their files are as accurate as possible. (But, just to be safe, consumers should make corrections with all three repositories directly - don't assume anything; they are, after all, competitors.



) The three repositories each use a different version of the Fair, Isaacs scoring model, but the model has been adjusted and weighted, so, theoretically, if all three had the very same information on you, your three scores would be identical. (A score of 640 at one repository would represent the same odds as a 640 at either of the other repositories, according the Fair Isaacs.) Of course, not all creditors report to all three repositories, so, even with adjustments, consumers can sometimes end up with three quite-different scores.



While it is true that, in theory, you can have great credit with one repository and bad credit with another, I have rarely, if ever, seen that happen, although I have seen some pretty wildly varying scores. In a few cases I have seen borrowers with scores that vary by 100 points or more. To combat this variance, the mortgage industry usually uses the middle score, but that can be of little comfort to a borrower if he/she has scores of 550, 570 and 700, and the interest rate for a borrower with a 570 score is two points higher than for a borrower who has a 700 score.



Still, keep in mind that this situation is rare. A borrower with good credit would, for example, have scores something like 685, 702, and 710.

Other new developments include outreach efforts to educate consumers about credit scoring by conducting seminars and sending out publications on the subject, plus efforts to make scores more readily available to consumers. Federal law says consumers do not have a right to see their score, but does not specifically prohibit lenders and creditors from revealing it (the credit report you can purchase from your local credit bureau does not have your scores posted - for now, only reports ordered by creditors have scores).



Many in the mortgage industry, who know just enough about credit scoring to be dangerous, wrongly believe they are not allowed to tell you your score. That may be their company's policy, but the Federal Trade Commission has made it crystal clear that it is illegal to reveal scores to a consumer, and some industry and consumer groups are now coming out in support of release of the scores. I strongly support the release of scores to consumers, so long as the scores are accompanied by information about how the scores are computed (my columns work nicely, I would think), so a number isn't just shoved at a consumer with no context or explanation.



In fact, until recently, Fair, Isaacs has opposed the release of the score to the consumer, fearing that, as the company told me in an e-mail, since "the nature of credit risk scoring requires that consumers behave normally (and therefore predictable) when managing their credit and if large numbers of consumers receive and misunderstand their credit risk scores, their short-term behavioral changes could harm the predictive accuracy of the scoring model." Fair, Isaacs position is that "the expansion of the credit industry in the 80s and 90s (was) made possible by expanded use of tools like credit scoring," so anything that hurts the "predictive accuracy" of the model could make credit less-available.



I would acknowledge that some might say that making credit less available is a good thing!

So, you might be wondering, just how is a score generated? A California-based company called Fair, Isaac www.fairisaac.com has created a complex, proprietary mathematical algorithm. By "back-scoring" millions of credit files using thirty-three or more "variables" that are grouped into five categories, from which your credit score is computed, and then analyzing the performance of those files, the company found the resulting score to be an incredibly accurate predictor of future rates of default or late payments.



Of those scoring below 600, 1 in 8 would have one or more 90-day late payments. Above 700 that number slipped to just 1 in 123 and above 800 only 1 borrower out of 1,292 would have one or more 90 day late payments.

The five categories found to be more predictive (with their relative weighting in parentheses) are:

• Past Payment Performance (35%): Do you pay your bills on time? The more recent the late payments, the lower you credit score. In fact, a 30 day late payment today hurts more than a bankruptcy five years ago.



• Credit Utilization (30%): Have you maxed out your credit lines? Low balances on a few cards are better than high balances on one or two cards. Keeping balances below 30% of the credit line increases your chance for a higher score.

• Credit History (15%): The longer your accounts have been open, the better, so surfing for a new lower rate on a credit card and transferring balances can hurt your score.

• Types of Credit In Use (10%): Getting a loan at a finance company rather than a bank or credit union lowers your score.



• Inquiries (10%): Applying for new credit lowers your score, but multiple inquiries from the same type of creditor - like mortgage companies or car dealers - within 14 days count as only one inquiry. Promotional or administrative inquiries do not count against the score - only those times that you applied for credit count.

It's no secret that Fair, Isaacs isn't happy about the relative weightings leaking out, and it contends that the relative ratings above are not necessarily correct.



The company, in an e-mail, to me "...the numbers change over time. That's why we periodically update our models and scorecards to account for changes in consumer behaviors, lender policies, etc." Well, then, now that we know how a score is computed, how do you go about improving it? Certainly the best way is to pay your bills on time. You should also keep your balances to below 30% of your credit line, and its better to keep some small balances on several cards rather than high balances on one or two.



Maintain your accounts for a long period of time. Limit the number of times you apply for credit.

What if you have done all that and there is incorrect derogatory information on your report? Challenge it quickly with the help of a mortgage professional, and insist the creditor correct the information promptly. It can't hurt to check out your credit report with a mortgage professional a few months before you intend to apply for a mortgage. But, in any case, with the increasing amount of identity theft occurring, you should check your credit report at least once a year anyway.



For more information on credit reports and credit scoring, see my article last month and go to the following websites: www.creditscoring.com, www.ftc.gov.com, www.homepath.com and www.fairisaac.com/consumer. At www.namb.org the site of the National Association of Mortgage Brokers, you'll find two of the best brochures I have seen on the subject - one for consumers and one for mortgage professionals. They were just released recently; you can also find message boards on the subject, and a lot of other sites that deal with credit scoring, by entering "credit scoring" on any of the search engines.



Once a year you can get a free credit report from: www.annualcreditreport.com.

If you are having problems with your credit go to my article "Reestablish your credit". You'll find some helpful hints. If you have any questions please feel free to call me: 952-345-7664 or Cell 612-597-6645 or Toll Free at 800-425-5150, ext. 7664.

Dick Piehl

Certified Mortgage Planner

Voyager Bank & Mortgage

952-345-7664 Direct or 612-597-6645 cell

www.



OneStopMortgageShopping.com

Mortgage Leads - A Mortgage Lead is a Mortgage Lead ... or is it?

Internetmortgage leadshave been around for more than a decade, yet many lending professionals do not really understand what they are, where they come from, and what different kinds are available. In addition, new business alliances and technologies are making some Internet mortgage leads more complete and easier to close than ever before. Here is an overview of the types of mortgage leads now available:



Traditional Internet Leads. An Internet mortgage lead is generated by a consumer who completes an online form.



The value of the lead depends on the reason the consumer completed the form. Was the consumer enticed to complete a form by the promise of a free gift or a contest entry? If so, the value of the lead is diminished. In such cases, the consumer is motivated with a desire to receive the gift or prize, not to get help from a lending professional. By contrast, if the consumer completed the form after proactively searching or a solution to a financial challenge, then the Internet mortgage lead can be quite valuable.



Such Internet leads are dubbed "organic" because they emerge organically from a proactive online search. The value of the lead is enhanced when the website "hardens" the response by stating that the person will be contacted by a lending professional.



Most lead providers "scrub" their leads by matching the information provided by the consumer against various databases. Website visitors sometimes submit incorrect information, fearing that they will receive spam or telemarketing calls. Lead providers have created software to weed out not only phony names but also false addresses and phone numbers.



The scrubbing software may match the area code of the phone number on the form to the ZIP code of the address to see if the two are compatible, or it may check names against known addresses. The extent of the lead scrubbing can be assessed in part by the replacement policy of the lead provider. If the provider guarantees replacement when contact information is invalid, the lead buyer can assume the information is reliable.



Enhanced Leads. Recently, iLeads.com, an Internet lead provider located in Newport Beach, California, has taken the verification process to a new level.



Drawing on its partnership with First American Financial Corporation, the nation's largest provider of real estate information, iLeads.com adds accurate property and loan information to the bare-bones Internet lead. Marketed as "Mortgage Plus Leads," these long-form leads include extra fields not completed by the consumer, including original lender, type of loan, interest rate, appraised value, equity position, APN code, home size, lot size, date of construction, and more.



ARM Leads.



Using a similar process, iLeads.com is also able to identify homeowners who will be facing large increases in their adjustable rate mortgages in the next 30, 60, 90, even 120 days. Working with First American, iLeads.com is able to provide ARM leads that include enough loan and property data to enable a loan officer or broker to create an estimate before calling the refinance lead. The phone numbers of these refinance mortgage leads are checked against the national Do-Not-Call registry to ensure compliance.



The government estimates that $1.5 trillion in adjustable rate mortgages (ARMs) are scheduled to reset in the next two years. Many of these mortgages will not qualify for refinancing, based on the plunging value of homes, but many will, and in this time of decreased new home loans, the refinance market can help mortgage brokers remain busy and profitable.



Hot Transfer Leads. Most Internet leads are delivered in via email. The mortgage broker or loan officer then calls the phone number provided in the lead.



Consumers do not always answer on the first call, of course, leaving the lending professional with the option of leaving a voice mail, calling back, or both. Live transfer leads were developed to save loan officers and mortgage brokers time spent getting prospects on the phone. With a hot transfer lead, the lead provider establishes contact with the prospect by phone and further qualifies the lead. The call center then transfers the "hot" call to the lending professional. Hot transfers cost more than traditional leads, of course, but many lending professionals find that they pay for themselves in efficiency and a higher conversion rate.



Vintage Leads. Most Internet leads are delivered in real time, as they come in from the consumers, or in batches sent out once a day. The leads may be sold as "exclusive," in which case they are not sold to anyone else. A lead also can be sold as "shared" leads, offered to a limited number of loan professionals, or "nonexclusive" leads, offered to any number of loan professionals. After a few days, the leads begin to lose their value, in part because the consumer may have received several phone calls from lenders.



If they have not signed a deal with anyone, however, the lead may be marketed as a "vintage" lead at a greatly reduced price. Lending professionals with exceptional sales skills find that vintage leads can yield good results at very little cost. Some loan offices like to provide vintage leads to new hires as way of letting them get the hang of selling on the phone.



Internet mortgage leads come in many varieties and flavors. The relative merits of each kind of lead depends on a lending professional's spending budget, time budget, sales skills, and business focus.

Economic Outlook For 2008

As we start this year let me share to you my own economic projections for this year.



We will start off with the happenings in the world largest economy, the United States of America. As we all know the United States of America is facing a serious economic dilemma due to its sub prime mortgage problems. This problem has translated into slower jobs growth, shortage of business credit, and a decrease in industrial production among other things. The problem is so serious problem that even the White house has lowered its economic projections for 2008.



Economic growth was insignificant during the past quarter. The only good thing that could happen to the United States is that it will not face a recession and that the sub-prime mortgage problem will subside by the first half of 2008 as some economist projected. The worst thing that could happen is that the United States would go into a recession if the problems won't subside.



What is the impact of this problem to the rest of the world? Exports by other countries to the United States will slow down because of the economic problems they are facing.



The positive thing about this is that as the Feds continue to cut interest rates, investors will instead pour their investment into economies that will give them a more attractive return. Strong emerging economies like China and India, which are said to continue to lead the growth in the Asian region are most likely to benefit from this. Most economist say that Europe will not be affected so much by the economic problems of the United States however a slow down in Europe's exports will temper its growth.



Most likely, oil prices will continue to remain high and will experience several spikes through the year due to speculation, higher demand, lower supply, limited capacity, geopolitical concerns etc. For 2007 alone, oil rose from $50 per barrel last January to a record high of almost a $100 last November. This will continue to affect the rest of the world as the rising economies of the world are oil dependant. Just last Wednesday (January 3, 2008), the price of oil hit $100 a barrel for the first time in history.



Economic growth is expected in the Middle East due as oil prices continue to soar. The emerging oil producer, Africa will also benefit from this situation. However continued violence in some parts of the continent may affect oil production.



On the local scene, the Philippines will continue to lock in to its previous economic gains and will continue to experience strong growth. The economic boom is continued to be fueled by rising foreign investments, more growth in OFW remittances, more growth in the tourism sector and continued growth in exports mainly due to business process outsourcing.



However this growth will be much slower considering the slowdown in the U.S economy. The worst case scenario for exports is a flat growth. As more dollars are flowing into the country the Peso will continue to strengthen as expected. It will range somewhere between the P 35 to P 39 level within this year. The stock market is expected to hit the 4000+ level by the middle of this year.



The only factor that will dampen this growth is the rising oil prices and the occasional political bickering. The oil problem will cause a slow but steady rise in the cost of doing business translating to the consumers paying more for good and services than they used to.



But I do not see any serious political turmoil that will happen in 2008. People are sick and tired of calls to unseat the president. For why should they? After all we are experiencing growth and will hopefully continue to do so.