Are you ready for the 3 most important days of the year?

If you thought the last two days were wild, just wait until next week!
Arguably the three most important days of the year affecting the mortgage market happen the first week in November.

Tuesday, November 2	Mid-term elections—what will the results mean to the markets?
Wednesday, November 3	Fed meeting—you think you know what the Fed is going to do, but what will it mean to rates?
Friday, November 5	Jobs Report—more important than ever, what will the Jobs Report bring us?

The foreclosure machine grinds again

Don’t blink — with dizzying speed and (supposed) efficiency, Bank of America (BofA) has announced it will resume foreclosures in the 23 states it halted foreclosures in several weeks ago. The other 27 states subject to the foreclosure moratorium, announced by BofA last week and including California, will remain in limbo. [For more information on BofA’s nationwide foreclosure moratorium, see the October 2010 first tuesday article, BofA postpones organic economic recovery by halting foreclosures.]
The foreclosure “pause,” as BofA officials are now referring to it, allowed for a comprehensive judicial review of their foreclosure procedures which has revealed no evidence, according to BofA, of wrongdoing or malfeasance. BofA has pledged that the nationwide foreclosure freeze was not due to any indication of impropriety on their behalf, but rather it was a concerted effort to ensure its customers were being treated fairly.
The fact that BofA has resumed foreclosure processing in 23 states is being taken as a cue from the big bank that fears over another “too-big-to-fail” crisis are unfounded. BofA has pledged foreclosures will recommence throughout the rest of the country soon.
first tuesday take: Is this a sign the foreclosure mills at BofA have regained their operational footing? Or is it a window into just how off-kilter and spastic the banking giant really is? Of course, BofA would like us to believe the former — the negative equity California homeowners (read: soon-to-be renters) should simply overlook this brief hiatus in the determination of their fate. They have waited this long to receive their walking papers, what is a couple more weeks, rent-free nonetheless, while BofA “pauses” to ensure they are, at last, being “treated fairly?” [For more information on how the wounded housing market is affecting the rental market, see the July 2010 first tuesday article, Rentals: the future of real estate in California.]
BofA seems to be woefully unaware of the effect such administrative schizophrenia can have on the housing market and thus the economy as a whole. The individual homeowner who is underwater and has strategically defaulted may not mind if their foreclosure was paused. In fact, many were thankful for the momentary reprieve from the stress of preparing for their impending eviction, negative credit reporting and so on.
But while the homeowner waits to be released from his residential prison, and while BofA halts foreclosures and simultaneously insists nothing is wrong, the economy is grinding to a halt (again) along the seemingly never-ending plateau of an abortive checkmark recovery. [For more information on the abortive checkmark, see the November 2009 first tuesday article, Divining the future: the letters game.]
As the BofA foreclosure machine sputters back to life, we will have to wait and see what happens once all foreclosures, BofA’s and those handled by other banks, are resumed. We can quantify how much housing inventory remains in the shadows. We can anticipate the losses big banks will be forced to report once the huge backlog of home loans in default finally go to the trustee’s auction block. Unfortunately, consumer confidence is not quite so predictable. When the largest bank in the nation freezes all foreclosures in the name of consumer protection, one would hope they would have the good sense to carry on the charade long enough to make it believable.

Home Path Mortgage Offers Low-Cost Fannie Mae Bank Owned Foreclosure Homes

Fannie Mae’s Home Path Mortgage is a home buying program that offers incentives to individuals who buy bank owned foreclosures. The Home Path program allows buyers to purchase Fannie Mae homes with reduced down payments and closing costs, along with flexible mortgage terms. Other incentives include elimination of home appraisal fees and mortgage insurance.
The Home Path Mortgage program provides two financing options. The first option is similar to a conventional home loan and is available to individuals who purchase a Fannie Mae foreclosure home as their primary residence. The second option is Home Path renovation mortgage financing and provides additional funds to make light repairs. Both finance options require buyers to obtain funding through an approved lender.
Home Path properties are owned by Fannie Mae and obtained through repossession and forfeiture. Properties include single family homes, townhomes and individual condo units. Properties are sold “as is” and often require some level of renovation. Buyers should obtain a home inspection prior to signing closing contracts.
Under the Home Path program, buyers must provide a minimum 3-percent down payment; making this a good choice for buyers who do not have the necessary funds for conventional financing. A major perk is borrowers can utilize funds obtained from outside sources to meet the down payment requirement. FHA is the only other program that allows down payment assistance.
One option for obtaining down payment assistance grant money to buy bank owned foreclosure real estate is the Neighborhood Stabilization Program offered through the Department of Housing and Urban Development. Billions of dollars have been earmarked for NSP grants to help stabilize communities hit hard by foreclosure.
NSP grant money can be used to buy Fannie Mae foreclosures offered through the Home Path mortgage program. NSP funds are managed by a variety of nationwide partners. Home buyers will need to contact their state’s Neighborhood Stabilization Program manager. A list of NSP grant partners is provided at HUD.gov.
Buyers of Fannie Mae real estate must obtain bank prequalification before submitting their offer. Prequalification does not guarantee home loan financing will be approved. Instead, it is used to determine how much buyers can afford to borrow.
First time home buyers who purchase Home Path properties prior to April 30, 2010 qualify for the $8000 federal housing tax credit. Homeowners who have resided in their home for at least five years and purchase a Fannie Mae foreclosure home with a higher value can obtain a $6500 tax credit. Individuals should consult with a professional tax preparer to ensure they are entitled to home buying tax credits.
The Home Path mortgage program is also a good option for real estate investors to purchase discounted investment properties. Investors can apply for NSP grant money, but cannot take housing tax credits against purchased properties. Unless investors obtain an NSP grant, they must wait 15 days after the property is listed before making an offer.
Home Path properties are sold under the “first look” provision. Buyers who receive down payment assistance and grant money are given first dibs during the first 15 days. If no offers are presented, real estate investors can submit offers on up to five properties through a Fannie Mae broker.
It is important to note not all Fannie Mae homes are eligible for special financing. Only properties listed at the HomePath.com website qualify.

Top 6 Mortgage Mistakes

During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages?

More from Investopedia: • 5 Steps to Attaining a Mortgage • Top 8 House-Hunting Mistakes • Financing For First-Time Homebuyers

Let's take a look at the biggest mortgage mistakes that homeowners make.
1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.
[Click here to check home loan rates in your area.]
Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.
2. No Down Payment
During the subprime crisis, many companies were offering borrowers no down payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers that place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.
3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.
They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.
4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.
There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.
5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.
Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70's?
[What It Takes to Get a Loan]
6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.
The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.
The Bottom Line
As you can clearly see, the road to home ownership is riddled with many traps. If you can avoid the traps that many borrowers fell into then you can keep yourself from financial ruin.

How Do Real Estate Commissions Work?

A real estate commission is a fee paid to a real estate agent, broker or realtor after a real estate transaction is complete. Real estate agents essentially work for free until they are paid this commission. Selling agents will host open houses and show interested buyers around the home, while buying agents will take their client to view the different homes that the buyer is interested in. Both agents will then work together to negotiate the final sale. The commission is their compensation for all their up-front work.
The seller of the property involved in the transaction usually pays the real estate commission. Real estate commission percentages can be tricky because commissions may vary greatly from office to office and region to region. The broker of any given real estate agency may set the commission fees at 5%, 6% or even 7% of the selling price to list any given property. If a participating agency sells the house, the listing agency may split the commission or the listing agency may take more.
By using the Multiple Listing Service (MLS), real estate agents can find out about commissions by taking a look at the BAC and SAC fields. The BAC field is designated as the "Buyer Agency Commission" and the SAC field is designated as the "Seller Agency Commission." If an agency charges an even 6% commission to sell any given property, it may spilt the commission fee with a participating agency. If this were the case, the fields would read "BAC 03" and "SAC 03." This means that the seller will pay a 3% commission to the selling agency. The other 3% will go to the listing agency.
Find out about your local real estate commission laws; click here to visit the Directory of U.S. and Canadian Real Estate Licensing Offices to locate your local office and learn more about how real estate commissions work in your area.

C.A.R. 2011 California Housing Market Forecast

CALIFORNIA ASSOCIATION OF REALTORS® releases its California Housing Market Forecast for 2011:
Small increases projected in both home sales and median home price
Multimedia:

• View video of the presentation  by C.A.R. Chief Economist Leslie Appleton-Young and Deputy Chief Economist Robert Kleinhenz.

LOS ANGELES (October) – A weaker-than-expected economic recovery will result in a projected decline in California home sales for 2010, although home sales are expected to edge up slightly in 2011, according to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) “2011 California Housing Market Forecast” released today. 
California home sales for 2010 are forecast to decline 10 percent from the 2009 sales figure of 546,500 homes sold.  Sales in 2011 are projected to increase a lackluster 2 percent to 502,000 units compared with 492,000 units (projected) in 2010.  After two consecutive years of record-setting price declines, the median home price in California will climb 11.5 percent in 2010 to $306,500 and increase another 2 percent in 2011 to $312,500, according to the forecast.
“California’s housing market will see small increases in both home sales and the median price in 2011 as the housing market and general economy struggle to find their sea legs,” said C.A.R. President Steve Goddard.  “The minor improvement in the housing market next year will be driven by the slow pace of recovery in the economy and modest job growth.  Distressed properties will figure prominently in the market next year, but we also expect to see discretionary sellers play a larger role,” he said.
“As the U.S. economy continues its tepid recovery, we’ll see some improvement in California’s economy,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  “We expect a net jobs increase of approximately 1.4 million jobs in California for the year to come and an improvement in unemployment figures,” she said.
“The situation in the California housing market continues to be a tale of two housing markets,” said Goddard. The segment of the market under $500,000 has been driven by distressed sales, while higher-priced areas of the state have been constrained by restricted financing options, and increasingly have experienced an increase in the number of distressed properties.  Sales in the low end have been constrained by a lack of inventory, putting upward pressure on prices.  Multiple offers on lower-end homes have been very common, according to Goddard.
“A lean supply of available homes for sale will drive prices up at the low end, but larger inventories and limited, less attractive financing will cause continued softness at the high end,” said Appleton-Young.  “There’s some indication that lenders will accelerate the number of foreclosures coming on market, further adding to the housing supply, but we do not anticipate that lenders will flood the market with distressed properties,” she said.
“The wild cards for 2011 include federal housing policies, actions of underwater homeowners, and the strength of the economic recovery,” said Appleton-Young.  “What is certain is that favorable home prices and historically low interest rates will continue to make owning a home in California attractive for those who are in a position to buy,” she said.
An expanded forecast presentation will be presented Wednesday afternoon during the CALIFORNIA REALTOR® EXPO 2010 (http://expo.car.org/), running from Oct. 5-7 at the Anaheim Convention Center in Anaheim, Calif.  The trade show attracts nearly 7,000 attendees and is the largest state real estate trade show in the nation. 
Don’t miss “2010 Econ Panel:  The Future of Real Estate Finance and Your Market in 2011” during CALIFORNIA REALTOR® EXPO 2010.  C.A.R. Vice President and Chief Economist Leslie Appleton-Young will lead a panel of renowned economists as the experts share their predictions on what the changing economy means for real estate.  Panelists include: Richard Green, professor and director of the USC Lusk Center for Real Estate; John Karevoll, housing analyst at Dataquick Information Systems; and Michael LaCour-Little, professor and director of the California State University, Fullerton Real Estate and Land Use Institute.  The panel is scheduled to be held Thursday, Oct. 7, from 2 p.m. – 3:30 p.m. at the Anaheim Convention Center.
2011 FORECAST FACT SHEET

	2005	2006	2007	2008	2009	2010f	2011f
SFH Resales (000s)	625.0	477.5	346.9	439.8	546.5	492.0	502.0
% Change	0.03%	-23.6%	-27.3%	26.8%	24.3%	-10.0%	2.0%
Median Price ($000s)	$522.7	$556.4	$560.3	$346.4	$275.0	$306.5	$312.5
% Change	16.0%	6.5%	0.7%	-38.2%	-20.6%	11.5%	2.0%
30-Yr FRM	5.9%	6.4%	6.3%	6.0%	5.1%	4.7%	5.1%
1-Yr ARM	4.5%	5.5%	5.6%	5.2%	4.7%	3.9%	4.1%

Leading the way...® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with more than 160,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

BofA’s new way to delay the economic recovery

BofA’s new way to delay the economic recovery

By Jeffery Marino • Oct 15th, 2010 • Category: real estate newsflash

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Bank of America (BofA) has announced it will bow out of the wholesale mortgage lending business, confining its funding of loans to direct-to-consumer lending from its mortgage centers and community banks. BofA insists this decision was not made in light of the recent discovery of faulty foreclosure documents and the ensuing public relations fallout. Rather, the decision to focus on retail lending purportedly stems from a passion for personalized customer service.
BofA is not the only banking giant to cease the funding of loans generated by mortgage loan brokers (MLB). JPMorgan Chase announced last year that it would only be dealing in direct-to-consumer lending through its mortgage centers as well. This means Wells Fargo & Co. is currently the primary source of all wholesale mortgage-lending funds.
Regardless of whether or not BofA has closed its wholesale lending department as a personal relations maneuver, the effect on the real estate market (and the economy as a whole) is of great concern.

first tuesday take: As thousands of BofA mortgage customers suffer through protracted foreclosures, this veiled attempt to appear dedicated to consumer protection is an effort to reassure homebuyers they should borrow from BofA since their paperwork will not get lost in the mortgage loan application machine. [For more information on foreclosure delays in California, see the October 2010 first tuesday article, 2Q California foreclosure data.]
While BofA receives considerable financial benefit by halting wholesale lending and funding of broker-generated mortgages, borrowers will suffer the consequences of the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, the actual effect of which is to eliminate MLBs from the highly lucrative consumer loan market. By subtracting the MLB from the loan origination equation, BofA will retain a greater profit on each loan that would otherwise be shared with a MLB who packaged and sold them the loan.
Although borrowers may potentially save as well (if BofA is benevolent enough to pass these savings on), there will simply not be as many choices on the mortgage loan market since the system for distributing mortgage money to buyers is reduced by eliminating the MLB and the Federal Deposit Insurance Corporation (FDIC) closing the small, politically impotent banks. As we have already witnessed, this will drive up loan charges as the effect of the SAFE act and barring MLBs kills competition.
The Federal Reserve (the Fed) is now using new strategies, untested in the U.S., to pump fresh cash into the economy via quantitative easing (buying 30-year T-bonds), which will ostensibly drive mortgage rates down even further. BofA’s strategy to lock MLBs out undermines the Fed’s efforts to introduce greater quantities of cash into the mortgage market and stimulate money lending.
As the Fed purchases billions of dollars worth of BofA’s stockpiled T-bonds, the nation’s largest private bank has decided it will be the sole administrator of those funds, opting to consume a bigger piece of the pie (comprised of front-end fees) while elbowing the MLB away from the table and interfering with the distribution of funds to California’s vast and geographically widespread homebuyer market. [For more information on the Fed’s new strategy to stimulate the economy, see the October 2010 first tuesday article, The Fed purchases treasuries, fights inflation.]
The hurdles to Real Estate Settlement Procedures Act (RESPA) MLB activity, which lenders placed in their way by guiding the SAFE Act into law, have been raised even higher by refusing to fund or purchase the loans they package. It looks like those of you who just earned your Nationwide Mortgage Licensing System (NMLS) registration and endorsement may not need it after all. Lenders do not want your assistance in locating homebuyers and homeowners who need financing.
- ft Copyright © 2010 by the first tuesday Journal Online - firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516
Readers are encouraged to reproduce and/or distribute this article. Copyright © 2010 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

What’s Ahead For Mortgage Rates This Week : October 18, 2010

Mortgage markets worsened last week in back-and-forth trading, pushing conforming mortgage rates higher on the week.
Despite the uptick, however, Freddie Mac reports that rates in California still managed to make new, all-time lows for the third week in a row. The benchmark 30-year fixed rate mortgage is now down 1.02% since April 2010.
The United States is experiencing a Refi Boom.
As compared to 6 months ago, a new, $200,000 home loan costs $124 less per month in principal + interest.
This week, monthly payments may fall some more. It all depends on data.
Early in the week, housing data takes center stage. The National Association of Home Builders releases its Housing Market Index this morning, and, Tuesday, the government prints September’s Housing Starts figures.  Both reports figure to influence the bond market.
Strong readings should lead mortgage rates higher; weak ones should lead them lower. Economists expect weakness.
That said, the biggest story of the week — and the one with the best chance of changing rates — could stem from the Federal Reserve.
Federal Reserve officials, including Chairman Ben Bernanke, have observed the recent U.S. economy and have openly discussed the use of “non-conventional means” to spur it forward. As the rhetoric increases, it’s widely believed that the Fed will act soon, and that the central bank’s plan will include new commitments to U.S. Treasury debt, and, possibly, to mortgage-backed bonds.
Speculation of the Fed’s next move has sparked mortgage bond demand which, in turn, has helped drive down mortgage rates. An official Fed announcement could push rates lower still.
For now, though, mortgage rates are as low as they’ve been in history. Rate shoppers have two choices. (1) Lock in a today’s low rates, or (2) Wait and hope that rates fall further. Ultimately, rates may fall, but once they start rising, they’ll likely rise quickly.
It’s a gamble you may not wish to take.

Bank Reposessions Top 100,000 In A Month For The First Time Ever

The number of foreclosure filings rose 3 percent in September, according to foreclosure-tracking firm RealtyTrac. The term “foreclosure filing” is a catch-all word for housing, comprising default notices, scheduled auctions, and bank repossessions.
September marked the 19th straight month that the number of filings topped 300,000, and the first month in which 100,000 repossessions were logged.
As usual, a small number of states dominated the national foreclosure figures, accounting for more than half of all repossessions.

1. California : 17% of all repossessions
2. Florida : 13% of all repossessions
3. Michigan : 7% of all repossessions
4. Arizona : 7% of all repossessions
5. Texas : 5% of all repossessions
6. Georgia : 5% of all repossessions

Thankfully for home sellers, mortgage servicers appear to be metering the pace at these newly bank-owned homes are made available to the public. RealtyTrac notes that, in doing so, servicers prevent “the further erosion of home prices”.
That said, distressed properties still sell at a steep discount.
In the second quarter of 2010, the average sale price of homes in the foreclosure process was 26 percent lower than the average sale price of homes not in the foreclosure process. It’s no surprise, therefore, that, based on RealtyTrac’s preliminary data, 31 percent of all homes sold in September were “distressed”.
There’s lot of good deals out there, in other words, but they come with certain risks.
Buying a foreclosed home is not the same as buying a non-foreclosed home. Specifically, you’re buying from a corporation and not from a “person”. Contracts may vary, and so may terms.
Therefore, Laguna Beach home buyers — even experienced ones — should talk with a real estate agent before making an offer. It’s important to understand the foreclosure-buying process.

October 14th, 2010 in Foreclosures | tags: RealtyTrac,Foreclosures,REO

Avoiding Common Mortgage Scams

Despite tougher mortgage guidelines and better loan disclosures for consumers, mortgage fraud is on the rise, according to the FBI.
Fraud has many varieties and it’s estimated cost to the nation is between $4-6 billion annually.  Today, common mortgage fraud scams target homeowners behind in their mortgage payments and/or facing foreclosure. And, despite the hordes of legitimate organizations that dedicate themselves to helping consumers, mortgage fraudsters proliferate.
In this 3-minute piece from NBC’s The Today Show, you’ll learn to spot common frauds, and to avoid them.
Some of the frauds highlighted include:

1. The Rent-to-Buy arrangement
2. The Bait-and-Switch
3. The “Phantom fees”

With respect to mortgage paperwork, it’s always wise to read what you’re signing, and to take time to understand what it means. If you’re uncomfortable reading mortgage documents, ask for an attorney’s help. And don’t worry if you don’t have the budget — many states offer free or discounted help via advocacy groups.

Credit Scores

Scorecards, Buckets and Points, The Anatomy of a Credit Scoring Model

There are four primary components to any credit score; the scorecards, the characteristics, the variables and the weights.

Scorecards – The scorecards are actually scoring models but cannot stand alone as a freestanding credit scoring system. All properly designed scorecards are built to evaluate the risk of a homogenous population. Bankrupt consumers is one example. “Consumers with thin credit reports” is another example. There are many more examples of scorecards but FICO and other model developers don’t generally disclose the exact definitions.

The purpose of having multiple scorecards in a model is to optimize it’s performance for all different consumer credit file types. If your credit score just had one scorecard then it would likely do well for one group of consumers and perform substandard for all others. That’s not a good credit scoring system. The better your developer is at defining a unique population, one that support it’s own scorecard, the better results from your credit score. Currently the FICO scoring system has 10 scorecards (for older versions) and 12 (for FICO 08). The following three components all reside within the scorecards.

Characteristics – A characteristic is simply a question the models asks your credit report. So, for example, “how many inquiries do you have in the past 12 months?” or “what is your revolving utilization?” or “what is the oldest account on your file?” Each scorecard has a different set of characteristics, but many of the same characteristics reside across multiple scorecards.

No model developer discloses all of their characteristics but we do know some of them and we do know that there are thousands of possible characteristics to choose from when building a model. There’s actually software designed to think up characteristics.

Variables – If the characteristic is best described as a “question” then the variable is best described as “the answer.” So, if the model asked you “how many inquiries do you have in the past 12 months” then the variable could be “none” or “one” or “15.” That’s why it’s called a variable, because the answer to the question can vary.

Each of your answers is going to place you neatly into a bucket or bin or class, they’re all the same thing so don’t get confused by the term. For example, here’s how inquiries COULD be bucketed, binned, or classed…THIS IS AN EXAMPLE.

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries

1 inquiry

2-5 inquiries

6-10 inquiries

>10 inquiries

The decision on how to break up those buckets is made by the model developer. He or she is trying to come up with the best scenario, which yields the most predictive model. This is an important step because you can’t simply choose how to break up your buckets based on common sense or anecdotal evidence. It has to be based on science. Just because you “think” 5 inquires is worse than 2 inquiries it doesn’t mean that it’s actually true. In the example above, 2, 3, 4, and 5 inquires all mean the same thing, which is why they’re all in the same bucket.

This “bucketing” process is going to apply to almost every characteristic in your scoring model. NOTE: Just because your bucket looks one way in one of the scorecards it doesn’t mean it’s going to look the same way in the others. It could easily look like this in a different scorecard…

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries

1 inquiry

2-4 inquiries

5-8 inquiries

9-12 inquiries

>12 inquiries

Weights – Weights, or point values, is where your scoring model is most visible to lenders and consumers. This is where your final score is going to start coming together. The weight is the point value given to your variable. So, if I used the above example here’s what it could look like…

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries = 50 points

1 inquiry = 45 points

2-4 inquiries = 40 points

5-8 inquiries = 20 points

9-12 inquiries = 5 points

>12 inquiries = 0 points

Just as it is with characteristics and variables, the point values will be different in different scorecards. So, using my first example for inquiry bucketing your weights could look like this…(remember, this is the same characteristic just in a different scorecard)

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries = 60 points

1 inquiry = 55 points

2-5 inquiries = 50 points

6-10 inquiries = 20 points

>10 inquiries = 0 points

This is what confuses so many “credit expert pretenders’ because they generally want to assign a fixed point value to each item on a credit report. When you look at these inquiry examples you quickly realize there is not a fixed value per inquiry. The value or points you earn is based entirely on what bucket you fall into. You don’t lose 5 points per inquiry. That’s not how scoring works.

There ended the lesson!

From Credit CRM blog by Jamison Law