Fannie Mae and Freddie Mac Déjà Vu?

I wrote recently about the problems at Fannie Mae and Freddie Mac that led them from being healthy, economically viable enterprises to becoming wards of the state. They used to have a combined net worth of close to $100 billion and now they are $100 billion underwater, and counting.

The Congressional financial restructuring act did not even attempt to deal with it other than to allocate $30 million or so to hire consultants to "study" how best to privatize them sometime in the future.  I suppose that is because today no one has a clue.

I said that one of the problems was that they forgot that the core mission of any business is to survive.  After that is assured, they can worry about expanding. After that, they can worry about things that are more altruistic, like expanding homeownership opportunities. They were sunk in large part because political forces at work in Washington D.C. thought, incorrectly as it turned out, that they could use Fannie and Freddie to achieve political goals without any attendant risk.

To that end, they inserted political goals into their mission statement, mandating that they should serve under-served markets, particularly loans to low- and middle-income borrowers.  As a result, the agencies bought billions of dollars of toxic loans, mostly to those borrowers, that later went bad. That helped create the meltdown.

You would think they would have learned their lesson.  Wrong!

In a statement this week, the Federal Housing Finance Agency that supervises Fannie and Freddie issued an announcement with the intention to:

"establish a duty for Fannie Mae and Freddie Mac (the Enterprises) to serve very low-, low- and moderate-income families in three specified underserved markets -- manufactured housing, affordable housing preservation, and rural markets."

Note that the politicos forgot the trouble that lax underwriting standards have gotten us into. In the announcement, it specifically says that borrowers will be evaluated on:

the development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing;

We got into this mess in part because of exactly those kind of statements and policies.

As to the rural program, it's designed to serve families who may have a credit and income history but who forgot to save money and who thus have no down payment.  Sound familiar?  Maximum loan-to-value is 102% and private mortgage insurance, PMI, is not required because the loans are government guaranteed.

Sounds like another disaster in the wings.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

More Folk Wisdom on Getting Mortgage-Savvy

Mark Twain is another wonderful source of great quotes that cut to the heart of issues. He was perhaps the first author to get to the heart of America's belief structure with finely drawn characters that inhabit his two most popular books "The Adventures of Tom Sawyer" and "The Adventures of Huckleberry Finn."  His remarkable insight also led him to give some great quotes. Here's one of my favorites:

"It ain't what you don't know that gets you into trouble.

It's what you know for sure that just ain't so."

This is certainly true in the homebuying process. Out of my more than 4,500 clients I think I can safely say that in a majority of cases, I had to help them "unlearn" something that was not true.  You can't build a structure of good decisions on a foundation of factoids.  For those who don't know that word, it's a word coined by Norman Mailer. The Washington Post described it as:

"something that looks like a fact, could be a fact, but in fact is not a fact"

Some of these factoids were perhaps learned at a prior time when the world was a different place than it is today.  As I look at the cycles of the last 30 years, I can assure you that each five-year period was remarkably different than the one before it. Today the landscape is so totally different that almost anything you learned before is obsolete.

The other thing that is important to understand is that borrowers think that because they got a loan before that they can do it again. In many cases, if not most, that just means they will repeat the mistake they made the first time, perhaps with another new mistake thrown in for good measure.

Of course, the tricky thing in this whole process is that most borrowers do not know that they made a mistake. That falls under another great quote, attributed to Thomas Grey.

"When ignorance if bliss, ‘tis folly to be wise."

Well, my friends, ignorance is certainly not blissful. Even worse, it is expensive.  When you are buying a $400,000 home, one single mistake most people make can easily cost $7,000.  If it's an $800,000 home, you're talking $14,000.

The problem is that our industry does not offer simple coaching like this: "I have alternative A or alternative B.  B saves you $14,000. Which would you prefer?"  It would be easy if it was like that, but it isn't. You need training and help from an expert.

Bottom line, becoming educated about mortgages can pay big dividends. Read a book, maybe two or three.

 

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Get Your Red Hot Toxic Assets Right Here!

The hosts and crew at NPR's Planet Money pooled their money and purchased $1000 worth of toxic assets. Not because they were expecting to make a killing, but because they thought it would be a good way to learn more about toxic assets and what they mean to investors, banks, and mortgage holders. (Here are some frequently asked questions about toxic assets.)

The NPR folks bought a portion of a mortgage bond that had sold for $2.7 million a couple of years ago. NPR's $1000 got them a 1/36th share in the bond. So, in other words, they got a share that was worth $75,000 when the bond was sold for $2.7 million. That's 1.3 cents on the dollar.

Why did the bond's value drop so much? Because many of the mortgages, mainly in California, Arizona, and Florida, are "troubled." The values of the houses are worth less than the money owed on the mortgages. Half people are behind on their mortgage payments. Fifteen percent of the homes are in foreclosure. When those foreclosed homes get sold at a loss, the bond shrinks.

But even so, the investors from NPR have received money each month because many of the mortgage holders are still making payments on time. Their first check was for $141. To date, they've gotten $332. As the NPR co-host notes, "If we keep getting checks [in this amount] till Thanksgiving, we will double our money." They asked their broker what was the worst thing that could happen. His answer: "Next month they sell all the houses and you get stuck with nothing."

On this page, you can track the health of NPR's toxic asset.

Here's the seven-and-a-half-minute audio segment | Here's a transcript of the segment

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Bulldoze in Lieu of Foreclosure? One Frustrated Homeowner's Solution

This is probably not the best solution to the housing problem or the rising foreclosure issue, but that's exactly what one frustrated Ohio man did, according to an AP report this morning:

"An Ohio man says he bulldozed his $350,000 home to keep a bank from foreclosing on it.

Terry Hoskins says he has struggled with the RiverHills Bank over his home in Moscow for years and had problems with the Internal Revenue Service. He says the IRS placed liens on his carpet store and commercial property and the bank claimed his house as collateral.

Hoskins says he owes $160,000 on the house. He says he spent a lot of money on attorneys and finally had enough. About two weeks ago he bulldozed the home 25 miles southeast of Cincinnati."

Mr. Hoskins also spoke to local TV station WLWT and was quoted as saying: "When I see I owe $160,000 on almost a $350,000 home, and someone decides they want to take it -- no, I wasn't going to stand for that, so I took it down."

Here's a clip of Terry sharing his story on WLWT:

This story is blowing up on the airwaves and the web and many are calling Terry a hero for standing up and sending a message. Others are speculating whether Mr. Hoskins will be prosecuted for his actions and end up in prison. What do you think? Share your thoughts in the comments section!

Shopping for a Mortgage 101

I have spent 30 years shopping for mortgages for people who think, quite correctly, that I can do a better job of it than they can.  But every once in a while I get someone in my office who is literally unable to comprehend that my 30 years of expertise can be of any benefit to them.  They invariably have a yellow pad of paper and they want to know "the facts."

Almost invariably, these folks are the analytical types, engineers, accountants, and so forth. These are people who are used to looking at the bottom of a page and coming up with a number. Important concepts like honesty, expertise, and trustworthiness seem irrelevant.

In some cases, they may have done enough shopping so that they say they know what they want, say a 30-year fixed rate loan at 5 percent with zero points. That choice is invariably the wrong one but they don't know that. 

Their thinking is that if they nail down the rate and fee, then the only other variable is lender costs, what we in the industry call garbage fees. Sounds logical, doesn't it. Then you just have to call a bunch of lenders and ask them what their fees are. The problem is that it is NEVER this simple. 

This is a complex business, so complex that I wrote a 256 page book and over 400 articles, something like 500,000 words of advice. My book  How to Save Thousands of Dollars on Your Home Mortgage is packed with secrets ways I have of saving people money.  If shopping were as simple as my shopper thinks it is, I could have published a book with only one-page!

The ways I know about how to save money are NEVER even on the radar screen of the analytical guy. These clever ways of saving money are a result of my having done 5,000 loans. My expertise manifests itself as I teach people things that are new to them.   Many, many clients have said so often, "I never looked at it that way." Then I know I have done my job.

Here's the sad thing. There is perhaps $200 difference in lender fees between one lender and another. $200 is inconsequential when you figure he'll spend $200,000 in interest.  Among the lenders I do business with there might be one than charges $200 more than anyone else. BUT we might use him because the points on his loan are 1/8th of a point less. On a $400,000 loan, that's a $500 saving for my client. That more than offsets the $200 extra he paid in lender fees.

The other critical variable in a volatile market is which day to choose to lock in.  I can tell you that a loose-cannon client has about a 20 percent chance of locking in on the day with the lowest rate.  He probably will leave $1,000 on the table by locking on the wrong day.

Now this shopper isn't alone. In fact, most shoppers are naïve. That is why most lenders staff their 800 number call centers with twenty-something people making little more than minimum wage.  They may even quote low fees to get him to apply and then make it up and more in some other way he can't see.

Finally, the reason I will not play the game on his level is that I know that people like this never stop shopping. If I’m $50 low, next week he'll find someone else that will be $50 lower than me and he's gone.

Here's how you should shop. Find an expert and go to his office and say, "You know a lot more than I do about this. How can you help me save money?" 

If your circumstances are identical to our shopper, I can guarantee you that I could show you how to save $5,000 over the deal he ultimately gets. You are a client and I help clients. The other guy is just a prospect. I'm not about to tell him my secrets. It won't earn his loyalty. He would just take my secret down the road to some other lender so I'm not going to let him pick my brains.

So, my way of establishing the "value proposition" is that the client has to attribute value what I as the mortgage broker bring to the table. He has to WANT my help.  A good shopper wants find the best and most affordable approach for his particular situation – and that's not a simple, cut-and-dry process.

In summation, find someone who knows these secrets and get their help. You might start out by buying a book and reading about the home buying process. Of course I recommend my own highly-praised book. I have heard from countless people, "After reading your book, we think we know more than our loan officer."

Sad but true.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Can You Trust Your Bank?

I strongly believe that when a consumer is researching buying a product or service that he can rely upon the provider to give him accurate information from which he can base his decision. That's not always true, hence the concept and term "buyer beware."

Nordstrom, probably the most trusted name in retailing, got their exalted position by earning it year after year, customer after customer. But you don't know anything about the street vendor, and if you buy a purse from one, as my wife recently did in the SoHo area of New York City, you realize that you are taking a chance.
 
When it comes to financial products, there have likely been more dishonest individuals per square foot than any industry I can think of. My end of it, mortgage lending, may be the worst, with fly-by-night mortgage brokers and subprime lenders who taught classes in how to deceive customers. And they did. And while I try to have sympathy for borrowers who were hornswaggled, there were so many warnings about shady characters in the mortgage business that those borrowers should have done a better job of verifying the reliability of the lender they chose.

But when it comes to the big banks known world-wide -- and, theoretically, highly regulated ones -- you would think that a consumer could trust the information. More particularly, when a bank has over 1,000 branches, you would think that you would get the same rate whether you went into an office in a big city like San Francisco, a branch in a small town like Yuba City, to the bank's Internet website, or called an 800 number. Apparently that has not been the case. 

It has been reported that one big bank has eliminated the ability of their loan officers to make "overages."  In a nutshell, an "overage" is industry terminology for extra compensation the loan officer earns when he is able to smooth-talk the borrower into accepting a loan on terms that are higher than the best rate that the customer was qualified for.

For example, let's say that the best rate is 4.75 percent. If the loan officer tells the customer that the best rate he can get him is 4.875 percent and the customer agrees, then an overage comes into play. That loan has a higher value because outfits like Fannie Mae will, logically, pay more for a loan with a higher yield. 

The differential would typically be about one-half point, or $2,000 on a $400,000 loan. Of that, the loan officer might get half, or $1,000. The loan officer's normal compensation might be $1,000 per loan, so with the overage, he just doubled his income. And the bank made more too. You might think this is illegal, but it isn't.

You can also see that the loan officer can get away with this only under two circumstances. The first is when the customer doesn’t understand or know what the proper rate is. The second is when he completely trusts the bank and the loan officer.

Thus on the one hand, the loan officer and his employer are exploiting the customer's misunderstanding of the proper rate and on the other hand they are violating the relationship of trust the customer counted on. If it occurs to you that this is an awful way to run a business, especially one that is regulated, you would be right. 

Worse, I will guarantee you that no regulator is looking into practices like this so as to police their behavior. They believe, quite seriously but also quite incorrectly, that "market forces" will not allow such behavior to be successful.

Good for that bank to remove temptation, but bad for them to have allowed it for so long. And you wonder how many of their loan officers are looking for jobs at other banks that don't operate quite as ethically, that will still allow overages.

Bottom line: You need to look out for yourself because no one else will.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Changes at FHA

I recently wrote a blog discussing the tightening of various underwriting rules by Fannie Mae and Freddie Mac.  FHA has now joined the fray with an announcement of various ways they are tightening the rules.

First, the most important change is the proposed increase in the initial Mortgage Insurance Premium from 1.75 percent to 2.25 percent. The initial premium is not a cash payment but instead is added onto the loan balance.

For example, if a borrower were to make a 3.5 percent down payment on a $300,000 home, the nominal loan amount is $289,500. Adding the MIP of 2.25 percent, or $6,513.75, yields a final loan amount of $296,013.75. After making ten years of payments, the loan balance would still not be reduced to 80 percent of the initial purchase price.

Second, FHA has asked Congress for permission to increase the annual premium that is charged to borrowers. Currently that amount is one-half of one-percent, or $123.34 per month. The effect of this change, assuming it is approved, will be to start increasing the FHA reserves that have been bettered by recent losses. According to an article in The Wall Street Journal, the agency's reserves fell 72 percent to about one-half of one percent of the balance of the loans it has insured.  

FHA is going to require a minimum FICO score of 580 rather than the previous limit of 500 to get the 3.5 percent down payment program. According to Money-Zine, only 15 percent of Americans have credit scores below 600.  

FHA will do loans for people with FICO scores of less than 580, but they now have to make a 10 percent down payment. At a score of 500, about 97 percent of people have better credit. But FHA says that these are "borrowers who have historically performed well." Given the losses on the FHA portfolio of loans, I would like to see the data that shows such good performance.

In another move, the amount of allowable seller concessions was reduced from 6 percent of the purchase price to 3 percent.

Not mentioned in the article is the widespread rumor that FHA will increase the minimum down payment to 5 percent. Additionally, there is a move in Congress to increase the maximum FHA loan amount in high-cost areas from $729,750 up to $829,750.

Speaking as a loan originator, this makes me wonder why in the world we are doing loans for people who have such bad credit. Neither do I think that it is wise policy to allow 3.5 percent down payments on loans of $729,750 or $829,750. This is not much different than zero down payment loans that created so much of our current problem. Anyone who can qualify for a loan amount that large should have had the financial foresight to save enough for a reasonable down payment, say 10 percent.

I realize the FHA commitment to under-served communities, but the large group of people who have been financially irresponsible does not fall within my definition of "a community." Trying to serve that group is (at least in part) what got us into the current mess we are in.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

More FICO Mythbusters

When I started at FICO in 1997, the company was going through a growth spurt. Most notably was the increase of FICO® score usage by mortgage lenders thanks, in part, to the adoption of FICO® scoring by mortgage industry giants Fannie Mae and Freddie Mac. Many mortgage industry players will tell you that Fannie and Freddie force-fed FICO scores to the industry, and they’re not entirely wrong about that.

Now that we're a good 12+ years into the mortgage industry's use of FICO scoring for underwriting, there still seems to be some misunderstandings about the tool. So in this edition of FICO Mythbusters we'll dedicate some digital ink to clearing up circa-1997 misunderstandings.

1. Income Matters – Nope, not in your FICO score. Remember that the FICO score is a CREDIT BUREAU-based scoring model. This means that it can only take into account what’s on your credit reports – and income isn’t. Income was being purged from credit reports when I started in the credit industry in the early '90s, and it hasn’t reappeared since. So whether you make $1,000,000 or $15,000, there’s no direct influence on your FICO scores. Those that complain about this assume, incorrectly, that capacity equal credit worthiness.

2. Risk-Based Lending is Unfair – …because it makes credit for higher-risk borrowers more expensive or unattainable. Duh! Lending is not a charitable event. Lenders have to make money or, well, they don’t need to be lenders. The following statement will eliminate me from any future presidential ambitions: nobody deserves credit. Credit is not a right. Credit is an earned privilege. Those who don’t pay their bills on time don’t deserve the same "cost" for their credit as someone who does. Complaining about this is a waste of time.

3. "Honest Mistake" Late Payments Shouldn’t Hurt Your Scores – Really? And why shouldn't they? Where in your closing documents or promissory note does it allow you to "honestly" not pay your bills on time? I'll save you the research time; it’s not there. Put yourself in the lender’s shoes just for a moment and pretend that the $250,000 home loan came out of your pocket. Would you really care why the payment isn’t being made on time? If you do, then you should not be in lender.

4. There is Such a Thing as a "Co-signer for Credit Only" – There is a very interesting lawsuit working its way through the court system in Georgia where a co-signer is suing a lender because the other co-signer stopped making payments on a car loan. Follow me… two people co-sign an application for a boat loan. The two people break up and one moves to Arkansas, with the boat. He stops making the payments because he lost his job. The other co-signer refuses to make the payments because, well, she can’t use the boat. Lender repossesses the boat, sells it at auction, sues both co-signers for the deficiency balance, and reports it to both of their credit reports and their FICO scores go down. Co-signer, sans boat, sues the lender because she claims that she was a "co-signer for credit only" and shouldn’t be liable for the payments. I love it. Now we’re creating new industry terminology because we don’t read our loan documents. This isn’t a joke; someone is actually making that argument and clogging the Georgia court system with this ridiculous lawsuit.

The silver lining of the credit meltdown, I hope, is that people will actually take time to learn more about the system rather than just complain about it. Complaining about something without offering a reasonable alternative is just that – complaining – and nobody wants to hear it. Complaining about something and having your facts wrong is just that – complaining – and nobody wants to hear it. Complaining about something, having your facts straight, and offering a reasonable alternative isn’t complaining; it’s innovation.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Mortgage Loan Standards Are Tightening

You have likely overheard someone talking about their trials and tribulations in getting a mortgage. Some of the issues may be overblown, but many others just reflect a changing environment in real estate finance.

All lenders, including and perhaps most specifically Fannie Mae and Freddie Mac, are writing off billions of dollars of uncollectable debt as they acquire homes through foreclosure. By tightening the standards, they hope to contain the damage to what is already on their plate. I don't blame them. At this point, we have a mess that is larger than anyone could have imagined a few years ago. It isn't over, and no one wants to add more loans that are likely to go bad in the future.

Remember that in this environment, there has been a lot of tightening already. For example, you cannot borrow without documenting sufficient income; you need to have reasonable credit scores; and you need to have a down payment if purchasing, and equity if refinancing. Here are some samples of current tightening:

Fannie Mae announced that they will not approve borrowers with total debt-to-income ratios greater than 45 percent. For example, if your income was $5,000 per month, your maximum outgo would have to be less than 45 percent, or $2,250 per month. If you had a $300 car payment and other bills with payments of $100, you would subtract $400 from $2,250, leaving $1,850 for a housing payment. Subtract anticipated monthly taxes and insurance to get the maximum allowable mortgage payment.

This is a dramatic change, as they would have approved loans with much higher ratios not too long ago. Note that Freddie Mac has not instituted this restriction. At least not yet, so if your ratios are pushing this limit, you would want to work with a lender that uses Freddie Mac.

Fannie Mae will also no longer do any loan where a borrower's FICO score is less than 620. They were doing these before, but they were exacting revenge by pricing hits that were almost confiscatory. Freddie Mac, again, has not done this yet.

I expected that real estate investors would take advantage of the drop in value to load up on properties, and that seems to be happening. I believe a good strategy is for an investor to buy now and hold for the long term value and cash flow. Fannie and Freddie will still allow up to ten properties to be financed, but the minimum FICO score is now 720 and loan-to-value is lowered. Purchases and rate-and-term refinances are allowed, but cash-out refinances are not.

Finally, on the Super Jumbo Conforming loans available in higher-cost areas, getting a new loan that is larger than the current loan, even if paying off a second TD loan, is considered a cash-out refinance. The minimum FICO score is 740 and the maximum allowable loan-to-value is 60 percent, and there is a 1-point added hit to the upfront fees.

The upshot of this is that if you want a mortgage, you will need to do everything you can to improve the measures of your creditworthiness. As a responsible adult, you would want to do this anyway, but a stricter disciplinarian is now in the room to assure compliance.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Strategic Default: The Real Cost of Walking Away from Your Mortgage

A University of Arizona law professor has raised eyebrows for urging homeowners who owe more than their houses are worth to act in their own self-interest by walking away from their mortgages. 

Professor Brent T. White argues that underwater homeowners could save hundreds of thousands of dollars defaulting on their mortgages in his academic paper titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”  

To do so, they must overcome their moral qualms about refusing to pay their bills. White argues that this moral barrier was constructed by a variety of players, including the government, the financial industry, and social control agents like banks and media.  

The short-term costs of walking away -- including a negative hit to one’s credit score -- are outweighed by long-term financial benefits, he says. 

“While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals, especially not when compared to the savings from walking away from a seriously underwater mortgage,” he says.  

Which raises the question: When homeowners strategically default on mortgages -- that is, skip payments even though they can pay their bills -- what exactly happens to their credit? White cautions borrowers, telling them they can expect to take a 100- to 150-point hit to their credit scores, with additional hits for late payments. The total hit from late payments and a foreclosure could be as high as 300 to 400 points. Plus, it takes seven years for a foreclosure to disappear from one’s credit report entirely.  

However, he says that “one can have a good credit rating -- meaning above 660 -- within two years after foreclosure" by staying current with other creditors. And qualifying for a federally-insured FHA loan to buy another home can happen in as little as three years.  

But other people -- ranging from walkaway borrowers to lenders and credit experts -- say the hits you take are deeper and more long-lasting than White suggests.  

“A default will have a serious negative impact on a consumer’s credit score and make it more difficult to obtain future credit,” said Barrett Burns, president and CEO of VantageScore Solutions, a scoring company created by the three national credit bureaus, Experian, Equifax and TransUnion.  

“That negative impact will vary depending on what action the consumer takes to avoid further default.”   There are a number of other options, beyond defaulting, available to underwater homeowners: loan modifications, short sales, foreclosures, and bankruptcies. Those who are current on their payments and have a positive loan-to-value ratio may inquire about refinancing to seek better terms.  

Loan modifications reduce a borrower’s monthly payments by decreasing the interest rate, rolling late payments and fees into the principal, or extending the life of the loan. These strategies make the loan more affordable.  

However, the rate of re-defaults after a loan modification are quite high, according to an October report by the Office of the Comptroller of the Currency and Office of Thrift Supervision.  

The report shows that a quarter of all borrowers who received loan modifications in the first quarter of 2008 re-defaulted three months later. And more than half who received loan modifications in earlier quarters re-defaulted after a year.  

An increasingly prevalent strategy is to lower the principal on the loan, according to the report. Principal reduction was used 3.1 percent of the time in the first quarter of 2009. That percentage jumped to 10 percent in the second quarter, statistics show.  

Loan modifications may have little effect on credit scores. A short sale, on the other hand, can adversely affect a score by 120 to 130 points, VantageScore has said. But it will have a less negative impact than a foreclosure, Burns said.  

“A consumer who has defaulted may face higher interest rates and/or more restrictive terms and conditions when borrowing in the future or may be prevented from obtaining credit altogether,” he said.  

Indeed, it will take a minimum of five years (not three, as White claims) to qualify for a federally insured FHA loan to buy a new home, officials at Fannie Mae and Freddie Mac told Washington Post’s Kenneth R. Harney. Harney has reported that people who file for bankruptcy protection covering all of their debts (mortgage, credit cards, auto loans, etc.) will get hit with an average 355- to 365-point drop in their scores. Bankruptcies remain on borrowers' credit bureau files for 10 years.  

The Vantage credit score rates borrowers on a scale range of 501 (subprime, the highest risk) to 990 (super-prime, the lowest risk). It competes with the Fair Isaac Corp.’s FICO scoring system, which ranges between 350 and 850. In general, a FICO score of 650 is considered a “fair” credit score, while 750 or higher is considered “excellent.”     

Cristine Gonzalez — A freelance writer specializing in family and personal finance, Cristine has worked as a reporter and copy editor for The Oregonian in Portland, Ore., The Associated Press, and People magazine in New York City.