For some time now consumers and industry professionals alike have been pondering an unknown:  how much credit damage will result from a short sale or foreclosure?   Opinions vary widely and we’ve yet to see a large enough sample to draw any conclusions.  In what amounts to a stronger sentence imposed on those who have lost a home, Fannie Mae recently increased the amount of time required after a foreclosure before one can obtain a new conventional loan.  That change signaled that lenders might be cracking down harder on foreclosures.

However, my Spidey sense has been tingling, and I believe that we’re going to have to do exactly the opposite in order to help speed the recovery along.   Sidelining foreclosed homeowners for five years will just prolong the agony.  My theory is that at some point, the industry must recognize that foreclosures today tell a different story than they did previously, and we need to find a way to bring worthy consumers back into the market sooner to help kick real estate back into gear.

When I spotted this article today, it gave me hope.

How Will Foreclosure Effect Credit Scores?

The amount of damage to a credit score caused by foreclosure, deed in lieu or a short sale during 2008 and 2009 may be mitigated by the slower economic times, say some credit and legal experts.

FICO may have to adjust its credit scores to lessen the impact of a foreclosure in the last two years, says Todd J. Zywicki, a professor of law at George Mason University.

”It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he says. ”To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”

One of the country’s largest credit unions Golden 1 has already figured out a way to lend to people with a foreclosure on their record by offering a mortgage repair loan specifically for those who have lost a home to foreclosure and who want to buy a new one.

BECU, another large credit union based in Washington State, is about to present a program to fellow lenders, ”How to Lend to the Newly Credit Impaired.”

Source: The New York Times, Ron Lieber (03/14/2009)

As consumers are swept into the foreclosure vortex, questions arise about whether to attempt a short sale or let the home go to foreclosure.  Which will damage credit less and allow the homeowner to more quickly reenter the market?

Many real estate professionals have promoted the idea that a short sale will be less damaging, and some have gone so far as to predict the number of points your score will drop on a short short vs. the point drop on a foreclosure.  This is like predicting how hot it will be on July 4th.  As I have disagreed in several posts including Short Sales vs. Foreclosures, Your Credit Will Suck Either Way,  one may be no better than another.

Here is an update from Old Republic Credit Services:

Recently, several alternatives to foreclosures have become popular. Some of these include “short sales” and “deed-in-lieu of foreclosure”. It is important to know that as far as the FICO score is concerned, there is no difference between foreclosures and these other options. Each is considered and an account that was “not paid as agreed” will have the same negative impact on the score. However, the account status reported is ultimately the decision of the creditor.

Lenders may state that the minimum time frame for securing a new loan is less for a short sale than for a foreclosure, but keep in mind that these are just the minimum time frames.  After that is satisfied, you’ll still need to have good credit scores in order to get a new loan.

I was recently chatting with Tonya Aldridge of New Start Credit Counseling who pointed out a couple of interesting things that may be valuable to those of you waiting for old collections and charge-offs to drop off your credit.  Conventional wisdom held that after 7 years, that stuff goes away and stops negatively impacting your credit. My experience is that old derogs are often reported by a successor collection agency and the problems starts again fresh.  Turns out, that’s because of the common and illegal practice of “re-aging”.

The Way It’s Supposed to Work

With each “tradeline” on your credit report, there is a little box that shows the date of “last activity” for that account.  Re-aging is the policy of putting a new, more recent date in that box, a practice Tonya says is flat out illegal per FCRA guidlines.  The law says that there is only one valid date that can go in that box:  the date of the last payment made to the original creditor.  Not all the credit bureaus put a date in there at all, but it’s important to insist that they do.  Tonya says Equifax usually reports the date, but the majority of the time Experian and TranUnion do not.

The 4 Year Statute of Limitations

The reason this date is so important is that after 4 years the law prohibits any creditor or collection company from calling to harass you about that bill.  While they can continue to write letters, they have no right to collect, and Guido can’t call and threaten you with a law suit or broken knee caps anymore.  Furthermore, the credit reporting agencies must drop those references after 7 years, although they might not if that date has been “re-aged”.  Tax liens and bankruptcies can still be shown for 10 years.

If You Need Help, Call Tonya

Tonya was my credit rep for years before starting her own credit consulting business.  She now helps many of my clients rebuild credit and improve their “Fico” scores the right way.  Most credit repair companies are a joke; they dispute “derogs” based on technicalities and their “fixes” are temporary.

Need help?  Give Tonya a call or email, and tell her I sent you.

Tonya Aldridge  916-300-9345  taldridgenewstartcc@gmail.com

As real estate values continue to sag, pushing many home owners toward foreclosure, one question surfaces more than any other. Will a short-sale damage your credit less than a foreclosure?

REWIND

I wrote a couple of articles awhile back entitled, Short Sales vs. Foreclosures�Your Credit Will Suck Either Way and Short Sales and Loan Prospector: A Response From Freddie Mac. At the time–nearly a year ago–my preliminary investigation suggested that short sales and foreclosures would have exactly the same effect on credit. But back then, this issue was just reclaiming the spotlight, and no one had really given it much thought. You see, it has been 10 years since we’ve really seen this problem.

Those articles are still garnering comments, and I’ve been getting daily phone calls and emails from all over the country from people facing foreclosure. So recently I reopened the investigation. And although the issue is far from clear, my conviction is the same. As far as your next mortgage is concerned, a short sale won’t leave your credit in better shape than a foreclosure. And it could leave you worse off from a tax standpoint.

NOT EVERYONE AGREES

Now I need to acknowledge the disagreement out there. Speculation is rampant, but a lot of it is groundless. There are people predicting the number of points each type of foreclosure will move your scores, a claim my credit reporting agency called “asinine.” Real estate agents seem more prone to recommending short sales, though most of the agents I know are very cautious about this. One Realtor/lender wrote,

Read the rest of this entry »

Last June I wrote an article entitled Is This The End of Credit Score Piggybacking? That article discussed the renting or selling of credit scores by good borrowers to fake good credit scores for bad ones. The practice of piggybacking credit has been used by parents to help their kids develop good credit scores. When accompanied by some education in the matter of building and maintaining good credit habits, this promotes the responsible use of credit.

However, the bad guys have been using credit renting to cheat the system and the credit bureaus are about to slam the door shut. Here is a brief summary from of how it works and the changes you can expect to see shortly. This came from someone at the credit reporting agency I use.

Authorized users are individuals that are added to an account without having any responsibility for the account. The most popular use is when an individual with a credit card, makes other members of the family �authorized users� on the card. The authorized users get their own cards (with their names on them) and the accounts show up on their credit reports as authorized user accounts. However, the authorized user has no actual liability for the account; if the account goes into default the creditor can only pursue the main account holder for the funds, not the authorized users. (This is how authorized user accounts differ from joint to co-signer accounts where the additional users also are liable for the account).

Fair Isaac has upgraded their scoring model to account for the fact that people were abusing the authorized user accounts to boost their credit scores. Called �Credit Renting�, individuals with highly rated credit cards were paid to add individuals with bad credit as authorized users their accounts. The authorized users would see credit score increases when these accounts became part of their credit profiles… Read the rest of this entry »