Archive for the 'Credit & Ficos' Category
I get a lot of calls these days from real estate agents wondering what effect a short sale or deed in lieu of foreclosure (DLF from here forward) will have on borrowers’ credit. That is a really important and interesting question, since the last real estate downturn preceded the widespread use of Fico scores and automated underwriting (AU) systems.
Everyone now seems aware that debt cancellation creates taxable income. In a short sale, the amount of the lender’s loss is reported to the borrower as income, creating an income tax liability for the borrower. If the borrower is insolvent at the time, the tax liability can be avoided, but only to the extent that liabilities exceed assets.
But how will credit scores be affected? And if a loan is approved through LP or DU, Freddie Mac’s and Fannie Mae’s automated underwriting engines, will the underwriter overturn the approval when she sees the typical “settled” comment on the mortgage tradeline?
For answers to these questions, I turned to my credit reporting agencies and representatives from the capital markets to see what is boiling inside the pot.
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Ever played “telephone”?
That’s the childhood game where a bunch of kids sit in a circle and one starts by whispering a phrase to the kid sitting next to him. The second passes the phrase to the third and so on around the circle. The game usually ends with last person and the entire group laughing wildly at the mutated final version of the original. Where credit is concerned, it sometimes feels like a game of “telephone”.
It’s not that people are stupid. The three big credit repositories don’t want us to know exactly how it works. If people find the cheat codes, then an 800 Fico score becomes meaningless. But it’s also true that much of what enhances credit scores defies common sense.