By KENNETH R. HARNEY - WASHINGTON POST WRITERS GROUP
WASHINGTON — Here’s a homeowner credit torture scenario that has a major real estate lobby on Capitol Hill demanding immediate reforms.
Say a homeowner has a solid payment record on just about all his accounts. The last time he checked, his credit scores were comfortably in the 750s.
Suddenly he receives a notice from the bank that because of “market conditions,” the equity line limit has been cut to $35,000 — slightly above the $30,000 balance outstanding — from $60,000. Then one of his credit-card issuers delivers more bad news: The $20,000 limit has been reduced to $10,000. The balance on the card is about $9,000.
The cuts could send the homeowner’s credit scores plunging into the upper 600s. This in turn could put him out of reach for a refinancing at a favorable interest rate or hamper his ability to buy a house and sell his current one.
The reason for the score plunge: With the reductions in credit limits, the homeowner is is using a higher percentage of credit — $30,000 of the $35,000 revised limit (86 percent) on his home equity line, and $9,000 of the $10,000 limit (90 percent) on the card. Scoring models typically penalize high use rates because they correlate with delinquency problems.
The largest lobby group on Capitol Hill, the 1.1 million-member National Association of Realtors, is demanding that the creator of the FICO score that dominates the mortgage market — Fair Isaac Corp. — act immediately to lessen the negative impacts when banks abruptly cancel or slash nondelinquent customers’ credit lines.
The group wants FICO either to ignore the use rate for consumers with solid histories of on-time payments or to compute the score as if the credit maximum had not been reduced.
Asked for a response, Joanne Gaskin, Fair Isaac’s director of mortgage scoring solutions, said research conducted by the company last year found that consumers who use 70 percent of their available credit “have a future bad rate 20 to 50 times greater than consumers with lower utilizations.” Ignoring this key indicator, the study said, would “decrease [the score’s] predictive power.”
The National Association of Realtors has also asked Fair Isaac to help out with the nationwide foreclosure crisis by revising its model to recognize lender codings on credit file accounts indicating that homeowners had received loan modifications approved under federally backed programs.
Rather than treating borrowers’ reduced post-modification payments as ongoing evidence that the mortgage was “not paid as originally agreed” — which depresses scores sharply — the association said FICO scores should reflect that the lender agreed to lower payments and borrowers are making payments “as agreed.”
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