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Short Sales and Slow Payments Can Ruin Your Credit Score

How to Wreck Your Credit Score  by Karen Blumenthal
Tuesday, May 24, 2011  


  

Don't underestimate the harm that even one missed mortgage payment can do to your credit score -- especially if you had good credit to begin with. 

The severe consequences underscore that you shouldn't shrug off even an accidentally missed payment. Instead, you should pay it and call the lender right away, begging for forgiveness before it mars your credit record. 

In an unusually specific commentary to lenders, Fair Isaac (NYSE: FICO - News), the creator of the FICO score, recently spelled out the severe consequences to the credit scores of borrowers who are 30 days late on their mortgages -- as well as the long-term impact of failing to repay the whole mortgage. 

It isn't a pretty picture.

Being 30 days late on a house payment -- even if it is an accident -- can knock 100 points off a pristine 780 credit score, moving you from qualifying for the very best interest rates to the edge of subprime territory.

The actual numerical drop is less severe if your starting credit score is 720 or 680, but the impact is greater, since your new score is likely to sink to a level where new credit is hard to get and very expensive.

The FICO score ranges from a low of 300 to 850, with scores of about 750 or higher generally qualifying for the best loan terms.

The details provide a warning for anyone whose home is way underwater and is tempted to simply walk away, or considering a "short sale." That is when the sale price is less than the amount you owe and the borrower doesn't make up the difference. More than 350,000 homes have been sold this way since 2008, according to the Office of the Comptroller of the Currency.

FICO officials usually dodge questions about the specific impact of actions on scores. But Joanne Gaskin, director of FICO mortgage markets, compiled the data partly to counter incorrect information, such as recommendations that people stop paying their mortgages so they can negotiate with a lender, she says.

FICO says a foreclosure or short sale where the size of the unpaid balance is reported are equally devastating to a good or excellent credit score, reducing it by as much as 150 points, to the high 500s or low 600s. A rarer "deed in lieu of foreclosure" -- in which the borrower voluntarily transfers ownership of the home to the lender -- may have less impact on an excellent score.

Recovering your original score takes about seven years. That also is how long the information stays on your credit report, where insurers and potential employers can see it. Returning to a mediocre 680 score may take only three years.

Here are some other lessons from the data:

• Your past behavior counts, but your current behavior matters more.

Credit scores are intended to measure the risk that you won't repay a current or future debt. So your careful payments over many years translate into a higher starting score.

But your score takes the biggest hit of all when you are 30 days late on a payment, falling 70 to 100 points in the FICO example. It drops less when you are 90 days late and if you default. The reason? The first missed payment "captures a good deal of the risk of the consumer," Ms. Gaskin says.

• The best way to rebuild a damaged credit score, ironically, is to use credit.

Avoiding borrowing altogether means "you've frozen your credit history in a negative state," says Maxine Sweet, vice president of public education for credit bureau Experian. You will be better off using a credit card judiciously and paying it off promptly, adding good-behavior points to your record.

• A rotten score hurts more than you think.

A person with a 620 score would pay almost 12% interest on a four-year $25,000 car loan, compared with less than 5% for someone with a 780 score -- a difference of almost $4,000 over the life of the loan. On a 30-year fixed-rate $250,000 mortgage, a person with a 620 score might qualify for a 6% rate, but probably wouldn't be able to get mortgage insurance, which is required if your down payment less than 20%. A person with excellent credit might land a rate less than 5% and pay about $3,000 a year less.

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Bargain prices help reduce glut of foreclosures

WASHINGTON – April 27, 2011 – A wave of foreclosures is forcing down home prices in most major U.S. cities. But economists and real estate agents are noticing what they call a key first step for any housing recovery: a drop in the glut of homes for sale in markets hit hardest by foreclosures.

Low prices are leading investors to snap up foreclosed homes in Detroit, Las Vegas, Miami, Phoenix and Tampa. Those cut-rate sales are reducing prices in the short run. Yet they’re also thinning the supply of homes – clearing the way for higher prices in the long run.

For some buyers, the deals are now too good to pass up. A studio apartment on the Las Vegas strip that cost $500,000 at the height of the housing boom is now selling for roughly one-third that price. Half the homes listed in the Tampa Bay area are selling for less than $100,000, not far from some of Florida’s top Gulf Coast beaches.

Such sales have helped shrink the combined supply of unsold homes in those five cities by 13 percent over the past year, according to local listing data analyzed by The Associated Press. Home prices in each of those markets are at or below 2002 levels, according to the latest reading of the Standard & Poor’s/Case Shiller 20-city home price index.

“If we were to see several consecutive months of supply getting smaller, it would point to an improving housing market,” said Celia Chen, senior director at Moody’s Analytics. “Even if it is investors buying them, they are renting them out in hopes that prices in the next several years will rise.”

Economists caution that a second wave of foreclosures, those that have been delayed by banks and backlogged courts, could throw the housing market back into turmoil. And few see home prices rebounding before the end of this year.

Home prices fell from January to February in 19 of the 20 metro markets tracked by the Case-Shiller index. At least 10 major metro areas are at their lowest point since the housing bubble burst. The index, released Tuesday, is slightly above the level reached in April 2009, the lowest point since the downturn began.

Getting rid of foreclosures and other risky properties is necessary for the market to turn around. When foreclosures and distressed properties are sold, home prices fall.

But as the supply of cheap homes shrinks, prices stabilize. Homeowners who had put off moving because they didn’t want to sell during the downturn grow confident that they can fetch a decent price. That prompts more buying and selling. Prices rise more.

Most of the current foreclosure sales involve investors: Private equity firms; foreign and out-of-state buyers seeking vacation houses; individual investors hoping to rent out or quickly sell properties for a profit.

Many are scooping up cheap homes with cash, said Andrew Duncan, a Realtor who runs a Keller Williams franchise in Tampa. In March, 35 percent of previously occupied homes sold were bought entirely in cash, according to the National Association of Realtors.

“When the bargains do hit, there’s more than one buyer looking for that bargain,” Duncan said. “Buyers are losing out left and right when they bid because it’s just so competitive.”

Foreclosures have flooded the market in Miami. Three out of five homes sold there are foreclosures or short sales. (Short sales occur when lenders allow homes to be sold for less than what’s owed on the mortgage.) Such sales have helped lower the median home price by 19 percent in the past year, to $159,800 in March.

At the same time, the supply of Miami-area homes for sale has dropped nearly 24 percent. It would take just seven months to clear those homes at the current sales pace. That’s down from a 17-month supply just six months ago.

In Tampa, it would take just six months to clear the supply of unsold homes off the market. That’s down from about eight months a year ago and 25 months in January 2008. Detroit’s inventory of homes for sale has fallen 17 percent in the last year.

In Phoenix, the number of homes for sale has dropped nearly 10 percent over the past year. The median sales price of a single-family home sold last month was $118,500 - down more than 12 percent from a year ago.

The supply of homes in Las Vegas could be cleared in less than seven months at the current sales pace. That’s down from a 26-month supply in December 2007.

“It’s like a feeding frenzy when a home goes on the market now,” said Mike Shannon, a Detroit real estate agent who specializes in foreclosures. “We’re getting a few dozen offers on some homes in a matter of days.”

The thinning supply is due, in part, to a lull in foreclosures. They’ve dropped more than 56 percent in Tampa and nearly 64 percent in Miami. In those areas, the number of homes receiving an initial foreclosure notice has plummeted.

That could change quickly. Many banks are revisiting thousands of foreclosure cases. They’ve been spurred into action by federal regulators who have ordered reviews of how foreclosures were carried out over the past two years.

The logjam has been compounded in states such as Florida, New York and New Jersey, where a judge must approve foreclosures.

There are 1.2 million foreclosures expected this year nationally, according to foreclosure tracker RealtyTrac Inc., and the decline in foreclosure filings is only temporary, said Mark Vitner, senior economist at Wells Fargo.

“The problems are still there,” Vitner said. “There are fewer early-stage delinquencies, so we are moving in the right direction. But the slowdown in foreclosures is just drawing the process out.”
AP Logo Copyright © 2011 The Associated Press, Derek Kravitz and Janna Herron, AP business writers. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Real Estate's Shadow Inventory

Where is the shadow inventory?
WASHINGTON – Sept. 20, 2010 – For the last year, the real estate industry has been talking about shadow inventory and the coming flood of distressed properties. Where are they?

Here’s what’s happening, according to a recent paper by Alan Mallach, a senior fellow the Brookings Institution:

• Some delinquencies have been resolved through loan modifications or people working out the problems on their own.

• Banks are getting better at managing short sales.

• Investors are aggressively buying up properties, sometimes in bulk, directly from the banks or at courthouse auctions so they don’t hit the market.

The likeliest outcome, Mallach predicts, is a steady flow of foreclosures over a long timeframe that will prevent another crash in home prices – but it will probably lead to low or no appreciation in home prices for a while.

Source: The Wall Street Journal, Nick Timiaros (09/16/2010)

Naples Fall Sales Surge


 

 

FALL SALES SURGE
Report Shows Inventory Declines 14 Percent

NAPLES, Fla.-November 13, 2009-Overall pending home sales increased at least 100 percent in October 2009 compared to October 2008 in each price category under 2 million, according to a report released by the Naples Area Board of REALTORS
® (NABOR), which tracks home listings and sales within Collier County (excluding Marco Island).
"The number of contracts written in October 2009 (904 contracts) was more than twice the number of contracts written in October 2008 (409 contracts). The volume of activity is significant at what is usually a slow time of year,"

acknowledged Mike Hughes, Vice-President of Downing-Frye Realty.

The properties in the under $300,000 market have led the way in sales for the past few months. However, the market recovery is now working its way up to the higher priced properties. Pending sales in the $300,000 to $500,000 price segment have increased 150 percent from 48 contracts in October 2008 to 120 contracts in October 2009.
"Low interest rates and the federal tax credit are helping to drive more sales. Buyers are getting off the fence," stated John Steinwand, President of Naples Realty Services. "Inventory continues to go down from its peak."
The available inventory has declined 14 percent to 9,347 in October 2009 from 10,815 in October 2008.
The October report provides annual comparisons of single-family home and condo sales (via the SunshineMLS), price ranges, geographic segmentation and includes an overall market summary. The statistics are presented in chart format, along with the following analysis:
Overall home sales under $300,000 saw a 42 percent increase with 555 closed sales in October 2009 compared to 392 closed sales in October 2008.
Single-family pending sales increased 73 percent with 475 contracts in October 2009 compared to 274 contracts in October 2008.
Condo sales increased 49 percent with 254 closed sales in October 2009 compared to 170 closed sales in October 2008.
The overall median closed price decreased 14 percent to $190,000 in October 2009 from $221,000 in October 2008.
The median refers to the middle value in a set of statistical values that are arranged in ascending or descending order, in this case prices at which homes were actually sold. It should be noted that in any given period the median could vary greatly if there is an anomaly, a single sale that is significantly higher or lower than other properties in the area.
According to Brenda Fioretti, Managing Broker of Prudential Florida Realty, "Educated consumers are contributing to the market rebound as sellers price properties competitively and realistically.