Ask John: Mortgage Meltdown Culprits

Credit woes, foreclosures, subprime meltdown…whatever you want to call it, the mortgage industry is in trouble. And while I will fully admit that I'm no expert on the industry, there are several obvious reasons for the current situation. Rogue mortgage professionals (mortgage brokers or mortgage lenders), inappropriate loan programs, and under-educated buyers are just a few of the main culprits.

There are also some little known reasons why I believe the industry is imploding. It's these secondary issues that are neither being addressed nor corrected. In fact, they're being flat out ignored. Let's explore...

Is Credit Repair okay in the mortgage industry?

What is credit repair? Credit repair is any process whereby a consumer's credit file is manipulated with the intent of making the consumer look better to prospective lenders, insurance companies, or employers. Credit repair normally involves consumers who pay a third party to attempt to get negative, but accurate, information removed from or changed on their credit reports. If the credit repair company is successful, the consumer's credit scores are artificially inflated and no longer represent an accurate reflection of his or her credit or insurance risk.

Credit repair organizations come in all shapes and sizes. While initially viewed as saviors by tens of thousands of consumers, over the years, credit repair companies have fallen into disfavor, come under intense scrutiny by federal and state consumer protection agencies and are now subject to significant regulation.

In the mortgage world, however, there are two very open and profitable services offered by companies that attempt to do the same things as traditional credit repair organizations: to make your credit reports and scores look better than they really are for the purposes of faking out lenders.

So who are they and how can you find them? You might be surprised to learn that these companies work fairly closely with mortgage professionals. That's right: they’re the ones who have been entrusted to create mortgage credit reports, or “tri-merges.” You won't need to go looking for them because there is a reasonable likelihood that your mortgage professional will introduce you to them if your scores aren't up to snuff.

Rapid Credit Updating and Rescoring Services

Are you familiar with these services? They have catchy names like "Rapid Rescoring" and "Rapid Update." Essentially, they charge consumers to investigate and update their credit files in a significantly shorter period of time than the credit reporting agencies. The normal time for a credit bureau to investigate a credit dispute is thirty days; however, there is no charge.

Here's how they work...

1. Joe Smith applies for a mortgage, has his credit reports accessed and his broker notices that Joe's credit scores are not up to par.
2. The mortgage professional asks about the credit report. Joe responds that those collections, credit card bills, and late payments are either not his or have been paid in full.
3. Rather than suggesting that Joe contact the credit bureaus to file a traditional credit dispute, his broker recommends an alternative: rapid updating.
4. For a fee that often exceeds $30 (per account, per credit report), Joe can hire someone from the mortgage credit reporting company to validate his claims in a day or two.
5. If Joe’s statements can be confirmed, these hired guns can leverage their relationships with the credit bureaus to have them manually update Joe’s accounts very quickly - perhaps as soon as 24-48 hours.
6. Once the credit files are “corrected” and updated, his broker can buy a new set of credit reports and credit scores. Presumably, the newly updated information should yield a set of higher scores and enable Joe to qualify for a better deal.

There are three major issues to keep in mind:

1. A large number of folks in the mortgage lending and brokerage communities are paid on commission. Their motivation is to get you approved and closed or they don't get paid.
2. It may not be the wisest course of action to depend upon your mortgage professional for credit score advice. While they may understand what lenders want to see, they may not be the most qualified to educate you as to the best way to improve your credit reports and scores.
3. At the end of the day, you are paying to have your credit files updated. It's that simple. Clearly, you are between a rock and a hard place. You love the house and there is a high likelihood that you'll lose the lock on the loan rate if you have to wait a full 30 days for the bureaus to correct your credit reports (assuming they'll even get it right in 30 days). Rapid rescoring/rapid update service providers profit from credit bureau errors and dispute windows. And guess who else shares in the spoils when you pay to have your credit reports updated? Drum roll please -- the credit reporting agencies. After all, that second set of credit reports isn’t free.

Now I suppose you could make an argument that these rapid updating services are good for borrowers. Sometimes the credit bureaus get it wrong, and if consumers have to pay a few hundred dollars to get balances corrected and old accounts removed – well, people do what they have to in order to live the American dream.

This next service, however, is a horse of a different color. It is credit repair plain and simple.

Score Optimization Services

These services review mortgage applicants' credit reports and advise them on a course of action designed to yield higher credit scores. Good news for commission based mortgage professionals and “motivated” consumers, not necessarily good news (in fact, potentially troubling news) for others in the mortgage lending/funding chain.  As I said, this is nothing more than credit repair masquerading as a legitimate service for the mortgage industry. The problem is that the mortgage – credit industrial complex actually supports these services.  It’s truly the elephant in the room that nobody wants to talk about.

For a fee, you get advice on what changes to make in your credit report that are likely to improve your scores. It's not credit education; it's an attempt to game the credit scoring system. You are not learning lessons that will last a lifetime; you are being taught how to beat the system one time, for one particular loan.

These services are offered by many of the companies that sell credit reports to the mortgage industry. Here's how they work:

1. Joe Smith applies for a mortgage and his broker pulls Joe's credit reports. Let’s say that his credit scores are not good enough to get the best deal - 620, 640, and 650.
2. His broker suggests that maybe it's a good idea to spend a few dollars on a service that will provide suggestions that should lead to higher scores.
3. One service in particular posts examples of possible suggestions on its website: “transfer balances, open new accounts.”  Joe follows its recommendations.
4. Fully understanding ”time is of the essence” when scheduling a loan closing, Joe opts to pay for a rapid update service to get his credit files and scores updated as expeditiously as possible. So, for a fee that most likely exceeds $30 (per account, per credit report), Joe hires someone from the mortgage reporting company to update his credit files quickly.
5. Let’s assume that his scores improve by 40 points and are now 660, 680 and 690. Joe is able to close on the loan at a better interest rate. 

Here are the questions mortgage professionals and mortgage credit reporting companies don't really want to answer...

1. Did Joe really deserve the loan at the rate he was given?
2. Is he, in fact, a lower credit risk...or was his score manipulated?
3. Will he pay back his loan like the 690 he appears to be, or the 620 he really was prior to his credit cosmetic surgery?
4. Doesn't the lender deserve to know Joe's REAL credit scores…not those he ends up with after some sort of fee-based coaching?

Joe didn't improve his credit management skills and he didn't have a credit epiphany; he just paid for some service to tell him how to game the credit scoring system for a temporary score increase. He may well revert back to his normal credit management practices. That may not be good news for the lender, the investor that ultimately funds the loan, or indeed, the mortgage industry as a whole.

The mortgage brokers, the mortgage reporting companies and these “credit manipulation” companies have no skin in the game. It's not their money; it's someone else's. Initially, Joe gets what he wants – he closes on the loan and gets the house of his dreams. The broker gets his commission. And then, well, perhaps twelve months later Joe becomes yet another foreclosure statistic.What I can't figure out is why Fannie Mae and Freddie Mac don't step up and do something about these rapid update and "score optimization" services. Surely they care that consumers are manipulating the credit system through these fee-based services and that their scores are being artificially inflated for the purposes of "getting the loan done."

Question: Is credit repair okay in the mortgage industry?

Answer: Not only is it okay, but it's profitable.

If you have a comment for John or would like to ask him a question then please feel free to drop him a note at AskJohn@credit. com

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