AskDong

Apparently having a top notch FICO score doesn’t cut it anymore, according to this article in the Boston Globe. During the housing boom, anyone with a pulse and a FICO score above 620 was rubber stamped for a home loan. 620 being the cutoff between prime and the dreaded subprime. I know because I was one of these borrowers who got quickly approved.

Lenders are being more careful now, and holding borrowers to higher standards. I for one think this a good thing. I believe Banks and individual lenders act in the best interest of the economy when they treat loans as assets they own instead of a liability to be passed to an unsuspecting pension fund. When I was recently approved for my current mortgage, I was told that the bank who funded the loan was most likely going to hold onto to the loan. A few years ago, I was told the exact opposite, “your loan will be sold.” If the bank knows it has to hold the loan, then it’s in the business of making sure borrowers are good risks. When banks know they will sell the loan, they are in the business of processing as many loans as possible.

The article cites 4 example of excellent borrowers facing the crunch.

1. Professor and Harvard Business School Executive have their 100k Home Equity Canceled
2. Finance executive moving from NY making in excess of 300k can’t get mortgage
3. A Homeowner since 1993 isn’t able to refinance because his appraisal has come in 80k lower
4. A Condo owner invited to get a loan can’t get 10k out of a refinance to pay bills

Call me unsympathetic, but I find it very credible that each of these borrowers were denied.  Just call me Scrooge McDong.

1. Home Equity Loans are secondary liens on a home and as result are only paid after the primary mortgage is paid. As a result home equity loans are especially risky in a declining market in which the value of the home might not cover the value of the 1st mortgage let alone the home equity loan. Lenders as a result are being justifiably careful.
2. The finance executive is not being denied but rather the bank wants an actual paycheck from the new job and not just a letter from the new employee. This sounds reasonable enough. This executive can join the the masses and rent for a while. Personally I’d rather rent before buying if I’m moving.
3. The homeowner since 1993 says the house is being appraised for 80k less than it was a little over a year ago. Why was is appraised just over an year ago? This guy sounds like he’s refinanced already, and has probably already extracted too much equity.
4. A condo owner who needs 10k to pay outstanding bills sounds like a poor risk. If she can’t pay her other bills, why should she be able to pay the loan? 10k of outstanding bills is a lot. Loan officers want to lend money out as that’s how they are paid, but ultimately it’s not the loan officer’s decision to make. The underwriter ultimately decides which risks are good and which ones aren’t. A loan officer is just a sales person.

I normally wouldn’t write about how having bad credit might have some perks, but I found this rather amusing. According the to rant from a VC, AT&T will allow you have a prepaid phone plan with the iPhone and therefore no contract.  However if your credit is too good, AT&T forces you onto a 2 year contract with the iPhone.

While I haven’t tried this myself, I imagine one could circumvent the system by putting the iPhone under the name of a minor.  I imagine most minors, given that they don’t have a credit history have poor credit. I could easily imagine someone signing up for the iPhone under his or her child’s name and social security number to avoid the otherwise mandatory 2 year contract.  Or if you want to avoid using your child’s social security number you can follow this guy’s advice. Using a bogus social security number might seem a little morally ambiguous, but given you’re basically guaranteeing AT&T payment, it’s hard to say how exactly other than a bit of dishonesty.