by Kenneth R. Harney

Forget about those online pitches that claim to raise FICO scores by hundreds of points in weeks-opening the door for unscrupulous home buyers to qualify for a lower mortgage rate than they actually deserve.

Fair Isaac Corp., the developer of the FICO score, is preparing to pull the plug on schemes that allow high quality credit card histories to flow into the credit files of people with bad credit, thereby boosting scores. The target: dozens of websites that give cash to credit card holders with excellent payment histories when they allow the websites to “rent” their cards out to people with poor credit for up to 90 days.

Fair Isaac’s public affairs manager, Craig Watts, said that beginning in September, the updated FICO scoring model no longer will consider credit card “authorized user” accounts in computing scores. When card holders rent out their cards, they are actually agreeing to add credit-repair clients of the website as authorized users. Authorized users get to share the primary card holder’s full payment history on the account, but they do not necessarily have physical access to the card itself. All the on-time positive payments of the primary card holder flows into the credit repair clients’ own credit files at Equifax, Experian and Trans Union-the three national credit repositories. That, in turn, raises their credit scores using the traditional FICO model.

As a real-life example, last Thursday a person with a subprime 580 FICO score who applied for a $300,000 30-year fixed rate home loan would have been quoted an average interest rate of 8.9 percent ($2,393 a month in principal and interest.) An applicant with a 700 FICO score, by contrast, would have been quoted around 6.56 percent ($1,912). This is based on a national survey of lenders conducted for Fair Isaac and published on its website, myfico.com.

Just a 120 point score boost, in other words, would get an applicant a much lower mortgage rate and save nearly $500 a month in payments — nearly $6,000 the first year alone. FICO score-boost websites will rent someone else’s card history for a one-time payment of anywhere from $400 to $2,000, with the price tied to the age and the maximum credit limit of the card account. The longer the cardholder’s excellent payment history and the higher the limit, the more it costs and the bigger boost it delivers.

Federal law permits authorized user accounts, but does not prescribe limitations on how many authorized users can be attached to a single card, and does not specifically prohibit rentals of tradeline accounts for limited periods of time by profit-making entities. Some websites claim card holders can earn “$10,000 a month or more” by renting out their cards to large numbers of authorized users-99 in one extreme case.

However, federal and state regulators have warned mortgage lenders and brokers to be on guard against such schemes. Though the websites may be exploiting a loophole in the law, regulators say, home buyers and loan officers who submit mortgage applications with artificially inflated FICO scores are violating multiple statutes-bank fraud is tops on the list-and could be prosecuted.

The Federal Trade Commission has been studying the situation for months, but has not moved against promoters of FICO boosting. The National Association of Mortgage Brokers has asked Congress to change federal law to remove what one association official called “an open door to fraud.”

In the meantime, however, Fair Isaac itself, by tweaking its latest model to ignore all authorized user accounts, believes it can solve “most of the problem,” according to spokesman Watts.

by David Reed

I was on CNN the other day and the host, Gerri Willis, asked me if mortgage brokers should be more heavily regulated out of Washington, especially since some big shot from Wells Fargo said so earlier on her show. They said that mortgage brokers need to be regulated more, implying I guess that everything’s the fault of mortgage brokers.

For purposes of disclosure, I am not a mortgage broker.

I responded that “I’ve never been a big fan of more regulation out of Washington for anything and that’s not the problem.”

But that question immediately brought to mind a few more interesting tidbits in this still-brewing mortgage-mess.

Wells Fargo, a fine institution, also had their hand in the subprime cookie jar. Wells Fargo also has a huge wholesale division that caters to mortgage brokers. Wells Fargo has interest only loans, payment option ARMs and so on.

I don’t mean to pick on Wells Fargo, any major (or minor for that matter) bank or mortgage company offered the very same programs. It’s just that Wells Fargo brought up the point about how all these mortgage brokers need a tighter rein from Washington, D.C.

Let’s step back for just a moment and imagine that you’re a lender and mortgage loan production is down and your very own loan officers and your bevy of mortgage brokers are clamoring for some new loan program that they could market.

So you sit around this big fancy table and after a few hours of discussion (if it took that long) you come up with a loan that requires:

• No Down Payment
• Credit Scores as Low as 580
• No Verification of Income
• No Verification of Assets
• Debt Ratios Not Calculated
• Negative Amortization Possible

Now look closely and raise your hands if you think this fancy new loan has “trouble” written all over it? Did mortgage brokers invent this new loan? No. Lenders did. Big lenders who usually have their hat on straight. But not this time.

Okay, part two. If there are loopholes in a loan and if someone can’t qualify for a mortgage “the old fashioned way” with pay stubs and tax returns, then will borrowers be tempted to fudge their income? Will loan officers be tempted to inflate assets in order to qualify their client? Of course. We all know about fraud. It happens all the time somewhere, but this is like handing someone a loaded gun.

I have seen this happen. I couldn’t do a loan and the borrowers went somewhere else and got approved. Not because I didn’t have the experience to close a loan. I wouldn’t do the loan because the only way the client could get a mortgage was by lying.

Anyway, back to CNN. I said that mortgage brokers are already regulated and licensed by their state agencies when I was interrupted with, “Aw, come on David. It’s not like they’re stockbrokers who have to go through more rigorous standards.”

I shot back that stock brokers have had their fair share of scandals and there is certainly enough corporate corruption out there in industries that are also heavily regulated.

You can’t regulate bad people. Bad people ignore laws and bend rules. Regardless of additional regulation.

I think mortgage brokers are getting too much of a bad rap on this and if it were me I’d be holding the mortgage banks’ feet to the fire instead. Lenders came up with these goofy programs and don’t tell me they would have been just fine if mortgage brokers hadn’t messed everything up.

Inventing reckless mortgage programs is nothing short of irresponsible. Instead of pointing fingers, someone needs to look into the mirror.

David Reed, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can’t Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won’t Tell You, is a Columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.

By Matt Woolsey, Forbes.com

August 9, 2007

Renting a vacation home has its perks. You’re not wedded to one area for longer than a few weeks. There’s no dealing with frozen pipes, property taxes or scraping together that down payment.

But if you’re tired of sitting on furniture from the 1970s and looking at peeling paint, buying might be in the cards.

The only question is where.

In Pictures: Best Places To Buy A Vacation Home: Northeast
In Pictures: Best Places To Buy A Vacation Home: West
In Pictures: Best Places To Buy A Vacation Home: Midwest
In Pictures: Best Places To Buy A Vacation Home: South
In Pictures: Undervalued Vacation-Home Spots

“The main thing motivating a vacation-home buyer is utility,” says David Hehman, president of EscapeHomes.com, a San Francisco-based second-home research site. “They want to maximize their purchase around a recreational activity.”

Still, whether that includes sitting surfside or skiing down double-black diamonds, no one wants to buy a property that will decrease in value. The safest bets are luxury homes in blue-chip locales. While a Jackson Hole ski lodge or a Martha’s Vineyard beach house probably won’t explode in short-term value – unless snow stops falling on the Grand Tetons or the Massachusetts shoreline disappears – both are highly desirable, heavily supply-constrained areas that have done nothing but appreciate in the last 20 years.

They’re also extremely expensive. Another route is to go for the undiscovered gem. Here, buy-in prices will be significantly lower than the blue chips. Picking a quality unknown is a way for buyers to build memories and still be able to afford to send the kids to college.

How It’s Done

In compiling our list, we picked the five fastest-appreciating regional blue chips, as well as 10 hidden gems nationwide, all of which offer many of the same geographic advantages as the blue chips, without the high price tag.

But calculating appreciation rates for second-home spots can be tricky. That’s because many of these destinations, like Tahoe City, Calif., or Sun Valley, Idaho, have a very distinct property-value divide between the housing stock for full-time and part-time residents, the latter set owning primarily luxury vacation homes.

The key is to track values on a granular level. To do that, NeighborhoodScout.com, a Rhode Island-based real estate research site, developed an index designed to pinpoint vacation-home spots. The firm looks for neighborhoods with desirable locations, near beaches, lakes or mountains, for example, and with amenities and services that cater to a vacationing crowd, which, according to its research, are typically high-net-worth renters. Property value spikes within a vacation home area are also examined. The data is then cropped to study which locations had the fastest median home price appreciation over the past five years.

Of the Northeast’s most expensive summer destinations, the village of Water Mill, N.Y., in Bridgehampton, appreciated fastest. The median home price there is $1.38 million; it increased in value at an average of 21% a year over the last five years. In the Midwest, Victoria, Minn., which is surrounded by many of the state’s trademark lakes, grew an average of 18% a year.

The north end of Key Largo, Fla., has appreciated at 27% a year, on average, according to NeighborhoodScout, making it the fastest-growing vacation spot in the South. Moran, Wyo., situated between Grand Teton and Yellowstone National Parks, has seen 35% average increases in annual value since 2002.

What’s Driving Prices Up?

Nationwide home sales are down 4.1% from this time last year. And sales of investment properties, which, unlike second homes, are generally urban properties rented for profit, fell 28.9%, according to the National Association of Realtors (NAR) Investment and Vacation Home Survey.

But vacation buyers aren’t sweating. Vacation-home sales were up 4.7% last year to a new record of 1.07 million, according to the NAR.

“We expected the drop in investment sales, because speculators left the market in 2006,” says David Lereah, NAR’s chief economist. “The rise in vacation-home sales is based on strong demographic and lifestyle factors, with only modest interest in renting their properties.”

In other words, if the sun is shining on the shore, or the powder’s falling on the slopes, vacation-home buyers don’t mind short-term market fluctuations very much.

This makes more sense when you consider that the average vacation-home buyer had a median household income of $102,000 last year, according to NAR, far out-pacing the national average of $44,000; and second-home buyers had a median age of 44, down from 52 a year ago, suggesting that the market has shifted hands to a new generation, one that has time to wait out market volatility.

Money matters, however. And long-term return on investment is important. In that regard, the best bets are blue-chip locales like the Hamptons in New York, or Aspen, Colo., where historical market appreciation has been strong but prices can be prohibitively expensive. Other such spots include Nantucket, Mass., and Jackson Hole, Wyo.

But “finding a top quality home that’s still affordable can take a lot of effort,” says Andrew Schiller, founder of NeighborhoodScout. “Good places to look are quality places near blue-chip vacation destinations.”

Take Kamuela, on the north shore of the Big Island. A bit up the road from Hilo, the median house value is $487,188, modest by Hawaiian standards. Or look to Blue Hill, up the coast from Kennebunkport, Maine, where a four-acre equestrian estate runs just under $300,000. If the Southwest is more your style, the Cochiti lakeshore in Pena Blanca, N.M., outside Santa Fe, has pristine views of the Sandia Mountains–and the median price is only $209,000.

But those hidden gems don’t stay secret for long.

“In [December 2006] you could get an ocean-view lot in Captain Cook, south of Kona, for $70,000,” says Schiller. “When we called in late March on behalf of a client looking to purchase in Captain Cook, the prices had gone from $70,000 to $150,000.”

In Pictures: Best Places To Buy A Vacation Home: Northeast
In Pictures: Best Places To Buy A Vacation Home: West
In Pictures: Best Places To Buy A Vacation Home: Midwest
In Pictures: Best Places To Buy A Vacation Home: South
In Pictures: Undervalued Vacation-Home Spots