March 2016 - RIP Dodd Frank

TheMReport — News and strategies for the evolving mortgage marketplace.

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44 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Millennials Prefer HELOCs for Home Renovation Projects Not only are millennials more interested in HELOCs for home renovations, but they also have a better understanding of HELOCs than older generations. R ising property values are making homeown- ers more optimistic about renovating their homes, and millennial home- owners in particular favor using HELOCs to help them finance their designs, a new study by TD Bank showed. TD's survey of 1,350 homeown - ers throughout December and January showed 56 percent of American homeowners believe the value of their home has increased enough to finance renovation projects, while nearly 60 percent of homeowners would use a home equity line of credit for renovations primarily in kitchens and baths. HELOCs, the survey found, are especially attractive to millennials, who were noticeably more eager to apply for or already have such financing than Gen-Xers and Baby Boomers. According to the survey, 53 percent of millennials would like to use a HELOC to fix up their homes, while 30 percent are interested in applying for one. Comparatively, 16 percent of Gen- Xers and 12 percent of Boomers said they would want to take on a HELOC. Millennials, however, simply seem more able to understand what a HELOC does and what to do when a HELOC's 10-year draw period comes to an end, the survey found. Only 9 percent of millennials reported not fully understanding what effects a HELOC's expiration will have on monthly payments, while a whopping 63 percent of Boomers reported having the same lack of understanding. Additionally, more than half of Boomers said they have no plans for their post-HELOC finances, while a mere 6 percent of millen - nials reported the same. Mike Kinane, SVP of Home Equity at TD Bank, said the new data is an optimistic—and welcome—response to home investment after almost a decade of caution and concern. "Consumers have been reluc - tant to start home renovations in recent years because of all the uncertainties in the economy," Kinane said. "It's encouraging to see a growing appetite for these projects." Why a New Credit Scoring System Will Open Mortgage Opportunities for First- time Buyers A House of Representatives Bill proposes Fannie Mae and Freddie Mac take a more multifaceted approach to credit scoring rather than relying only on FICO scores. F annie Mae and Freddie Mac only consider the FICO credit scoring model when making mortgage purchase decisions, but some believe this singular method of scoring is locking potential buyers out of the housing market and cut - ting into lenders' businesses. A bill introduced in December 2015 is aimed at trying to change this singular model and move toward a more multifaceted mod - el. The H.R. 4211 bill, also titled the "Credit Score Competition Act of 2015," was introduced by Rep. Ed Royce (R-California) and Rep. Terri Sewell (D-Alabama)— both members of the House Financial Services Committee. Both Reps. Royce and Sewell announced on their websites that the bill would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models instead of just the FICO model. This would open up homebuy - ing options for many consumers whose credit does not meet the current standards. "The GSEs' use of a single cred - it score is an unfair practice that stifles competition and innovation in credit scoring. Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout," Royce said. A recent report from Trulia showed the use of alternate credit scoring models would help buyers obtain a mortgage that they normally would have missed out on. Fannie Mae and Freddie Mac own about 90 percent of the secondary mortgage market, so there is no room for competition in the credit-scoring industry, which Trulia says is hindering innovation. "The model currently used to score borrowers is based on data from nearly 20 years ago and excludes millions of people that companies like Experian say are creditworthy but whose scores don't reflect that under the system in place today," Trulia said. "The current credit-scoring model also effectively punishes borrowers who don't have much of a credit history; a short or nonexistent credit history can drag down overall scores. With this system, if you're financially responsible, a diligent saver, and debt-free, you could still miss out on a mortgage because you don't utilize credit in your day-to-day life. (Some people do prefer to use cash!)." The FICO credit scoring system does not take into account that not everyone has access to tradi - tional forms of credit that boost FICO scores, Trulia reported. "The bill could positively impact millions of Americans who can - not currently secure mortgages or are forced to pick from less than stellar options simply because the system in place today doesn't truly measure how financially respon - sible they are," Trulia concluded.

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