Interview with Jillayne Schlicke – Part 1: LO's Are You Ready for 2009?

I recently contacted Jillayne to see if she would be open to an “interview” geared to Loan Originators who plan to sticking around beyond the end of this year…of course, she agreed!  😉   Jillayne offers training and clock hour approved courses to LOs and I thought this would be good timing to touch base with her.  This will be a two part series with the next post addressing the SAFE Act (national licensing). My questions to Jillayne are in italic text.

What should Loan Originators be doing right now to prepare for 2009?

Jillayne:  Well, let’s first define LO’s.  In my mind, we’re talking about LO’s who work for non-depository lenders such as mortgage broker LOs and CLA [correspondent lenders, credit union and consumer loan] LOs.  Loan originators who need to work for an FHA lender have all ready made that move.  Those who have not, will.  LOs who work for a lender or broker that is not FHA approved are all ready finding other sources of money.  Some LOs have already positioned themselves nicely but are experiencing a dramatic drop in income.

Many LOs made six figures income during 2006 and 2007 and subsequently have a six figure lifestyle that they are already trying to pare down to match 2008 income levels.  Income levels will remain volatile in 2009.  Existing client bases will not return the same income level as prior years.  LOs must prepare for the recession and start to research what kinds of industries survive and thrive in a down market and begin to reach out to people in those industries today.

Loan modifications have popped up out of nowhere to become the current “get rich quick” scheme marketed to hungry LOs.  Stories are circulating about LOs wo are closing 60 loan mods a month.  This is a possible untapped revenue source for LOs, however, there are some big liability pitfalls to navigate in the form of state laws, federal laws and contract laws.  Loan mod salesmen have been pitching lots of different programs, charging LOs thousands to buy into a “system”, without knowledge of state and federal laws.   LOs must be cautious and do their homework before jumping in head first.  Massive government intervention in foreclosures may make that “system” investment worthless.  There are ways to do loan modifications without putting your license in danger.

What trends are you seeing in the mortgage industry?

Jillayne:  Mortgage lenders, no matter where they work; banker, broker, consumer lender, credit union, ought to be prepared for more regulations at the state and federal level.  The winds of change are blowing in favor of the consumers.  The industry went through this in the 1970s when we saw a wave of consumer protection legislation such as the Real Estate Settlement and Procedures Act (RESPA), Truth-in-Lending, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act.

We have only seen the beginning of what will likely be more consumer protection.   The consumer must be told in a clear way what fees will be charged and how much the loan originator is making on the deal.  The mortgage broker industry mis-used Yield Spread Premium.  Because of this, the government will now tell mortgage brokers exactly how to explain that fee, and the brokerage industry won’t like it.  Watch for RESPA reform to pass and a new Good Faith Estimate.

I expect that underwriting guidelines will continue to go up as banks and conforming paper sold to Fannie and Freddie will raise minimum credit score requirements to 800 and require 20% down.  Everyone else will be pushed to FHA.

On the broker side, we’ll likely see more of the smaller, non-FHA approved brokers joining larger, branch office brokers with FHA-approval already in place.  Brokers who do not want to join the FHA party could take a look at the hard/private money side of the industry, which will likely grow as more people who always will be subprime return to their broker.  Brokers always have been a source of non-traditional money.  Now more than ever, subprime borrowers need that broker.  FHA is not the world’s subprime lender.  It was never intended for that purpose.

If we continue to push subprime towards FHA, then we will soon be looking at an FHA bailout.  Let’s not act surprised when it happens.

We are likely to see government intervention in the foreclosure crisis on a massive scale. FHA Secure and Hope 4 Homeowners will be deemed colossal failures because the underlying lenders simply cannot write down the principal balance on those non-performing loans without sending their own banks teetering into receivership.  I believe we are inching closer each day toward eventual nationalization of banks.

What are your most popular classes that you’re teaching right now?

Jillayne:  The short sale class, which I’ve taught for over ten years now, is very hot.  Other best sellers:  Foreclosure; Losing the American Dream, Current Issues in Lending, FHA Loans, Fiduciary Duties for Mortgage Brokers, and for Real Estate Agents: How to Survive in a Down Market and How to Become an REO Agent.  I’m starting to teach the fundamentals of a loan modification inside the Short Sales/Short Refis class and my class last week loved it so watch for one on loan mods.

On that note, I really recommend that Washington State LO’s make sure they’re signed up for their 2008 clock hour classes, if they have not all ready met their education requirements for licensing this year.  Be sure to check out Jillayne’s new Professional Education page here at RCG and watch for Part 2 of my interview with Jillayne where we discuss national licensing: The SAFE Act.

32 thoughts on “Interview with Jillayne Schlicke – Part 1: LO's Are You Ready for 2009?

  1. Nice!

    800 FICO scores to get conventional loans? Really?

    Do either of you have statistics as to percentile breakdowns of credit scores nationally?

    This is the most helpful site I could find, and it only does a good job or breaking down the state by state average. They say the national average is 693. Washington is higher than the average.

    I have not been able to track info down as to percentiles, so I will offer an anectdotal guess, based only on my experiences. The ranges are not entirely arbitrary, but reflect changes that may currently occur in pricing or loan parameters in most programs. It does not include people effectively out of the credit sphere (credit below 500, or no credit).

    800+ 3% rare air
    740-800 7% you can have anything available
    720-740 15% pretty normal, some price hits and limits
    700-720 15% the hits keep comin’
    680-700 20% traditional median FICO scores
    660-680 10% start thinkin FHA
    620-660 10% really, FHA
    620 and less 20% few programs will go there, hard money, some FHA

    I’d be happy to hear better data, or even guesses.

    I did find this interesting site.

    It did give me a breakdown by percentiles, using only Transunion. It differs from my guesstimates, probably because I just do not see the truly low credit score strata, and a fairly portion of the high credit score strata does not usually get involved in mortgage transactions that require credit pulls (retired people, gazillionaires that pay cash for RE, etc.).

    Here are their national stats, abridged, sorry could not cut and paste

    300-500 18%
    500-600 17%
    600-650 12%
    650-700 14%
    700-750 17%
    750-800 16%
    800+ 6%

    They did not provide the median or average, but it looks similar to Experian’s data.

    As a side note, they WILL provide you with a credit score for free, but it takes a bit of nerve to provide them the info needed to get it.

    I really found to be hugely disappointing. I used to think rather highly of that site, now it’s a waste of time and a money sucker.

    If you are correct in your prediction regarding 800 FICO being entry level, then conventional lending (thru Fannie Mae/Mac) becomes boutique lending and is effectively toast.

  2. Roger, I don’t agree with the 800 credit score picture that Jillayne mentioned in our interview. With the government involvement in Fannie and Freddie, they’re not going to make it that much tougher on people buying homes. I believe the credit scoring guidelines will remain the same (which are still tougher and more expensive than they were a year ago).

    I can see 20% down becoming the norm unless the borrower can arrange for a second mortgage. I’m wondering how long private mortgage insurance companies can hold up. Even if they stick it out, pmi is getting quite expensive too.

    We’ll see what changes lay ahead with our new President.

  3. Well, I don’t think it’s likely either.

    they say that 740 is the new 720.

    Used to be, there was little benefit to having a higher than 720, now there is.

    Currently, anything above 750 is just braggin’.

    Did you see Flagstar’s new guidelines?

    The pinch continues…

  4. Hi Roger,

    I’m glad I got your attention with my 800 prediction. Leave it to you to do the statistical background work to find those percentages. Let’s say I’m overshooting and it ends up more like 750. That’s still tough.

    (With the government involvement in Fannie and Freddie, they’re not going to make it that much tougher on people buying homes.)

    I disagree. I think that because F&F are now controlled by the gov, they have to try as best they can to take in the bad loans from the banks…..but any new lending will be far more conservative in terms of underwriting guidelines to balance out the schlock they’re being forced to take in from the banks.

    Perhaps we’ll see mass government intervention at the state level where states will be given bond money for first time home buyers at a decent rate, decent credit score, and zero down, in order to stimulate the housing market.

    I still don’t see how banks can justify loaning at the lower credit score tiers right now. It’s a declining values market and we’re entering a recession. Banks NEED to make GOOD loans to people with a VERY low chance of default.

  5. The gov has been assisting with mortgages for those with lower credit scores and no credit scores via FHA. FHA will become more and more popular of a choice and perhaps the only option for many.

    Jillayne, with your background in lending, what do you think the credit score cut off should be? Or should we just go back to manual underwriting and throw out the credit score system?

  6. This study is from 2005:

    Age Group Credit Score

    18 – 29 637
    30 – 39 654
    40 – 49 675
    50 – 59 697
    60 – 69 722
    70 plus 747

    If only the people who are more than 60 years old can buy a house, where does that leave us? Someone should match average age of homebuyers with average credit score needed to buy.

    What good is it to say interest rates are at 5.875%, if only people 70 plus can get that rate? False advertising…no? If the average person buying a home can only get a rate of 6.5%, then we have to stop enouraging people to think their rate is going to be something that is unlikely.

  7. Ardell:

    While there is definitely truth in the figures, it is also somewhat misleading.

    In my experience, there are a MANY people in their 30s, 40 and 50s that have good FICO scores.

    Folks in their 20’s would have to take very specific steps and allow those steps to mature for a few years to get in the 700s, but it could be done.

    Most just are not interested in the discipline that it would require.

  8. The scoring that Ardell is showing is very accurate since older people have more established credit and that’s what the scoring models like. The mistake that some make is closing old established accounts for new credit (super tempting low rate credit card) for example. I would also say that older adults probably tend to carry lower balances on their credit accounts or pay them off monthly.

    This is why I base my rate quotes on 720-739 and not 740+.

    You’ve just created a home work assignment for me, Ardell. I think I’ll analyze credit scores to age over the last month of my clients.

    One thought, average credit scores will probably start to come down as credit limits are lowered on unsuspecting consumers and rates are hiked with no refi available to bail them out.

  9. The average credit scores from my experience vary considerably from the gross numbers. Most people with truly awful credit do not apply for loans.

    Older folks also tend to have MUCH higher credit limits than younger folks, and usually have learned not to carry balances.

    Here’s a little fact re FHA…

    Wow, how times have changed.

  10. Roger, Every so often I still have folks with 530 scores wanting to buy homes and applying on-line. Typically I help them with a plan on what they need to do to improve their credit. Most lenders will go to a 580 score for FHA as long as the consumers last 12 months of credit is clean.

  11. “One thought, average credit scores will probably start to come down as credit limits are lowered on unsuspecting consumers and rates are hiked with no refi available to bail them out.”

    I have heard MANY people talking about their open lines of credit being reduced. They don’t realize that the credit scoring system will ding their credit as well. They are very unhappy when telling me their tale of lower cash flow woe, so I don’t point out the ancillary affect on their credit score. It would feel like kicking them when they are down or putting salt in their wounds. The older I get…the better I get at biting my tongue, when the info can not be used to their advantage.

    I have been opposed to credit scoring all along and have mentioned several times that I flipped out the day it became the industry standard (I was in CA at the time). Streamlining obviously did not help lenders in the long run, so hopefully they will move back toward the days when the system worked better for them.

  12. Ardell, one factor with credit scoring is how much is used on the credit line compared to what’s available. Ideally consumers want to keep their credit balances below 30% of the available credit line. So if you have a credit card with a $10,000 limit, you’d want to have a balance of less than $3,000.

    Let’s say the bank decides to reduce their exposure to credit and they decide to cut the limit in half to $5000. Now the credit bureau is going to ding them because it appears as though they’re using 60% of their available credit.

    This is also happening with HELOCS.

    It really stinks.

  13. This is the type of information that needs to be spread around. There was a time when I thought it was prudent to ask for a lower credit limit than what I could qualify for, and to close old credit accounts I was no longer using. No more.

  14. cautious buyer, actually if you want to play the credit score game, you’d be better off to ask for the highest limit possible. 🙁 Credit scoring does not reward prudent people. For example, if you close an account that’s established and that you’ve been utilizing, you’re dinged.

    Scoring favors established accounts vs new accounts. It does not factor in that the new account has a much lower rate and that the borrower is improving their financial situation.

  15. Check out your avatar, cautious buyer!

    800 credit scores (generally) have established excellent credit by have approx. 3-5 accounts w/a mix of type of credit (mortgage, installment, revolving). No late payments and the revolving credit is paid off monthly. It generally takes some time.

    I am working on a credit score post based on data I have from the consumers I work with.

  16. Pingback: Credit Scores and Age | Rain City Guide

  17. “Jillayne, with your background in lending, what do you think the credit score cut off should be? Or should we just go back to manual underwriting and throw out the credit score system?”

    Credit scores can be manipulated.

    Let’s completely throw out credit scoring and go back to manual underwriting.

    Automation, technology, and efficiency can be wonderful things, when used for the good.

    In the case of mortgage lending, I argue that credit scores put too much focus on that one number as a risk factor and ignored many other factors in how to assess the willingness of a borrower to repay a mortgage loan v. other revolving debt.

    Credit scores were used as an excuse to ignore other important characteristics of a borrower’s ability to repay.

    In some cases, credit scores were used as a weapon to force lenders to say yes or lose the deal to a competitor.

    We hit bottom when we saw people making money by ‘selling’ credit score improvement systems, selling the ability to use someone else’s score, or selling the use of our trade lines to artificially improve a score.

    Credit scores are broken and are part of the overall systemic failure that we’re now living through.

    /End of soapbox rant. 🙂

  18. “FHA will become more and more popular of a choice and perhaps the only option for many.”

    Remember, no shock and awe when an FHA bailout is put on the taxpayer’s shoulders.

    FHA: 3.5% down. That’s not a lot when factoring in declining values and recessionary times.

  19. Jillayne, I couldn’t agree more with you on comment 20 but I disagree with you on 21.

    Sometimes I’d play a game with my processor by covering up the credit scores and asking her to guess what she thought they should be…even without manipulation, sometimes a consumer is fluked by a high or low score regardless of the model.

    It especially stinks if you’re the borrower who is one digit below qualifying for a better rate.

    With regards to FHA: borrowers are paying for FHA with the upfront and monthly mortgage insurance–it’s not cheap and was recently increased. FHA loans were created as a result of the Great Depression as part of the New Deal. This program has weathered recessionary times and declining values. This won’t be the first or the last.

  20. Hi Rhonda,

    I’m basing my assumptions on the huge number of FHA loans that are now being pushed through the system. If you look at any graph or chart showing the sheer growth in volume of FHA originations, it’s staggering. I’m not sure the system was created to withstand that sort of volume and pressure with market values declining rapidly, like we’re now experiencing.

    In addition, think about all the loan programs for high risk homeowners that the government is hoisting onto the back of FHA: FHA Secure and Hope 4 Homeowners.

  21. Jillayne, when I do an FHA loan, it’s hardly pushed through the system. They’re extra work and must meet guidelines.

    Do you have any stats on what percentage of FHA loans are FHA Secure or Hope 4 Homeowners?

  22. Another perspective on FHA loans is that we are returning to traditional volumes.

    Remember, FHA collects a sizeable premium for the mortgage insurance part. That should provide them some cushion for defaults.

    They probably could not survive an overall 35% reduction in home values for loans originated in 2008, but I do not worry about FHA’s collapse from a 15% reduction.

    35% would be an extreme condition. The feds probably will not allow it. They will most likely pursue an inflationary policy, pushing wages up, to do what they can to sustain home values.

  23. Hi Rhonda,

    It’s difficult to tease apart FHA Secure and FHA. When HUD provides figures on their press releases, they will typically lump all FHA loans together. H4H is just beginning so we won’t have statistics on that program for awhile. Other bloggers have taken on this topic here:

    and here:

  24. “Jillayne, when I do an FHA loan, it’s hardly pushed through the system. They’re extra work and must meet guidelines.”

    I seem to recall reading a blog post or comments stating that FHA was easy! and painless! and not like the FHA of the 1980s….

  25. Jillayne, I don’t think I said easy and painless w/FHA–but it is better than the FHA loans that many agents and sellers have associated with–mainly with the appraisals, which are still more strict than conventional.

    FHA is a full doc loan–meaning 2 years of employment income is verified. Nothing “lite” or “stated” about it.

  26. Pingback: HUD Passes RESPA Reform, New GFE Coming in 2010 | Rain City Guide

  27. Pingback: Interview with Jillayne Schlicke - Part 2: The SAFE Act | Rain City Guide

  28. Pingback: Credit Scores for the Ages | The Mortgage Porter

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