Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.

Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.

The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice. And after being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit scoring system beginning later this year in a way it contends will end this little-known but potentially high-impact mortgage loan loophole.

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Posted by Tom Davie

Why many borrowers who qualified for prime-rate loans wound up with subprimes instead.
Les Christie, CNNMoney.com staff writer

May 30 2007

NEW YORK (CNNMoney.com) — Imagine you’re a homeowner, and you discover that instead of the expensive subprime mortgage loan you signed on for, you actually qualified for a prime mortgage with much lower interest rates.

Subprime loans are usually designed for borrowers with damaged or sketchy credit histories. Lenders charge higher rates to these customers to offset the extra risks they take on. Prime loans are usually granted to borrowers with credit scores of 650 or higher.

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“We are sitting on a time bomb,” the mortgage analyst said — a huge increase in unconventional home loans like balloon mortgages taken out by consumers who cannot qualify for regular mortgages. The high payments, he continued, “are just beginning to come due and a lot of people who were betting interest rates would come down by now risk losing their homes because they can’t pay the debt.”

He would have given great testimony at the current Senate hearings on subprime mortgage lending. The only problem is, he said it in 1981 — when soon after several of the alternative mortgage products like those with adjustable rates and balloons first became popular.

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.

Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.

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CHICAGO (Reuters) - Jillayne Schlicke’s father used to tell her that mortgage banking was the "highest calling of all" because it involved helping people live the American dream of homeownership.

"I learned how to spell ‘mortgage’ when I was about 6 years old. It was on a flash card," said Schlicke, the daughter of two mortgage bankers and co-executive director of the Ethical Lending Foundation near Seattle.

As a widening crisis over nontraditional and subprime mortgages gone bad threatens to force millions of people out of their homes, Schlicke worries that mortgage brokers are well on their way to overtaking used car salesmen on the list of professions least trusted by consumers.

"We’re in ethical chaos in mortgage lending," said Schlicke, who followed in her parents’ footsteps and became a mortgage banker and now teaches classes for real estate agents, lenders and consumers on ethical mortgage practices.

"All you have to do is open up your spam (e-mail) bin and you see porn spam, and you see Viagra spam, and you see mortgage spam," she said, adding that the unethical behavior of a small minority of brokers was tainting the entire industry.

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