How much impact does a short sale have on FICO® Scores? How about a foreclosure? Since I frequently hear these questions from clients and others, I thought I’d share new FICO research that sheds light on this very subject.

The FICO study simulated various types of mortgage delinquencies on three representative credit bureau profiles of consumers scoring 680, 720 and 780, respectively. I say “representative profiles” because we focused on consumers whose credit characteristics (e.g., utilization, delinquency history, age of file) were typical of the three score points considered. All consumers had an active currently-paid-as-agreed mortgage on file.

Results are shown below. The first chart shows the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully “recover” after the fact.

All in all, we saw:

• The magnitude of FICO® Score impact is highly dependent on the starting score.
• There's no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.
• While a score may begin to improve sooner, it could take up to 7-10 years to fully recover, assuming all other obligations are paid as agreed.
• In general, the higher starting score, the longer it takes for the score to fully recover.
• Even if there’s minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to fully recover.

This study provides good benchmarks of score impact from mortgage delinquencies. However, it is important to note that research was done only on select consumer credit profiles. Given the wide range of credit profiles that exist, results may vary beyond what's in the charts above.

At least for now, optimism that the economy is rebounding from a second-quarter slowdown has been quelled. Without an improving labor market, it becomes increasingly difficult for economic growth to move higher, and we seem to still be suffering the effects of $4 gasoline which emptied pocketbooks during much of the Spring and lingering effects of the Japan crisis in March, not to mention weather and fire related domestic disasters. Those issues will only be solved in time, and while prices at the pump have retreated somewhat, there is a lagged effect to that benefit... and prices are always much slower to come down than to rise.

After the payroll processing firm ADP reported a reasonable improvement in private market payrolls in June, it looked as though the soft patch of growth was starting to pass by. Expectations for a stronger labor report emerged, and the upward pressure on interest rates which started during the last week of June remained in play. 

Market interest rates -- including mortgages -- began rising during the last week of June as investors moved money out of safe havens and tried to catch a stock market rise. That momentum pushed rates higher into this week as a result, but the economic news released though Friday has been bleak enough as to at least partially-reverse the increase as we move into next week.

With another 418,000 new applications for first-time unemployment benefits filed at state windows during the week ending July 3 -- a figure little different that those seen throughout June, if the lowest number since June 11 -- why anyone would have an opinion that the labor market is improving is a mystery. We will need to see a sustained drop-off in weekly unemployment claims driving us toward the 300,000 mark before the job market can be said to be truly healing, and that trend remains well off into the future at this point.

As always, the employment report on Friday was the most anticipated one of last week, perhaps more so given ADP's release. Expectations of up to 125,000 new hires were in the forecast, so the 18,000 actual new hires during the month was a crushing disappointment to some. Worse, downward revisions to job growth over the last two months revealed 44,000 few jobs than was originally reported, and the 9.2% unemployment rate was up a tenth-percentage point from May. For those with jobs, there was no wage growth during the month, so funds to power the kinds of spending which will spur the economy remain in short supply. Should gasoline prices retreat further, trending more toward $3 per gallon, billions of dollars would be unleashed into the economy, and this no doubt is at the heart of the decision by the Obama administration to release oil from the nation's Strategic Petroleum Reserve a few weeks ago.

The short week this past week is often the beginning of what could be considered the market's "Summer Doldrums" period. If this is the case, it is starting off on a blue note. While there wasn't much to start with, the little bit of enthusiasm about the economy's prospects had at least some wind taken out of its sails with today' employment report. As such, there is little optimism to come by and this suggests that it will take a string of strong reports to do much damage to interest rates.

It should be noted that economic growth will ultimately bring higher interest rates, so knowing what to cheer for becomes a quandary: Do we cheer for lower rates, to help support refinancing and possibly home purchasing? Do we applaud more growth, lower unemployment and the resulting higher interest rates, knowing full well that this removes some of the support for housing? We've noted before that we would prefer 5% rates in a growing economy over 4% ones in a deep recession, and our view hasn't changed.

The weeks-long downturn in rates probably went a little farther than it should have, and the quick upturn was too much in the other direction. At best, we're back to the muddy middle for at least the moment. Mortgage rates should settle back next week.

We were dressed and ready to go out for the New Years Eve Party. We turned on a night light, turned the answering machine on, covered our pet parakeet and put the cat in the backyard.

We phoned the local cab company and requested a taxi. The taxi arrived and we opened the front door to leave the house.

As we walked out the door, the cat we had put out in the yard scoots back into the house. We didn't want the cat shut in the house because she always tries to eat the bird.

My wife goes on out to the taxi, while I went back inside to get the cat. The cat runs upstairs, with me in hot pursuit.

Waiting in the cab, my wife doesn't want the driver to know that the house will be empty for the night. So she explains to the taxi driver that I will be out soon, "He's just going upstairs to, uh, say goodbye to my mother."

A few minutes later, I get into the cab.

"Sorry I took so long," I said, as we drove away. "That stupid thing was hiding under the bed. I had to poke her rump with a coat hanger to get her to come out! She tried to take off, so I grabbed her by the neck. Then, I had to wrap her in a blanket to keep her from scratching me. But it worked! I hauled her fat rump downstairs and threw her out into the back yard!"

The cab driver hit a parked car.