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A new national research study found that American consumers have a "poor" grasp of the mechanics and importance of credit scores -- a lack of knowledge that can cost them thousands of dollars needlessly when it comes to obtaining a home mortgage.

The study, conducted by pollster Opinion Research Corp. and sponsored by Washington Mutual and the Consumer Federation of America, surveyed a nationally representative sample of more than 1,000 consumers.

Misunderstandings about credit scores were rampant:

• Less than a third (29%) of respondents were aware of the meaning or uses of credit scores -- that they predict the risk of nonpayment of loans.
• Less than half (47%) knew that Experian, Equifax and Trans Union are national credit bureaus.
• Less than a quarter (24%) knew that the lowest FICO score needed to qualify for a low-cost mortgage generally is around 700.
• Only 45 percent of consumers polled were aware that they have more than one score-one each from the three credit bureaus. Scores on the same individual from the bureaus differ at least slightly because each bureau has different information on file.
• A stunning three quarters (74%) of respondents said they believe that their income level influences their credit score -- despite the fact that the credit bureaus have no access to data on personal income, and do not maintain records on income. One third said they believed their scores were tied, at least in part, to their educational attainments.
• Thirty-four percent of African-Americans said they believe that credit scores are affected by race or ethnicity, contrary to federal civil rights laws.

"Overall," said Stephen Brobeck, executive director of the Consumer Federation of America, "the results (of the study) were sobering." Consumers' "understanding is poor and has not improved over the past two years." CFA co-sponsored a similar survey by Opinion Research Corp. in 2005. The current study, conducted during the month of May, has a statistical margin of error of plus or minus three percent.

Americans' lack of correct information about scores and the credit system is costly, according to the survey. If all consumers raised their FICO scores by just 30 points on average, "total consumer savings would exceed $20 billion" a year.

The potential impact on home buyers is especially severe. Using data compiled by Fair Isaac Co. from regular surveys of mortgage lenders, if an applicant seeking a $300,000 fixed rate mortgage raised his or her credit score from 580-619 to 660-699, the applicant would save $5,148 in annual interest payments.

Raising the score from 620-639 on a 15-year home equity loan of $50,000 would cut annual interest costs by $1,044.

The same pattern of savings exist in other areas of consumer finance as well, noted Brobeck. For example, raising one's score from 590-619 to 660-689 would cut interest payments on a 36-month $25,000 auto loan by $708 a year. Significant savings can also be achieved by raising scores in advance of applying for insurance or even cellphone service.

But "mortgage finance is where the biggest savings are possible when a consumer understands credit scores" and knows what factors raise them and lower them, said Brobeck in an interview. CFA and WaMu said they recommend that consumers-and the professionals who advise them-redouble their efforts in the field of credit literacy. Vast educational resources to help in that endeavor exist on the Web, and a good starting place for understanding scores is Fair Isaac's site, www.myfico.com.

You'll continue to hear and see a lot more properties in the "short sale" and foreclosure ranks as we move through the correction phase of our market. Nevertheless, low prices are not the only thing you should look for when bidding on these diamonds in the rough.

The challenge you're going to face with these valuable jewels is how to dig them out of the ground without cracking them into little pieces and without bursting your budget.

So you have a condo for $214,000 on a short sale list, and you know that the owner paid $249,000 two years ago for that bugger. Now, you feel like is that time to purchase because earlier this year, they were selling for $209,000 and the last few settlements were creeping up oh so slowly -- $209,999; $210,500; $212,000. Meanwhile, one unit down the hall in model condition is fetching $224,000. So with some sweat equity, you believe you could buy lower than low and walk in with some equity built-in.

Maybe. I recently attended a seminar on Foreclosures and Short Sales by MBH Settlement Group, L.C., a title and settlement firm in the Washington, D.C. suburbs where the short-sale and foreclosure market is in full throttle.

Now, does the increase in short sales/foreclosures mean that all the houses on the market are at risk? Of course not. The fact that there are more homes now on the market in short sale/foreclosure situations than in the past only means there are more on the market than in the past.

Most houses -- the overwhelming majority -- are selling at market rate, the sellers are walking away with plenty of cash so they can get a great deal on a house that is poised to appreciate with the coming sellers market. However, there are a percentage of homes on the market where you can get a good deal. But when you come across these, be aware of what may be attached -- liens.

Seminar leader and branch manager Todd Fisher explained one of the hidden dangers prevalent in these sales is the possibility of liens from various directions. Mr. Fisher has spent 20 years helping buyers and sellers of distressed properties navigate the short sale and foreclosure terrain.

Understand that liens are sold with the house -- much like the old rotted fence in the back. The seller doesn't take it with him. You, as the new owner, must take care of it -- fix it up, replace it or knock it down.

Liens must be dealt with in the same way -- you must either, work out a payment agreement with the lien holder, see that it is paid off at settlement or get them canceled altogether. It is the buyer's responsibility to find out if these exist and what to do to deal with them. (If you have an agent experienced in these transactions, s/he will know what to do.)

"A proper foreclosure cancels any junior/subordinate liens (liens filed after the mortgage being foreclosed) but leaves in place any senior/superior liens (those liens filed before the mortgage being foreclosed)," Mr. Fisher said.

Liens that survive foreclosure include, but are not limited to, municipal and mechanics liens (your state may allow others). Keep in mind, that the IRS has 120 days to redeem its tax bill from the sale of the house. In other words if you get a good foreclosure deal and settle July 30, the IRS has until November 30 to set aside (void) the sale and redeem the property so they can auction the house to get its money.

Better to contact the IRS and deal with the lien before settlement than to settle, count on dumb luck and cross your fingers that the IRS won't go after the property to settle a tax debt from the former homeowner.

When it comes to the short sale be sure to do your homework and don't ignore the facts because you're blinded by dollar signs.

Imagine if you lived in Boca Raton, Florida, and you owned a 60 unit apartment property in Kansas City, Missouri, that was not performing. How do you know it's not performing? You are having trouble making the mortgage payments. You have called local apartment brokers and property managers and discovered that the market occupancy rate is 90 percent, but your property's occupancy rate is 60 percent. What do you do?

Long distance ownership

Just like long distance romances, you have to work a little harder.

You have two choices in managing the property:

• Hire an onsite manager that you supervise from afar
• Hire a local property manager that supervises the onsite manager

In either case you cannot just walk away and expect everything to be taken care of. In both cases without a regular check-in, they will forget about you.

Structure for success

First you need to make sure that the property is in rentable condition. If it is not, you cannot expect the managers to succeed. Like everyone, tenants have choices. A property that looks ragged and not taken care of will not attract tenants. They will choose a better looking property. Better looking is also emotionally perceived as safer. A good location is critical. If you bought in a miserable location, you will have more crime, more repairs and a harder time attracting tenants.

In addition, a property that looks run down will not attract a good quality manager. I speak from personal experience. If your property has moldy walls, leaking ceilings and weeds growing everywhere, you will have a hard time finding an onsite manager -- much less a good quality onsite manager -- no matter how much you pay them.

Once you have made sure that the property is in rentable condition, you want to find the best onsite property manager that you can get. What is most important is that the manager has the ability to rent units. You can always hire out maintenance, but the rent-up skill is critical to your property's success.

It is up to the offsite manager to find you a good onsite manager. Bear in mind that it is not unusual for onsite managers to move every 12 months. To forestall this, pay as much as you can and consider offering health insurance and vacation benefits. Yes, this is expensive, but constant tenant turnover is more expensive.

Finding a good offsite property manager is equally as difficult. There are quiet a few companies to choose from in every marketplace. Accredited Management Organizations (AMO) typically have a Certified Property Manager (CPM) at the helm. These companies generally have been in business for a while and have comprehensive systems in place. It is critical for you to meet with the principals as well as the property manager that will be taking over your property. Try to figure out how busy they are and if they can handle one more property.

It makes sense to ask them for an annual management plan and budget. They will probably only invest the time to do this once you have committed to them, but in your interview you will get a feel for their approach to business.

You need to require monthly financial and operational reporting. Set goals with them that are reachable. If they are not reached, call other property managers to find out about the marketplace and decide if this is a management company problem or a marketplace problem. You need to fly in at least two times a year to meet with them and compare notes. Monthly phone calls that show that you are reading the reports are also important.

If you feel that you are having trouble getting the straight scoop from the property manager, consider hiring a secret shopper (there are national companies) to shop your property and give you a report with how the onsite manager is doing. Bluestone & Hockley secret shops managers' properties at least once a year.

You can also survey your tenants annually to establish their level of satisfaction.

Other reasons a property may not perform

It is not unusual to have a property that has high maintenance costs. 60 units is not large enough to warrant a permanent onsite maintenance person. Offsite vendors are expensive but often necessary. Onsite maintenance needs to be supervised by both the onsite manager as well as the property manager.

High water and sewer costs can also screw up your cash flow. We have properties that use twice as much water and sewer as the norm. With those properties we are instituting water bill-backs to the tenants.

Onsite managers that are not ethical can rent units and call them in as vacant, they can charge parking rent, pre-rental fees or just be devious and just not send in rent when a tenant has paid. It is critical that the company you hire has systems in place to combat such theft.

Who is responsible?

In the end, the investor needs to be involved. Remember when your baseball coach said to "keep your eye on the ball" to score a hit off of the pitcher? It is this same discipline that is needed by the investor to make sure that your investment is successful.

You must read your monthly financial reports. You must inspect the property. You must make sure that annually you are on the same page with your property manager by virtue of approving a management plan. You need to invest enough money into the property to make and keep it competitive in the marketplace. No property will operate well without supervision. If you do all of this you may have a chance to turn your property around and hit the market occupancy rate of 90 percent. May the investor gods be with you! Good luck.

What's a home really worth? Not emotionally or psychologically, but in cash, today, at this moment?

I ask because a letter from a reader raised this question in an interesting and important way -- a way which has national impact.

My husband and I are first time home buyers. We will be closing on our condo this Friday, and just found out that the final closing costs are less than the sellers concession amount. My question is: Where does the extra money from the seller concession go? I know that the buyer is not supposed to get any cash back from the seller (we are okay with that), but then the extra money will go to the seller? I don't think the seller should get that money because we added the seller's concession amount on top of the original value of the property (we offered 239K for the condo + 11K seller's concession). Can we add other expenses such as initial association fees, or home repairs?

On one level, the answer to the question is that who gets the $11,000 depends on what the contract says. For instance, there's a difference in an agreement which says a seller will pay "up to" $11,000 in closing versus language which says the buyers will simply get an $11,000 credit at closing.

But on another level, the letter asks: What's the property worth? What's its fair market value?

The writer says they bid $250,000 -- $239,000 for the property plus $11,000 for the "seller's concession." If this accounting is correct then there was no concession for $11,000. Instead there are postponed costs in the form of a higher monthly mortgage expense, larger property tax and insurance bills (because the property is more expensive than $239,000), and a higher financial hurdle when they sell.

Let's say the property was offered for sale at $239,000 and the purchase was financed with a 30-year mortgage at 6.25 percent and nothing down. The monthly payment for principal and interest would be $1,472.

However, the property actually had a $250,000 purchase price. With the same loan terms, the monthly cost for financing will grow to $1,539 -- an increase of $67 a month or $804 a year.

Is this a big deal? Is anyone hurt by this arrangement?

It's not a big deal if the property has a $250,000 fair market value and the buyers can afford the additional monthly cost, some of which is tax deductible. But what if they're buying on the edge of affordability, like so many first-time purchasers? What if someone loses a job, some overtime pay doesn't come in or there's a costly accident or medical emergency?

If the property must be sold or if it goes to foreclosure, then the buyers can have big problems if they bought above fair market value. In that case, with a sale the preimum-plus property the owners would then be competing with sellers who did not pay an extra $11,000 and can thus offer their properties at a lower cost without a loss. As to a foreclosure, if the property was purchased with 100-percent financing, then between the above-market price, full financing and a possible "foreclosure discount" the lender, mortgage insurer or both are likely to take a financial beating.

HUD is distressed at the idea of purchases above fair-market value that involve FHA mortgage insurance because if something goes wrong then FHA must compensate the lender. HUD is now proposing regulations that would limit if not eliminate the ability of third parties such as the Nehemiah program to provide down payment money.

With Nehemiah, a seller provides a contribution of up to 6 percent of the sale price to the nonprofit group. Nehemiah, in turn, provides a grant to the buyer of equal size. The seller also pays a $499 processing fee. No money from Nehemiah goes to pay off credit cards, auto debt, etc.

Help from Nehemiah and similar groups would not be necessary except that HUD requires buyers to provide 3 percent down payment money or to get it from friends, family, work, a union, a community group, etc. -- but not from a seller. Amazingly, FHA rules do allow owners to make as much as a 6-percent seller contribution to offset closing costs and repairs -- but no money can go to the down payment.

"FHA's primary concern with these transactions is that the sales price is often increased to ensure that the seller's net proceeds are not diminished, and such increase in sales price is often to the detriment of the borrower and FHA," says HUD in its proposal to cut off buyer down payment help from charitable groups.

But the Nehemiah program has been enormously successful. Writing in the Louisiana Weekly, Scott C. Syphax, President and CEO of the Nehemiah Corporation of America, says that since 1997 his program has helped "229,000 families purchase their first homes across every state in the country and has given out almost $900 million in grants without receiving a single dime from either government or foundations."

Syphax says the Nehemiah program has a 2 percent failure rate -- 98 percent of its borrowers succeed. The Mortgage Bankers Association says the FHA program has a foreclosure rate of 2.19 percent, so Nehemiah borrowers and FHA borrowers in general pose about the same risk.

There are really several issues here.

First, the Nehemiah program works and it does not represent excessive risk to the FHA insurance plan. Does it then make sense to limit or end a program which is successful? What alternatives does HUD offer?

Second, imagine the impact on home values if we didn't have 229,000 buyers in the past decade. How many billions of dollars in home sales would be lost? How many neighborhoods would see declining home values? Imagine the impact on the FHA program. Nehemiah is doing the work the government says it wants done: It's a faith-based initiative with an outreach to minority borrowers.

Third, HUD has a good point in thinking that sale prices might be raised above fair market values to include seller concessions. But worries about over-pricing apply not only to 3-percent down payment assistance, they also apply to 6-percent seller contributions -- a practice which HUD accepts. If HUD wants to get rid of down payment help it should logically be in favor of getting rid of seller contributions.

The answer to over-pricing concerns is not to worry about programs such as Nehemiah, instead the solution is to look at the appraisals HUD requires for all FHA-backed loans.

Surely local and licensed appraisers can determine if a home is being sold for more than fair market value; surely appraisers can see if a sale price is higher than the last asking price for a property; and surely appraisers can document if a higher price is or is not justified in the marketplace.

Once there's an independent and accurate appraisal, the problem for lenders and HUD is easily resolved with an old underwriting standard: Lenders will provide financing based on the sale price of the property or the appraised value -- whichever is less.

Federally regulated banks started the week with new rules governing how they write subprime loans.

Critics consider the rules too-little too-late because they don't apply to mortgage brokers and lenders that are not federally regulated. Also an estimated 2 million homeowners, many of them saddled with subprime loans they can't afford, are already in or destined for the foreclosure pipeline.

Effective immediately, the "Statement on Subprime Mortgage Lending" is the work of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision and the National Credit Union Administration, federal monetary system regulators.

The new rules were spawned by waves of failing subprime mortgages.

Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems. Without the subprime segment, some borrowers would be locked out of the American Dream.

Unfortunately, in numerous documented class action suits, state-filed cases and other claims, too many subprime loans became predatory with exorbitantly high costs, penalties and other financially abusive features often directed at specific groups, including single women, minorities, older, low-income borrowers and others who can least afford the added cost.

Other studies revealed members of those same groups could qualify for prime loans but were steered toward subprime mortgages instead.

Many lenders have already tightened underwriting standards and not only for subprime loans, but also so-called nontraditional mortgages which were the target of previous regulatory tightening from the same group of regulators in "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" .

Nevertheless, even as the Feds move to tighten regulations, subprime mortgages continue to flourish, according to the Center for Responsible Lending.

Last week, just days before the Feds released the new rules, the Center released a study of mortgage-backed securities consisting primarily of mortgages made in 2007 which contained high levels of subprime loans with risky terms.

The Center said on average, 77 percent of the loans included in the subprime securities came were adjustable rate mortgages (ARMs) and nearly half came with large scheduled interest rate increases. Many loans with prepayment penalties and others made without fully documenting borrowers' incomes also comprised a chunk of the loans.

HousingPredictor.com says in "Foreclosures Will Affect 2 Million Homeowners," new federal regulations won't be enough to stem the tide on subprime foreclosures.

The Feds' new group of subprime rules is, however, one of the fastest moves in recent regulatory history.

Lender mandates include:

• Curtailing predatory lending. Loans should be based on the borrower's ability to pay rather than the foreclosure or liquidation value of the home. Lenders should not induce borrowers to become serial refiancers for financial gain nor engage in fraud or deception to conceal the true nature of the borrower's obligation.
• Tightening underwriting controls. Loan approval should be based on the borrowers ability to pay the loan based on the fully indexed rate, rather than the starter rate.
• Offering workouts. Where warranted, lenders are encouraged to offer struggling borrowers loan modification or workout arrangements.
• Improving disclosures. Disclosures shouldn't be misleading, mystifying or unclear but spell out in understandable terms the costs, details and risks of loan products so that the borrower is better equipped to choose a loan that is best for him or her.

Consumers should be well informed of "payment shock," stemming from interest rate adjustments; prepayment penalties charged when a loan is paid off early in the term, even by a refinance; balloon payments' existence; the cost of reduced documentation loans; and the borrower's responsibility for other non-mortgage costs including taxes and insurance.

Consumer advocates hope states will follow suit and strengthen local level regulations as many did after the Feds released new rules for nontraditional mortgages and home equity loans.

Federal legislation aimed at such state level compliance from brokers and lenders not federally regulated are also making the rounds on Capital Hill.