Despite recent advances by credit scoring companies, the mortgage industry still questions whether credit scores can be relied on to predict borrower behavior.
A gray area is created by consumers' ability to improve their scores, especially since programs to do so are provided by the companies managing the scores. The question that lingers is whether consumers who take measures to improve their credit scores have a higher propensity to pay their mortgage.
If mortgage lending continues to languish, some argue, it will be because Dodd-Frank, Fannie Mae’s Loan Quality Initiative, buyback fears and revisions to credit score models are all pushing the qualifying threshold for a conforming loan up into the 770 FICO range.
“Needing a 4506-T income verification and an upfront appraisal on every loan is bogging lenders down,” said David Chiappe, COO of Spokane, Wash.-based SharperLending. “Dodd-Frank is incredibly burdensome to the smaller and regional lenders and, frankly, to the borrowers. And credit has gotten very complicated.”
“I am not exactly wild about the current credit score picture,” chimed in Ron Cahalan, sales and marketing manager of The Lending Co., “The restrictions have gotten ridiculous. There are too many good borrowers out there that can’t qualify.”
Cahalan voiced a complaint familiar across the industry. “Somebody with a 680 FICO score can get a car loan with a one-page application,” he said. “I am willing to bet that the default rate on a mortgage for that same borrower would be no more and no less than on the car loan.”
Meanwhile, Sanjeev Dahiwadkar, president and CEO of IndiSoft, said he is aware of recent improvement by the credit scoring companies, but argues that they still have not done everything they can to reassure lenders, investors and regulators that they can be relied on to predict borrower behavior.
Dahiwadkar believes the cumbersome business of pulling credit at the beginning and end of loan modification transactions and originations alike could be done away with if credit monitoring were done continually in real time.
“My credit card issuer has the ability to track my behavior in real time,” said Dahiwadkar. “If they can do that with a simple credit card, then they have the resources to do that with a mortgage. It’s a matter of will to do that. The infrastructure is there to make real-time reports. All the information is there.”
“You should be able to use the technical information to validate the information you get live,” Dahiwadkar argued. “If you must have an additional means to evaluate credit, the credit bureaus are losing their value.”
However, credit reporting data and technology providers don’t drive the standards and procedures that the investor community requires.
“What the investor community requires drives a lot of processes for both loan mods and originations,” points out Steven Meirink, the mortgage growth initiatives leader at Atlanta-based Equifax. “Those are the rules we all play by.”
Meirink did say, however, that one problem with adding new tools to meet today’s stringent loan quality requirements is that “every solution seems to feature another platform. We’re focused on integrating with existing platforms.”
