Written By: Bonnie Wilt-Hild, Op-Ed Writer
When I hear those words, they immediately evoke images of a world in which mortgage underwriting decisions are determined by AUS systems that have no capacity to either employ common sense underwriting principals or fairly or adequately assess overall risk. They are simply three more numerical values used by a computer model to “recommend” if a loan should be approved and just like its partner, the AUS, I think credit scoring as rule has outlived its usefulness. In a world of rescores, which by the way many investors will no longer accept and scams such as disputing accounts in order to inflate them to acceptable levels, well and the fact that their mere use is just disparate, I think it’s time to evolve beyond them.
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I am sure everyone has heard the standard version of why things fell apart in the housing market in 2007, it was all about risky lending practices, irresponsible Wall Street brokers and of course legislation created by our government during someone else’s administration, not the current one, that lead to the collapse. The standard version just neglects to mention a few things like many of the congressmen and other congressional leaders were also part of the “other administration” and where creating legislation that not only made all of this possible, but encouraged it. Risky lending practices otherwise defined as sub-prime mortgage products where not illegal, just another product that met a need for a segment of the population that could not qualify for agency type financing such as FNMA or FHLMC type products and honestly automated underwriting methods were touted by everyone as the one safe surefire way to adequately assess risk, why if you received an Accept Plus via FHLMC Loan Prospector, you didn’t even have to document income, the good old credit score said it all. So with that being said, the mortgage industry went with it, after all it was the best method, remove the human element, allow the software to handle it and of course if the credit score is great and the value looks reasonable, who cares about anything else, it wasn’t on the checklist.
So here we are today, stressing responsible homeownership and governance for the financial sector, penalties for banks who practiced risky lending practices (even if lending and underwriting standards were established by the GSE’s for the A paper stuff) and embracing things like Dodd Frank and the QRM and still, everyone looks to the AUS and the credit score as a means to determine if the loan is approvable. Now granted, the AUS has lost some of it popularity since 2007, well at least lenders are now requiring underwriters to actually underwrite loan applications, but those credit scores just won’t go away. I think more and more underwriters concur that the credit scoring concept has little value, but the industry as a whole still embrace them as a reliable way by which assess if a borrower will make timely monthly payments. Very recently a friend of mine was having a conversation with an examiner from the OCC who was sharing war stories from an audit he completed on Countrywide Home Loans about two weeks before they went under. During the examination he had determined that on the Pay Option Arms, underwriting was not calculating ratio’s. When he addressed this with one of their Sr. V.P’s she informed him that ratio’s were not indicative as to if a borrower could or would repay the debt. Needless to say he asked her what they used as the indicator and she said, “The credit score”. I found this concept extremely interesting, as did he, because quite frankly, credit scores change daily so why in the world would one assume that this factor alone could safely assess risk. That score is nothing more than a snapshot in time, that time being the day the report was pulled. It give no historical data, won’t tell you what the score was last week or month, can’t predict what it will be six months from now, and certainly doesn’t tell you what is was before the applicant borrowed $25,000 from mom and dad to pay off debt and get their credit score up to an acceptable level so they could make application. It doesn’t tell you any of that. Examining the overall credit report, as well as other file documentation won’t tell you that either but it will give you some insight from an underwriting standpoint as to the likely hood that a borrower may repay based on their overall financial behavior, past and present.
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In closing it’s just my personal opinion which I guess would count as my professional opinion that lenders need to know move away from a dependence on credit scoring as they have AUS. I think the most recent past is pretty clear indicators that if you give an underwriter the ability to truly underwrite a loan, than they will and with far more proficiency than any AUS system ever invented. Do away with credit scoring and we might just be able to approve a few more loans for deserving borrowers as well. Have a great week all.
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie holds mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".
