Looking beyond credit scores.

Author:Biundo, Rosie
Position:CREDIT RISK
 
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Rich sources of data are available to help lenders and servicers assess borrower credit risk. Some of the best indicators of risk can come from tapping data on owner occupancy, income and employment tenure.

Credit scores have long been used as a reliable way to assess borrower risk. However, just as the numerical values for credit scores differ, so can the interpretation of those scores. [paragraph] There are no two borrowers who are exactly alike. Even two borrowers with the same credit score can vary greatly with regard to their individual ability to repay--a realization that lawmakers, lenders and their partners have come to understand. [paragraph] "In my experience in residential lending, and now working with lenders all over the country, I've found that credit scores, as a part of evaluating applicants' overall credit picture, can sometimes be overvalued by lenders and may not be the most accurate predictor of repayment," said Rich Swerbinsky, executive vice president of national sales and strategic alliances at The Mortgage Collaborative, an independent lending cooperative based in San Diego. [paragraph] Following the Great Recession and the advent of the Qualified Mortgage (QM) and ability-to-repay rules, having a 360-degree view of borrowers has become an even more important component of building a robust loan pipeline, as many of the borrowers impacted by the recession are now entering--or re-entering--the real estate market in significant numbers.

Considering this, some lenders are looking to verify the solvency of prospective borrowers by sourcing other types of data such as owner occupancy, income and employment tenure to paint a more complete picture of prospective borrowers. Such an approach can improve decision making at the loan level, help underwrite loans with greater precision and maximize the overall integrity of existing loan portfolios.

Verifying property occupancy

Determining whether a property will be occupied by the borrower can help safeguard against potential loan default and is essential to avoiding potential misrepresentations in the future. Recent statistics (Fannie Mae loan reviews completed through the end of February 2015) reveal that approximately 19 percent of loans sold to Fannie Mae included properties on which a borrower's intent to occupy was materially misrepresented.

A primary driver for this type of misrepresentation is the lower rates and less-stringent requirements associated with properties that are classified as owner-occupied. It is no secret that tenants can stop paying rent at any given time, making the owner and prospective borrower responsible for missed payments. This is especially damaging if the potential borrower owns a second property, in which case an absent tenant could trigger a second mortgage payment, increasing the likelihood of delinquent payments or default.

To verify the occupancy status of a property, lenders must be particularly diligent. At the point of origination, many systems are not equipped to determine whether a borrower is actually residing at the property--but there is accessible data that can help clarify this for lenders, including where bills addressed to the borrower are being sent (credit card, utility...

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