A new pilot program will put the power of Freddie Mac's automated underwriting system behind one of the oldest institutions in American housing policy - the FHA. If all goes well, it could push the FHA out of the old world and into the new.
A powerful new technology that for more than a year now has been transforming the conventional mortgage market is about to hit the FHA market. Automated underwriting - with its incredible speed and more hassle-free documentation - is about to enter the FHA world, where loan approval speed and documentation ease have been anything but common.
In July, Freddie Mac and the FHA announced they had signed a statement of understanding to start a pilot program using a special version of Freddie Mac's Loan Prospector[R] automated underwriting service to underwrite FHA loans.
Under the pilot, a select group of FHA-approved lenders will use this specifically designed automated system - dubbed Loan Prospector for FHA Loans[SM] - to provide speedy loan approvals to a range of FHA borrowers. The FHA will use the results of the pilot to study the ways that automated mortgage technologies can be used to expand homeownership opportunities for the families served by government housing programs.
A closer look at how the FHA-Freddie Mac pilot came about reveals the unique circumstances that paved the way for these two major players to undertake the first automated underwriting partnership between a government agency and the private sector. What follows is an insider's view of how the distinct visions and interests of Freddie Mac and FHA led to this ambitious experiment. This article also explores how this pilot program exemplifies a new era of cooperation between FHA and the private mortgage financing industry.
Leading the way
Freddie Mac management has been relentless in charging its automated underwriting team with a single mission: to lead the mortgage industry in bringing new and better uses of automated mortgage technologies to the lenders who are Freddie Mac's customers. Freddie Mac envisioned creating a full-service automated underwriting system that could:
* Make the mortgage lending process fairer, more consistent and more accurate;
* Expand the reach of affordable mortgage credit by creating a larger playing field that accommodated all types of American families;
* Slash consumer costs on both interest rates and closing fees and speed up the mortgage approval and settlement process;
* Accommodate the full range of mortgage products and programs that lenders offer to consumers; and
* Set the industry standard.
Driven by these daunting performance objectives, Freddie Mac invested millions of dollars and more than several years developing and validating a credit risk-ranking model based on performance data on millions of loans. The model was tested in a pilot mode throughout 1994 and commercially introduced to the market as Loan Prospector in January 1995.
Loan Prospector delivers within four minutes a Freddie Mac purchase decision for conventional loans (or, in pilot versions being tested today, a risk assessment for so-called jumbo or subprime [B/C market] loan products). The system uses loan application, credit and property information to evaluate a potential borrower's ability to meet a mortgage obligation. Loan Prospector enables lenders to streamline their origination process, lower origination costs through greater productivity and offer significantly greater service to their customers.
Reinvention through innovation