Credit Scoring... the Good, the Bad and the Ugly

Most anyone who has obtained a home mortgage in the past 5 years or so has heard about credit scoring. How many of you have been told "your scores are great", or "if your score were 10 points higher, your rate would be better by 1/4 point"? Probably most of you.

We in the industry started to become aware of "scoring models", as they are called, as early as 1994. The use of scoring models in the mortgage industry came about as the major secondary market players, known as Fannie Mae and Freebie Mac, started to develop automated underwriting systems. They had been in use for a long time for auto lenders and credit card issuers.

The early creators of the automated underwriting systems felt that, if someone could go to a Mercedes dealership at 10 am and drive off the showroom floor an hour later with a $100,000 car (still more expensive than homes are in many parts of the country), they ought to be able to obtain a home loan the same way. The logic in this should be obvious... after all, cars are rolling stock, so they can disappear, they depreciate and usually people don't live in them. Houses are attached to a foundation, they usually appreciate and people usually live in them. Using that logic, the industry should be able to make the home buying process easier for everyone.

This theory sounds good, but it is only in the last year that we have seen some relief from the mountains of paper that go into loan files, and it is because the scoring models have become more refined. Still, there is progress yet to be made and the industry is grinding slowly in that direction. Scoring models figure prominently in the future of how people obtain home mortgages.

Most people know that most creditors use credit report agencies for obtaining information on a person when they have applied for any type of financing. However, there are actually two levels of credit reporting agencies. There are three major repositories of credit and background information. They are Equifax, Experian and TransUnion. When someone obtains credit, the creditor reports the payment history to these repositories. This is usually done monthly but may be done on an irregular basis. These repositories simply accept the information as it comes in electronically and they DO NOT check the accuracy of the information.

The credit repositories and other agencies also maintain other background information on every person in the country who has a Social Security number or other identifying information. The other agencies may include the Department of Motor Vehicles, the Medical Information Board, the FBI, local law enforcement agencies, the county recorders for each county (public records repositories), etc. Even the mortgage industry has a central repository for borrowers and lenders who may have been involved in fraudulent activities in the making of mortgage loans.