It's been a couple of weeks since I last blogged. Frankly, nothing has caught my attention enough to cause me to feel the need to spend the time or effort to blog.
I always watch a video alert called ThinkBigWorkSmall and my content is often prompted by something I've seen there. The hosts are usually timely at least. Wow, there are some clowns chiming in there daily who seem pretty full of their own opinions. There are also quite a few with like-minds that I relate to.
To me a Revolution is over-turning or changing the status quo and the truth of the matter is, not a single comment that I've ever seen there other then my own is challenging the way things are now being done in the mortgage industry or offering REAL CHANGES.
So, enough of this dribble. The last show that caught my ire and forced this blog out of me has to do with Fannie Mae introducing a policy of running an 11th hour credit report on every loan they do. So the big fear is that someone runs up a credit card during the loan process and is disqualified or has to pay higher fees for their loan. I can understand that if a new debt or new loan other then our subject mortgage is incurred, we should make sure that the debt ratios are still within guideline.
But I have a fundamental difference of opinion with our credit scoring system. And the current system can heavily penalize a borrower because they are 1 point below a threshold score. Here's the perfect example: in order to do a conventional fixed rate loan without any additional fees, one must have a credit score of 720. If the score is 719 then one half (.5%) is added to the cost of the loan. That's $2,000 for a $400,000 loan.
Yet, if you look at a credit report with a 719 score and right next to it you look at a credit report with a 720 score, there is virtually no difference in risk. So, not only are Fannie Mae and Freddie Mac being given money by our government to keep them afloat, but these companies are getting paid much more in fees for providing the loans. They're getting paid on the front and the back by guess who? Us!
There is a simple solution to this and yet no one in the mortgage industry seems ready to make any fundamental, Grey Matter, common sense changes to make things better.
When making loans, lenders must consider risk. Alot of the guess work has been taken away from underwriters because a frontline automated underwriting system (a machine) makes the initial decision as to whether a borrower qualifies or doesn't qualify for a loan. The thing is that additional sets of human eyes further scrutinize these decisions anyways and make sure that all necessary documentation is provided prior to the loan funding and closing.
My solution is to utilize the additional set of human eyes to overide an automated decision when a credit score misses a threshold by 5 points or less. Someone who has a credit score of 715 - 719 may very easily still not warrant a penalty of .5%. If the reason for the lower score cannot be seen with the naked eye, then I say don't penalize. This person is still a lower risk.
I understand that we need to set these thresholds with some sort of conformity and standardization. I agree with that. But one half point in cost for an invisible 1 point score on a credit report is a hefty price to pay. If there is any compensating factor with the overall profile of the borrower (job stability, time in the home, low loan to value, etc.) then give the borrower the benefit of the doubt.
The industry has over-reacted to so many aspects of the process of making loans that I believe it's time for new architecture. The old foundation is crumbling. We must form a new foundation from which to re-assemble this industry and use grey matter and common sense to do it.
Fannie Mae proposes second look at credit
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