United Guaranty Corp. Launches Credit Scoring Service for Jumbos

United Guaranty Corp. has joined a growing list of companies offering credit scoring services to assess mortgage risk.

The Greensboro, N.C., company has introduced a service that uses scoring to measure risk in pools of jumbo mortgages. The pools can then be insured by United Guaranty.

The service - developed with Fair, Isaac & Co. of San Rafael, Calif., a leader in credit scoring for consumer lending applications - is a "measurement system designed to give lenders and investors more control over the quality of their originations," said Mark Amacher, vice president of strategic planning and marketing at United Guaranty.

Mr. Amacher said the model has proved to be powerful. Tested against a sample that was heavily weighted with loans that eventually defaulted, the scoring model consistently identified the bad loans.

The model is based on data from about 4,500 company-insured loans. The insurer looked at 500 loan file elements, chose the ones most likely to predict mortgage defaults, and determined their weights for the scoring system.

Mr. Amacher emphasized that poor credit scores were not necessarily a basis for rejecting loans. "You can make a loan to any kind of score," he said. "You just have to make sure you price for it."

United Guaranty says its new underwriting service will save lenders money. Rating agencies such as Fitch Investors Service will require less credit enhancement for pools insured through the new technique. A smaller subordination tranche, for example, could make a big difference to a lender that is securitizing a pool.

The insurer also says the service can be used to underwrite not only A paper, but also riskier grades of loans.

Credit scoring in the mortgage industry is new. Using the technique, lenders measure the risk of mortgages, based on the credit history of the borrower as well as the loan-to-value ratio, the appraisal, and other factors.

Freddie Mac, Fannie Mae, and several large lenders are integrating credit scoring into their underwriting systems. GE Capital Mortgage Corp. said it plans to use the technique to underwrite mortgage insurance next year. Not only does scoring promise to improve underwriting performance, but it lends itself to automation, reducing underwriting costs.

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