Credit scoring as it applies to mortgage analysis is still in its early stages, and its importance should be carefully weighed, according to a research report from Fitch Investors Services.
The report, due out next week, is designed to address the interests of investors in mortgage-backed securities.
"Investors are concerned and curious about credit scoring" as it applies to mortgages, explained Kevin P. Duignan, director of Fitch's residential mortgage group. "It's a very important tool that has a lot of potential for the mortgage marketplace, but it's still fairly early in terms of the sophistication of models."
Statistical information on mortgage credit scoring is not mature enough to allow loans to be automatically approved based only on their scores, the report says. Underwriters must still be involved in the approval process for Fitch to purchase a loan.
Scoring systems used to evaluate conventional mortgage performance must be analyzed carefully to determine their reliability, the report states.
Origination scores, or credit scores that take into account many factors, are better predictors of mortgage performance than straight credit scores (credit bureau reports), the Fitch study says.
Several mortgage issuers, including GE Capital Mortgage Services, Residential Funding Corp., and Citicorp Mortgage have developed proprietary origination scoring systems. Mortgage insurers United Guaranty Insurance Corp. and GE Mortgage Insurance Co. have also developed complex, predictive scoring models, according to Fitch.
Three to five years of information about a large portfolio of loans is recommended for developing a proprietary scoring system, the report states.
Scoring systems that address nonconventional loans (jumbo and impaired- credit loans, for example) may have questionable results. Credit scoring systems are often built on traditional loans, and then adapted to nonconventional loans - rather than developed on a foundation of B and C portfolios, Mr. Duignan said.
B and C loans need a scoring system that determines how bad a prospective borrower's credit is.
"With B and C lending you're looking for the story in the loan," Mr. Duignan explained. "Creating a system that finds that story is difficult."
As originators continue to develop and use credit scoring systems, it is important that they keep investors abreast of new developments, Mr. Duignan said. "Investors are still wary of these systems."
