The mortgage industry's ability to capture and analyze huge amounts of information about borrowers has resulted in a redefinition not only of who is a good credit risk but what makes a good customer.
People with blemishes on their credit records, once pariahs to conventional lenders, are now being eagerly embraced as highly profitable accounts.
As a result, more lenders than ever are making both conventional and subprime loans. Responding to this situation, Freddie Mac has been making it easier for lenders to handle the processing of applications of both types, as well as loans that exceed the agency's $207,000 limit.
Freddie Mac, formally the Federal Home Loan Mortgage Corp., announced Monday that it would be expanding the subprime program in connection with its Loan Prospector system to include more conduits that are ready to buy graded loans.
Under the program, originators using the automated underwriting system, starting in December, will be able to transfer mortgages to the conduits. In turn, the conduits, which package loans for sale in the secondary market, will be able to get risk gradings and to return pricing and purchase decisions instantly. Freddie is working with Standard & Poor's to standardize risk categories, according to the announcement.
Freddie conducted a subprime pilot program with Independent National Mortgage Corp., Pasadena, Calif., a unit of CWM Mortgage Holdings Inc.; and Residential Funding Corp., Milwaukee, a unit of GMAC Mortgage Corp.
Now the program is going fully operational and adding First Union Capital Markets, Charlotte, N.C., and Saxon Mortgage Inc., Glen Allen, Va., as conduits that stand ready to buy the subprime loans. Additional conduits will be added soon, Freddie said.
First Franklin, San Jose, Calif., also participated in the pilot program but will not be a conduit since it lacks a shelf registration to issue securities.
According to Freddie Mac, some 35% of all loans made last year were nonconforming. It also said about a third of all loans submitted as subprime could qualify as conventional loans, in the process saving the consumer about $100 a month on a $75,000 loan.
In July, Freddie also reached an agreement with the Department of Housing and Urban Development under which it will automate the underwriting of government loans through Loan Prospector. "The pilot program is designed to demonstrate the ability of automated underwriting to streamline the FHA approval process as well as identify high risk applicants who may require additional counseling or default intervention after the mortgage is made."
Freddie expects to process about 6,000 FHA loans during a six-month pilot test, then make the system commercially available. At that point, the underwriting system will be able to handle virtually all loans submitted by lenders.
Strongly embedded in Loan Prospector is credit scoring, which Freddie is pressing all its lenders to use in submitting loan applications. In a new report, Freddie said credit scores, which are based on credit-bureau reports, are highly predictive and that the more detailed mortgage reports, which include additional data, are not necessary. It endorsed the Fair, Isaac & Co. and MDS bankruptcy scores.
One sore point in automated underwriting has been complains that the system may not be fair to minorities and low-income people, whose credit histories may not accurately reflect their creditworthiness. Freddie Mac said recently that a study it conducted of loans made in 1994 indicated Loan Prospector accurately predicts the risk of default for all income, racial, and ethnic groups.
