4-Lender Test Could Advance The Status of Credit Scoring

Four mortgage companies are participating in a test that could advance credit scoring from an applications tool to one that helps set company policy.

The lenders, including Chase Manhattan Mortgage Corp., want to see if a numerical rating system can be applied to help guide lending, risk management, and secondary-market strategies.

The effort-which also includes HomeSide Lending and the mortgage units of First Nationwide Bank and First Tennessee National Corp.-is a pilot through Mortgage Information Corp. The San Francisco company is developing the program by importing credit scores into its data base of 21 million mortgage loans.

Mortgage Information-using systems from Fair, Isaac & Co. and Equifax Inc.-plans to score loans in its data base and then stratify them according to type, rate, geographic location, and other measures. Mortgage companies' own portfolios will be assessed in much the same way, and compared to Mortgage Information's much larger pool of loans to provide insights about performance, prepayment, collection, and foreclosure patterns.

Lenders can use the comparative information to step up lending in areas that appear to be doing well, or to increase policing of loan types that the data base indicates are headed for trouble, executives with Mortgage Information said.

The system is believed to be one of the first commercial efforts to expand credit scoring beyond its traditional use to judge loan applications. Credit scoring analyzes loans according to payment history, type, and numerous other factors and assigns a score based upon risk.

Credit scoring has also begun to find limited use by a handful of lenders on the collection side, to help pinpoint potential collection problems.

The system by Mortgage Information represents a more comprehensive way for lenders to look at their loans, industry experts said.

"You're working with a large data base that, on a number of levels, gauges the quality of your portfolio," said Jeff Lebowitz, principal at SSP Associates, a mortgage research firm in Chevy Chase, Md.

The approach "is an important use for credit scoring," Mr. Lebowitz said.

Indeed, the program will give Chase Mortgage, "for the first time, the ability to benchmark" its own mortgages against similarly structured loans in the broader mortgage market, said Charles Freeman, vice president of mortgage portfolio risk for the Edison, N.J., company.

After an original assessment, Chase will also be able to follow over time how its loans compare to others, Mr. Freeman said.

Mortgage Information is in the midst of setting up the systems for lenders in its pilot program. The company expects this spring to add at least two more participants, including a large West Coast lender, said Pat Schwinn, director of consulting services at Mortgage Information.

If the pilot program works as expected, the service could be widely available next year, a Mortgage Information spokesman said. He declined to say how lenders would be charged.

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