The Housing Roundtable held a forum in Atlanta last month about the impact of credit scoring and technology on residential lending.
Participants were Steve Blose, a vice president for Mortgage Guaranty Insurance Corp., Milwaukee; Michael Keller, executive vice president, Norwest Mortgage Inc., Des Moines; William Makuch, vice president, GE Capital Mortgage Corp., Raleigh, N.C.; and Ralph Mozilo, executive vice president, Countrywide Home Loans Inc., Pasadena, Calif.
The session was chaired by Weston Edwards, chairman of the Housing Roundtable, which stages forums around the country.
BLOSE: In any market where you want to profit, having an information advantage would be preferable to not having an information advantage. In fact, we're going to see a shift in the informational power that exists between players and the market.
Whether you're in mortgage banking, real estate brokerage, or title insurance, we all have to understand that there's a potential revolution occurring and at the very least an evolution in the market that's going to be driven by information. That informational power is going to shift.
You're going to have companies like MGIC and others that bring models out to the market and make them available in a fairly inexpensive, easily assessable way. You don't have to have those skills in your own shop to take advantage. Ultimately, more and more lenders are going to take advantage of this information.
The last phase will be a shift away from information arbitrage opportunity to the loan triage stage, where the majority of loans, at inception, are going to be scored, differentially processed, and then sold into markets populated by well-informed investors. Again, you're going to be disadvantaged if you're not on the same information level as they are.
KELLER: Everyone in the press today says we'll all be doing loans and buying homes from our own houses on-line any day now. That's the way home loans and title services are going to be sold, and that gets a lot of hype.
But up to this point, the concept just does not accomplish the basic goal of all technology. The fundamental business question for networks such as Compuserv, America Online, and Freddie Mac's Gold Works is: Do you reduce the cost of loan origination or home sales or title orders? In my opinion, the answer is no. In fact, to the contrary, I think it adds cost today. The basic business reason for employing this technology as a sales tool simply does not exist. We can originate loans cheaper using other methods than we can over either the Internet or the value-added networks.
Even if we pay a fee to the network of $100 or $150, the pitch to us is that these orders will be cheaper than sourcing the business from our traditional sources. So far at Norwest, we think that has been a false prophecy.
Supposedly, we'll save money on our marketing expense. The second savings is that the computer will eliminate the need for us to sit down with and consult with the customer. The third area of savings is that by connecting this ordering system to our in-house computer systems that we use to actually produce the loans or process them, we'll exchange information between the customer and ourselves more efficiently.
At Norwest, we don't think we've experienced any savings in any of those three areas. Our current reality is a far cry from what we think the future might be.
MAKUCH: I'm going to actually focus on concerns that credit scoring is not adequately represented to the consumer community as well as to others. We will examine four myths.
The first myth: Scoring is a new idea. Absolutely not. It's been in use in the consumer credit card industry for about 30 years. Also, scoring is exactly how they approve your life insurance, auto insurance, and health insurance policies.
The second myth: All scores are the same. A credit score uses only credit bureau data and predicts the propensity to repay on any trade line. At the other end of the spectrum are custom-built mortgage scores. They range from origination models to servicing models, refinance models, foreclosure prediction models, cross-sell models, and numerous others.
The third myth: Approval rates will decrease. As we saw in our credit card industry and our auto lease industries, it's been G.E.'s experience that the approval rate will actually increase over time.
If you can take yet one more loss out of the equation, you're that much more profitable. You're allowed to penetrate much deeper into your existing market.
Conventional guidelines are rigorous. Scores consider all compensating factors simultaneously. If you're outside one of the guidelines but you look good in all other dimensions, you'll score high.
One more myth: Those without credit histories cannot be accurately assessed. With custom-built mortgage scores, we can accurately assess and score essentially 100% of the population, whether you have minimal trade lines or no trade lines.
I think that anybody that uses scoring can instantaneously identify three times more losses than your best underwriter can. It's an injustice to put the wrong person in the wrong house.
MOZILO: For the last two years, we have been able to reduce costs substantially - not only for ourselves but for our mortgage insurance business partners by electronically transmitting all our data.
(But) it is my opinion that scoring is really in its embryonic stages. I'm deeply concerned that we put too much emphasis today on scoring. Scoring has a place and a focus, but I think we are in the very beginning, learning stages. I can tell you that there are borrowers with high scores to whom we shouldn't make loans and borrowers with low scores to whom we should make loans.
We can't figure out the whys and wherefores of it.
But scoring does have a purpose, and I think it will have a larger place in conjunction with artificial intelligence systems.
Freddie Mac, when they audit loans - and Fannie Mae has announced that they're going to do the same thing - looks at the scores. They come in and they look at the lower scores. I've had them come in and audit nothing but my House America product based on the scores. I can tell you that I don't sell very much of that product because I don't want to be audited and have those loans gone through with a fine-tooth comb to be purchased.