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More than three years ago, federal regulators were warned by community groups, including the Greenlining Institute, about the perils of exotic adjustable-rate mortgages and the need to focus, at least in part, on Wall Street investment bankers and other unregulated sources of subprime credit.
March 23
A lot of consumers are carrying less debt these days in an attempt to shore up their personal finances, but the lack of a credit payment track record can pose a challenge when getting a mortgage. To reach those borrowers, Churchill Mortgage is turning to a web engine that analyzes payments of "non-debt" expenses to come up with a grade that's an alternative to traditional credit scores.
Churchill is the first lender to license an online service from eCredable that gives the lenders access to alternative information such as rent, utilities and insurance bills as part of the process that matches consumers to appropriate loan products by giving prospective borrowers a grade.
"More people are starting to get the message that there are better ways to manage their finance than through debt. So this service allows these people to get home funding," says Matt Clarke, CFO and COO of Churchill Mortgage, a conventional, FHA and VA residential mortgage lender that operates in 25 states.
The lender's looking for a way to make loans to young consumers who may not have a long history of paying auto loans, credit card bills and other mortgages, or people who used to have a mortgage, but don't anymore (but have demonstrated a good track record when paying other bills).
Clarke says that by plying a web analysis based on payments of recurring bills, a better picture of creditworthiness can emerge than a snapshot that relies largely on payments of debt instruments such as credit cards or pre-existing mortgages.
In today's market, existing mortgage or credit card payments may not exist or may have been adversely affected by a single event, while the prospective borrower's overall ability to pay bills is still a good bet for the lender. Credit card debt is declining-CardHub.com says credit card debt in the U.S. declined to $764.5 billion in the first quarter of 2011 from $810.2 billion in the fourth quarter of 2010.
The product works the same way as online bill pay. Consumers enter their various monthly payments, and update the site when bills are paid. A web-based analysis gives the borrower a tentative snapshot of what their credit grade (from "A" downward) will be ahead of applying for a mortgage. Upon applying, eCredable then verifies the payment information, a manual process that's still very non-tech.
The lender is still using automated underwriting tools like Desktop Underwriter and Loan Prospector, but borrowers don't necessarily need a traditional credit score. Churchill believes analyzing extra information will help it find good borrowers that fall through the cracks. "Sometimes [credit] is less about the [underwriting] model and more about the behavior," Clarke says.
Alternative scoring is still new to the mortgage market and Churchill's deployment will be watched closely. And there are some challenges.
The exact size of the segment of consumers with low credit card debt who are qualified for a mortgage hasn't been determined. Also, Churchill sells about 85 percent of its production into the secondary market. Since it's an early adopter, it's unclear how mortgage investors will respond to mortgages partly underwritten by an alternative web engine. And other credit scoring products that use payments of utilities and other monthly bills, like the four-year old FICO Expansion Score, have been primarily used by credit card lenders, so there's not a wide swath of mortgage performance to fall back on.
Steve Ely, CEO of eCredable, says it will track the loan performance throughout the life of the loan to compare how eCredible's grades would match up against a corresponding FICO score over time. That would serve as a guide for secondary market pricing.
