The expanded use of mortgage scoring is bringing greater efficiencies to the origination, servicing, and secondary marketing of loans, according to a panel of experts.
But it also has the potential for unexpected consequences, some of them negative, the panel members agreed.
Their roundtable discussion took place at the annual convention of the Mortgage Bankers Association of America, which drew some 6,000 to the hilly city on the bay.
The panel discussion was sponsored by PMI Mortgage Insurance Co., Fairfax, Va., whose scoring system has been gaining wide acceptance in the mortgage business.
"Scoring can help originators determine whether to service individual loans aggressively or passively," said Frank Raiter, managing director of the structured finance department at Standard & Poor's Inc., New York. "And over time it can help determine whether to move to a more aggressive stance in servicing."
Mortgage scoring uses complex statistical models to calculate the relative likelihood of a loan to default, using standard credit-behavior data as well as information specific to mortgages.
Mr. Raiter also said scoring technology was redefining criteria for determining what is a top-quality, or A, loan. Issuers of mortgage securities that can do an effective job of improving the definitions may be rewarded in the secondary market with smaller interest-rate coupons on their pools, he said.
Joel C. Horne, director of mortgage-backed securities at Deutsche Morgan Grenfell, New York, said the spread of scoring could lead to improvements in the collection of data about borrowers. But he also warned that by reducing the cost of originations, mortgage scoring could lead to an increase in refinancings and thus of prepayment speeds, something that investors typically look on with suspicion.
Mr. Horne also pointed to these potential disadvantages:
*The possibility of unanticipated consequences, perhaps comparable to those of program trading in the stock market.
*The lack of transparency to the market of the inner workings of scoring systems.
*Elimination of human judgment from underwriting.
Edward L. Toy, a director in the private placement group of Teachers Insurance and Annuity Association, also said complacency was a hazard in the reliance on scoring. "The focus is on the average loan, but not every loan has average expectations, and we must look at nonaverage results," he said.
He also noted that changes in regional economies and in the tax laws could have a significant impact on the implications of credit scores.
Mr. Toy was also skeptical about the impact of scoring in prepayment rates. "People who think they can predict prepayment speeds are deluding themselves," he said.
Luke S. Hayden, executive vice president at Chase Manhattan Mortgage Corp., Edison, N.J., said the increased efficiency in predicting loss rates on mortgage pools could give lenders an additional bargaining tool in seeking favorable prices for guaranty fees from the Federal National Mortgage Association and Federal Home Loan Mortgage Corp.
But Claude Seaman, executive vice president of PMI, said he did not expect improved risk ratings to reduce the need for mortgage insurance, pointing to insurers' low capital costs and geographic dispersion of risk.