A credit scoring test conducted by Standard & Poor's found that about a third of mortgage applicants classified as A-minus or lower through traditional underwriting - and thus ineligible for loans to be sold to Fannie Mae and Freddie Mac - were rated A or A-plus through scoring.

Also, significantly fewer loans were classified through scoring as A- minus, B, or C, and only a few more were found to be of D quality.

Tom Gillis, a managing director of Standard & Poor's, provided details of the test at a conference here last week sponsored by Fair, Isaac & Co., a credit-scoring consultancy based in San Rafael, Calif.

Why the big difference in evaluations?

Sally Taylor Shoff, a Fair, Isaac executive, said one major reason was that standard underwriting often involves "knockouts" - single factors that disqualify an applicant from a prime credit rating.

"Conventional underwriting tends to be unforgiving," she said. "If any factor is triggered, the borrower is forced down into the next level."

But credit scoring considers all factors in combination rather than using any knockouts.

"With scoring you can have two 30-day latenesses on your mortgage payments but if everything else looks great you can still score relatively high," she said. "Traditional underwriting doesn't give you a chance to get back up."

In his presentation, Mr. Gillis pointed out that under traditional underwriting guidelines, two 30-day mortgage delinquencies would automatically bump an applicant to A-minus, three such delinquencies to B, four to C, and 5 to D. Other factors, such as consumer credit histories, debt-to-income ratios, and defaults or bankruptcies, are similarly tiered.

In the test by Standard & Poor's, about 500 loans that had been bought by a conduit that securitizes subprime loans were fed into Freddie Mac's Loan Prospector, an automated underwriting system. S&P helped develop the B and C evaluation segment of Loan Prospector.

In another session, Fair, Isaac executives described what can happen when loan officers use personal judgment to override poor credit scores, and how credit-scoring technology can be used to track and identify problems.

In a case history presented by Fair, Isaac executives Bernadette Canniffe and Rita Emami-Peasley, a bank dubbed Loan Star found it had a sudden rise in delinquencies on personal loans. Scoring reports helped trace the problem to a single branch, which had recently been established to cater to a new division of a university.

The reports further narrowed the problem down mostly to loans made, despite poor credit scores, to students who lived with their parents. The outcome: Loan Star was able to make adjustments to its program at the branch.

The mortgage industry isn't yet up to speed with this kind of tracking capability, but experts say demand is likely to develop as lenders worry more about the dangers of approving loans despite low credit scores.

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