Lenders who once had to evaluate every piece of information submitted as part of a mortgage application are turning to automation to decrease processing time and increase efficiency. For example, credit reports now come with a credit score – a computer-generated rating that is meant to provide a statistical way of predicting whether a person will repay his or her loan. In calculating the credit score, the computer program considers the borrower’s records of repaying loans and credit cards. It also factors in tax liens or bankruptcies and how often the applicant applies for credit cards, as well as how much he or she owes, according to the National Association of Realtors.
Employment history, monthly debt payments versus current income, savings patterns, the amount of savings the applicant has, the type of loan being applied for, and the value of the property are also among the considerations lenders make in determining whether an applicant will be approved, according to the association.
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Lee L. Verstandig, senior vice president of governmental affairs for the association, noted that things that credit scores do not consider include the borrower’s race, religion, and demographic data such as marital status. This makes for objective treatment of applicants, he said.
Douglas Robinson, of the Federal Home Mortgage Corp., a federally chartered organization that buys mortgages from lenders and repackages them as mortgage-backed securities, said Freddie Mac performed a study of credit scores to see if they are accurate – if a high score really means that a borrower is a good candidate. The results were positive, he said.
For credit scoring to work, however, the borrower must have a credit history. In instances in which an applicant lacks a significant history – because he or she carries no revolving debt, for instance – Freddie Mac has been able to help these people get loans by buying the mortgage from the bank, Robinson said. In these cases, the borrower would find other ways to prove creditworthiness, such as a record of paying rent and utility bills on time, he said.
But the most important consideration in whether a borrower will be granted a mortgage is his or her ability to repay, he added.
The extent to which lenders rely on automated systems varies. Tim Pigott, of Bank of Newport, said the bank uses credit scores as a guide, but not as a final arbiter, in determining an applicant’s creditworthiness. Extenuating circumstances that do not show up on a credit report may come into consideration, he indicated.
Stephen Adamo, president of Citizens Mortgage Co., said Citizens uses automated underwriting to approve mortgages. The automated underwriting system was developed by the Federal National Mortgage Association, also a government-chartered organization, which buys mortgages from lenders. Fannie Mae is a publicly held company; Freddie Mac is owned by savings institutions.
Citizens has used the system for 15 months, he said. Nationwide, many large mortgage lenders are using automated underwriting to increase the speed of loan processing, he said. The automated system provides a ‘loan score’ to determine if a borrower is fit for the mortgage he or she has applied for, he said. While the automated system can approve loans, it cannot deny them. If the system does not approve a loan, an underwriter sits with the applicant to consider the application further, he said.
“Some loans just need more time,” he said.
The automated underwriting system considers factors such as job history and debt to income ratio, he said. Once the requisite information is fed into the system, the program will return an answer in three to five minutes.
Besides speeding up the approval process, the automated system actually allows the company to approve more loans because the program makes the guidelines that the bank uses to determine if a loan is approved more flexible, Adamo said. While the system has been good for Citizens Mortgage Co., he said, it has also been, “very, very good for the mortgage industry,” because of the increased speed and efficiency it brings to the approval process.
