MyCreditsBad

In the years that the mortgage industry has used credit-scoring as a tool to determine borrowers' creditworthiness, or a borrowers' ability to pay back a mortgage, the industry has not experienced a market like this. Even the historical data used to create the scoring model does not date back to a market like this.

Therein lies the problem. In the 1990s, the mortgage industry began using credit scores uniformly as part of loan decisions. These scores were designed to determine the probability of a borrower having a 90-day late payment in the next 24 months on any account. Millions of credit profiles from borrowers across the country were used to compile these scoring models. Credit scores removed a number of risk determination factors from the underwriting process, which may have led to the disastrous default situation we are facing today. On top of that, these scores are becoming out of date because they were not designed for a depreciating market. It may be time to abandon the credit score and return to a more detailed risk-analysis system - and at the least, safer loan programs.  

Before credit-scoring, trained underwriters examined borrowers' credit profiles objectively to determine borrowers' financial strength and their ability to pay back mortgage debt. Underwriters established this by verifying borrowers' assets, savings patterns, credit depth and increasing credit limits, as well as determining the probability of mortgage payment "shock."

If borrowers didn't have ever increasing credit limits, which show a proven track record to pay back larger and larger debts, they were less likely to gain approval for maximum-financing loans. Today, borrowers with three credit cards with a minimum of six months of activity and credit limits between $500 and $1,000 can have a credit score in the mid-700s. This allows borrowers to qualify for large loans without that track record of increasing credit limits.

Another previous practice was that borrowers with questionable savings patterns were considered higher risk and less likely to receive maximum financing. The philosophy was that these patterns often signaled that these borrowers were not prepared for the addition of mortgage payments. With today's models, underwriters look at debt-to-income ratios, but they typically look at gross income instead of net income. Therefore, they may not include the spending habits that could make that disposable income nonexistent - something underwriters could determine from analyzing borrowers' savings patterns.  

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