Scoring Gains Ground While the Web Waits (1997)

With the recent conclusion of our series covering modern mortgage-banking technology, some readers will be wondering, What happens next? Even as the series progressed technological initiatives kept moving forward in the business. following updates and new ideas are based on events and announcements made during the Mortgage Bankers Association's Annual Convention near yearend 1996. Citicorp scores sooner Citicorp Mortgage would like to approve 100% of the applications that enter its shop. Stamford, Conn.-based lender isn't anywhere near such total approval yet, but Michael Shaw, its director of risk management, predicted that a combination of credit scoring at multiple stages with an adaptable secondary-marketing effort could bring the company to that goal. idea, as Shaw explained, is to score loans at the front end of the mortgage process -- right at the point of sale -- so they can be directed immediately towards the best possible execution among the investors Citi works with, be they traditional purchasers such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., specialized buyers of credit such as those who buy inferior credits, or even Citi's own portfolio. latter, Shaw noted, helps meet the company's Community Reinvestment Act duties by purchasing loans that can be made but which don't meet outside investors, parameters. Citicorp Mortgage began using credit scoring in 1993. company devised its own system, basing its initial setup on a sampling of 16,000 mortgage loans of varying types. As apposed to other systems which evaluate credit only at the front end, Citi's is used not only at the origination stage but throughout the life of a mortgage. At the origination stage, credit scoring is based on three sets of factors: application characteristics, findings in credit reports; and the details of the particular deal. latter includes information regarding the property and any special aspects of the loan that make it different from the run-of-the-mill mortgage. combined evaluation is intended to predict behavior from origination to three to four years of performance, according to Shaw. Loans are categorized as low risk, average risk, and high risk. Shaw said most loans scored by Citi's proprietary system are performing as forecast. Part of the intent of the application-scoring effort is to improve productivity of human processors, said Shaw. The scores help focus underwriters, attention where they need to focus, he explained, so they don't have to spend time with the easy loans. As would be expected, riskier loans are flagged for human evaluation, as are loans that earn only average scores. However, outliers on the low-risk side may also be flagged because of characteristics of the proposal. An affluent customer who represents an excellent credit risk may be requesting loan terms that exceed typical standards, but directing underwriter attention to them enables Citi to pick up applications that represent excellent loans after some tweaking. Loans that the upfront credit scoring indicates are subject to higher risk of going delinquent are labelled as such when passed on to the mortgage bank's servicing side, said Shaw. He said this has helped reduce losses somewhat as servicers' attention is directed to those loans where a single delinquency may mean trouble. They can work such loans more quickly, he said. Of course, borrower circumstances are subject to change. To counteract this type of risk, Citicorp Mortgage also subjects existing loans to credit scoring based on borrower behavior subsequent to closing. Two horizons are used@ one-month out and a long-term score that evaluates the loan's potential performance from six months to two years out. Within the long-term scoring there are tests which aim to predict which loans will move from 90-days delinquent to foreclosure without intervention and which aim to flag current loans in danger of going delinquent within two years from the date of evaluation. …