New Policy Overlooks Credit Blemishes
Hundreds of thousands of home buyers and refinancers with imperfect credit could be the beneficiaries of forthcoming policy changes by the country’s second-largest source of mortgage money.
Mega-investor Freddie Mac, a congressionally chartered private company that buys billions’ worth of home loans per month, plans to extend its lowest mortgage interest rate pricing to a wider spectrum of people who have blemishes on their credit histories.
The net effect of the change will be to make lower interest rates and fees available to about 250,000 additional loan applicants annually over the next four years. The savings for qualified buyers should run into the thousands of dollars per mortgage.
Freddie Mac officials confirmed last week that the company will revise its Loan Prospector electronic underwriting system before the end of November to accept at standard interest rate pricing large numbers of additional applications that currently would be treated as marginal and charged higher rates and fees.
Freddie Mac’s electronic underwriting system allows lenders nationwide to submit borrowers’ applications for advance screening online, and get almost instantaneous decisions. An “accept” or “accept-plus” decision tells a loan officer that Freddie Mac will purchase the closed mortgage at its best, currently posted rates and terms.
A “caution” decision, on the other hand, tells the lender that Freddie sees the borrower as higher-risk--requiring a higher interest rate or extra fees on the loan--or a resubmission after the borrower’s credit profile has been improved.
The rate and fee differentials between “accepts” and “cautions” run from a quarter-percent to more than 1 percentage point.
In a 7% market, for example, an application that gets an “accept” might get a 7% rate, but a “caution” could get an 8% effective rate including fees.
The Loan Prospector system currently “accepts” about 75% of the loans it evaluates. Under the forthcoming revisions, that figure will jump to 80%. The extra 5%--roughly 1 million additional applicants over four years--will be qualified for the standard rates.
Patricia McClung, Freddie Mac’s vice president in charge of the Loan Prospector system, said that the new, more liberal pricing is the product of technological “enhancements” in the company’s ability to distinguish moderate-risk borrowers from higher-risk borrowers. The Loan Prospector system incorporates credit, appraisal and other underwriting criteria to determine whether an application is acceptable for purchase. Though most of the loans Freddie Mac buys are high-credit quality “conforming” mortgages less than $275,000, it does purchase certain loans with blemished credit, high debt ratios and tiny down payments.
All three of those characteristics increase the statistical likelihood of borrower default, and when combined require extra-careful scrutiny and possibly higher rates and fees. Loans with down payments under 20% all require private mortgage insurance--paid for by the borrower--to qualify for funding by Freddie Mac.
Loans with credit file “dents and nicks”--two or three late payments on credit cards, auto loans or other debts--also generally require higher rates or fees. But under its revised program, Freddie Mac is essentially saying: Look, even in a recession, we know that many borrowers who look risky actually will turn out to pay their loans on time every month. Sure, they may have had temporary difficulties and a missed a payment or two, and they may be strapped with a lot of personal debt. But that’s not all that unusual these days, and we know from our own research that many of these folks are going to be rock-solid, dependable customers.
“We feel we now know which ‘dents’ and ‘dings’ really matter,” said a Freddie Mac official, “and how to weight them” in forecasting future risks of nonpayment. The company’s new approach is part of a series of steps since the late 1990s to widen the “accept” entryway and reduce costs for marginal borrowers. The higher the rate of “accepts” through its online underwriting system, the smaller the number of home buyers who are forced to deal with “sub-prime” or nonconforming mortgage money sources. The latest changes are expected to be especially important for first-time and modest-income applicants who may have below-average credit scores and high household debt ratios. A Freddie Mac official said that the estimated million additional “accepts” projected over the next four years may not all translate into actual loans purchased by the corporation.
The upshot of all this for you? First and foremost, if you fit the profile, be aware of this potential opportunity to save money on mortgage rates and fees. Don’t be shy about it with lenders, either. Ask whether they use Loan Prospector and whether they think you might be precisely the sort of borrower the latest changes might help most.
And then go for it.
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Distributed by Washington Post Writers Group.
