Magazine article American Banker

Technology Key in Revising Credit Standards

Magazine article American Banker

Technology Key in Revising Credit Standards

Article excerpt

The rapid rise of B and C home loans is more than just a flash in the pan. It involves a broad redefinition of credit standards that is sure to have a lasting impact on the mortgage business.

Technology appears to be a major driving force behind the rapid rise of subprime lending. Elaborate computer models and large data bases of lending experience have fostered wider use of credit scoring, making subprime lending easier and safer for both lenders and investors.

So lenders, squeezed by thin profits on conventional loans, have been far more willing - many have been downright eager - to venture into this still-lucrative field. And the availability of underwriting technology has encouraged them.

Credit-rating agencies also have embraced credit-scoring technology to rate securities backed by B and C mortgages, bolstering investor confidence and stimulating market enthusiasm.

The impact of these developments has been far-reaching. Freddie Mac, for example, discovered in performing the underwriting on loans submitted as subprime (which it can't buy), that about a third of them qualified as prime loans (which it can buy). By contrast, relatively few loans sent in by lenders as B and C became rejects under Freddie's underwriting scheme.

One reason for the higher quality found by Freddie is that scoring models don't use single factors to disqualify borrowers from prime status, as the manual, rule-based systems do. Instead, they examine offsetting factors, singly and in combination.

Further, Standard & Poor's has come up with seven rating categories for bonds backed by credit-scored loans. …

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