The other day, a mortgage broker named Deb Killian called me, more or less out of the blue. Ms. Killian has been in the business since 1994. She and her husband run Charter Oak Lending Group, a small firm based in Danbury, Conn., that they founded in 1996. She is a member of the board of the National Association of Mortgage Brokers. By her estimate, she has closed more than 3,500 loans during her career.

Ms. Killian was calling because she was upset about one element of the mortgage underwriting process that, in her opinion, had gotten completely out of hand. That element was the borrower’s FICO score — in other words, his or her credit score.

Essentially, she says, a person’s credit score has become the only thing that matters anymore to the banks and other institutions that underwrite mortgages. Yes, the banks all mouth pieties about how credit scores are just one of many factors that go into their underwriting decisions. But every day she receives notices from banks and other lenders showing just the opposite: as they fiddle with the terms for one or another of their loan products (something they do constantly, by the way), invariably, the credit score is the dominant — and sometimes the only — criterion mentioned. Most of the time, needless to say, the minimum credit score needed to get the mortgages has been increased.

To make matters worse, she says, clients are having a difficult time just maintaining their current credit scores — even when they have done nothing to merit a downgrade.

“This is the example that drove me over the edge,” she said.

A woman seeking a mortgage had a credit card with a $3,000 limit. She had $1,500 worth of debt on the card, which meant, in industry jargon, that she had a 50 percent debt utilization. The client had moved the balance to a different bank, and that bank immediately lowered her credit limit to the amount she had borrowed: $1,500. Without taking on an additional penny of debt, the woman’s debt utilization had suddenly jumped to 100 percent.

Which, as Ms. Killian knew only too well, the FICO algorithm frowns on. Once that information made its way to the credit bureaus, the woman’s credit score dropped. And because it had, the interest rate on the mortgage she hoped to get increased. Ms. Killian had a hundred stories like that.

Yes, she told me, she knew that underwriting standards had been way too lax during the bubble. But to her mind, the mortgage lenders had swung too far in the other direction, depriving perfectly creditworthy borrowers of the chance to get a mortgage at a reasonable rate. “If the loan criteria says you need to have a 700 credit score, and you have a 699, you don’t get the loan,” she said. “It makes me nuts.”

Was I interested, she asked me finally, in writing a column about this problem?

I most certainly was.

“Mortgage brokers,” said Craig Watts, the head of communications at FICO, with a tone of bemused exasperation. “Some of them are kind of cranky these days.”

The mortgage brokers, he went on to say, were seeing things only from their own narrow perspective — the perspective of someone who wouldn’t get a commission if their clients couldn’t get a mortgage. Thankfully, from his spot high on the mountaintop in FICO-land, Mr. Watts could give me a broader, more sophisticated take on the topic. Thank goodness for that.

A FICO score, he patiently explained, is merely a tool that lenders use to help manage their risk; criticizing it is akin to criticizing “a saw because the construction job turned out badly.” With big banks making thousands of credit decisions every day, they couldn’t possible do it without some standardized benchmark; a credit score provided that benchmark. Over the years, he added, the algorithm had gotten very good at predicting the odds of a borrower defaulting.

In fact, FICO scores are not the best predictor. The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores, according to Dave Zitting, the chief executive of Primary Residential Mortgage, a leading mortgage lender. And yet, he said, “The credit score has become the line in the sand for the banks.”

Article Source:
http://www.nytimes.com/2010/07/24/business/24nocera.html?_r=1&pagewanted=1&ref=business