Electronic mortgage underwriting comes with pitfalls for buyers, lenders


November 27, 1994|By Kenneth R. Harney

Washington -- Some of the nation's most experienced mortgage credit specialists have a blunt warning for home mortgage applicants: The headlong rush by the mortgage industry to switch to electronic underwriting has potentially dangerous side effects for consumers and financial institutions alike.

That's because the major electronic systems rely heavily on "quickie" on-line credit checks that specialists say often contain erroneous, incomplete or outdated information. When no

examinations of credit data are made by real, live human beings, they argue, three serious problems may result:

* Applicants who should have been approved for a loan get turned down because of bad information in their credit files. Correcting the file can take weeks -- leaving the applicant in limbo, subject to rate increases or the loss of a fleeting home purchase opportunity.

* Applicants who should have been rejected sail through unchallenged because the quickie credit check failed to include key pieces of information only a manual investigation would turn up: Bad debts with local merchants who don't report to national credit databases; court judgments for nonpayment of debts; fraudulent information about employment, length of residence or assets that can be spotted only by traditional, person-to-person checkups and interviews.

* Lenders and investors then get stuck needlessly with ticking credit time bombs: Loans in their portfolios that shouldn't be are destined to slide into foreclosure. This, in turn, could trigger financial losses to shareholders, investors and even the tax-paying public.

The credit accuracy problem is particularly heightened now, according to credit industry experts, because lenders nationwide are beating the bushes for new applicants to replace the loan volume they had during the 1992-1993 refinancing boom.

Compounding that is the nationwide push -- initiated by the Clinton administration -- for mortgage companies to rapidly expand the number of loans they make to lower- and moderate-income and first-time buyers.

The biggest private sources of low-down payment mortgage money, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), both have revised their traditional underwriting guidelines to enable larger numbers of such consumers to qualify for home loans.

One prominent Midwestern credit bureau executive, Don Miller, president of Indianapolis-based Mortgage Credit Services, says market forces this fall have produced "the worst-looking credit applicants that I have seen in 35 years in this business."

By that, Miller says, "I mean the entire credit reporting industry is seeing more people with credit problems applying for loans." Lenders scrambling for new business are reaching out to consumers "who would have been rejected out of hand during the refinancing boom," according to Miller.

This is "the worst conceivable time," Miller says, for lenders to be switching wholesale to electronic credit checks that tap into the three national credit repositories -- TRW, Equifax and TransUnion -- and merge their raw data files by computer software into a single report.

The problem, Miller says, is that a lot of important local information on consumer credit behavior never makes it into the big databases. Local merchants or public agencies either don't supply it or it arrives with inaccuracies from the local department stores, banks, and other businesses who do supply it.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St., N.W., Washington, D.C. 20071. 243-6007.

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