Breakthroughs hold promise for first-time homebuyers

Nation's Housing

October 26, 2003|By KENNETH HARNEY

TWO OF THE largest behind-the-scenes players in the American home mortgage market are working on important breakthroughs for modest-income, first-time home buyers: new electronic credit assessment tools for applicants with "nontraditional" credit histories and discount-priced, single-fee settlement packages.

Fair, Isaac & Co. - the originator of the FICO score, the dominant credit-evaluation measure used in the mortgage market - confirmed this month that it is developing "alternative" online scoring mechanisms for loan applicants who have minimal banking, credit card or loan histories.

The main purpose of the new scoring tools will be to open the door to home purchases by recent immigrants and others who currently score poorly - or can't be scored at all - because they have little or no repayment information in their credit reports.

Current FICO scoring models focus heavily on national credit bureau data - credit cards, mortgages, auto loans, student loans and revolving charge accounts. Yet millions of consumers make relatively scant use of traditional credit products. They have cultural aversions to banks and prefer to borrow from relatives or community resources. Or their credit relationships - monthly rent payments, utility payments, telephone bills, rent-to-own purchases and the like - are not reported to the bureaus.

Still others may be victims of non-reporting by their major creditors such as student loan finance company Sallie Mae.

With little or no repayment data in their credit files, such consumers frequently end up with artificially depressed FICO scores and are charged higher interest rates and fees or are rejected when they apply for loans.

Though Fair, Isaac spokesman Craig Watts declined to identify specific sources of alternative credit information, he confirmed that the company wants "to be helpful" to lenders in better evaluating loan applicants whose nontraditional credit patterns may unfairly penalize them.

Banks and mortgage companies that seek to expand home loan activity within fast-growing minority and immigrant communities are likely to be heavy users of the alternative FICO credit tools.

Fair, Isaac won't be alone in the nontraditional credit assessment marketplace. First American Corp., a real estate information, title insurance, appraisal and credit data conglomerate, announced this month that it, too, plans to provide mortgage lenders with new credit evaluation products aimed at modest-income Latino, black, Asian-American and other homebuyers.

The credit-assessment tools "won't be scores as such," First American Vice President Landon Taylor said in an interview, "but they will enable the lender to evaluate" applicants with scant or nontraditional credit patterns electronically, within seconds.

The information to support the online evaluations will be pulled mainly from proprietary national databases controlled by First American subsidiaries, a tenant-screening and rental performance database, a sub-prime and finance company lending database and others that tap into utility payment files, the rent-to-own marketplace and public records.

Lenders offering alternative credit assessments also will get access to new fixed-fee, discount-priced loan closing packages consisting of appraisal, flood certification, title search and insurance, home warranty policies, credit and settlement services from First American subsidiaries.

Taylor said the packaging concept will cut costs to homebuyers by about 25 percent. It will be introduced first in California early next year and then nationwide.

An eligible first-time buyer might apply to a participating lender and get a quote for a 6 percent 30-year fixed interest rate plus a fixed-fee, discounted package of services costing a flat $2,400.

"There would be no 11th-hour surprises on settlement costs for these homebuyers," said Taylor. "There'd be no situations where the good-faith estimates said $2,000 but the settlement sheet said $3,500.

"A lot of these families have no money to come up with an extra $1,500 anyway," he said. With fixed-price packaging, they'd be paying 25 percent less than the standard price for the services on a retail basis and would never be asked for more than the upfront package quote, he said.

First American's package of guaranteed, single-fee services resembles one proposed by U.S. Housing and Urban Development Secretary Mel Martinez as a solution to settlement-cost uncertainties and abuses. Martinez's final plan is expected to be announced this year and could be available from lenders and others in the national marketplace by late next year.

For would-be homebuyers with credit-score problems, though, help is on the way. If you are a good credit risk but lack the traditional banking relationships to prove it, the new alternatives to credit-score assessments could open the door to your first mortgage.

And you just might get a cut-rate settlement cost package along with that loan to boot.

Ken Harney's e-mail address is

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