Few factors affect the mortgage lending process as much as a borrower's credit score.

Mortgage bankers and their Wall Street counterparts have long relied on the FICO score to judge the ‘credit worthiness’ of the borrower.  When determining pricing on the sale or purchase of millions of dollars of mortgage loans, quantitative analysts known as tape crackers use the individual credit scores as one of the primary data points considered in their pricing models.

For individual borrowers, their credit score at the time of loan application has a major influence over the amount of interest they pay or the next 30 years, not to mention the amount of cash required to close and whether or not they even qualify for the loan. Because of this, credit profiles and their impact on risk-based loan pricing to borrowers may be the most important part of the loan approval process.  

The explanation behind the construction of FICO scores is a not simple concept for borrowers to grasp either. 

The loan agent must deconstruct available balances and compare to credit limits, they must call attention to the timing and size of payments made since then while not forgetting to include some comments on the number of inquiries and the time since their first trade-line was opened. Sounds like a recipe for confusion. This is not an easy task, in fact, the mythical FICO score formula still evades even the most seasoned professionals and often times leaves borrowers baffled.

During the lending boom that took place in the mid to late-2000s,  lenders deemed middle FICO scores at or above 680 the imaginary cut off for a borrower to be considered as having a strong ability and willingness to repay debts.  As such, borrowers with 680+ middle FICO scores earned the right to be quoted a lower interest rate.   Mortgage loans were mass-produced under this national standard.  What many outside of the underwriting department’s walls were unaware of was the disparity on what the magic formula entails.  For example, each of the three bureaus collect data from a multitude of sources, yet we still see three variations in credit scores even though each provider is given ‘equal access’ to consumer data. Thus when assessing the credit worthiness of a borrower or establishing a long term price for estimated payment performance,  reliance on credit scores alone can be not only confusing but deceiving.

Today, banks and lenders are making credit decisions that adversely impact credit worthy borrower by decreasing available credit, closing accounts and raising rates on borrowers who have no derogatory history but fall within certain formulaic risk factors established to protect the banks from potential losses.  The end result of this knee-jerk reaction to the mortgage crisis is a growing population of prime borrowers whose credit scores have fallen due to no cause of their own.

Persistent debate continues to surround loan sale decisioning methodologies heavily weighted on borrower credit scores.  The crux of this issue is substantiating the borrower's bottom line when all credit scoring is not created equally. So the question begs to be asked:  Should the credit bureaus be held accountable for their role in the mortgage crisis where FICO scores were the predominate factor in loan purchase approval? Do we rely too heavily on the FICO model? Do we need to change the way we judge mortgage credit worthiness?