Beacon shines a light on mortgage risks

Posted by Chicago Tribune

There’s about to be a new number in the numbers game that determines if you’re going to get that home loan.

FICO, the company behind the credit scores that have taken center stage in the credit and housing crisis, has developed a new scoring model that it says better predicts whether or not consumers are going to stay current on their mortgages.

In April, Equifax will be the first credit reporting agency to offer the new Beacon Mortgage Score to mortgage lenders. Initially it will be used to determine loan modifications, either in tandem with the traditional credit score or by itself. Equifax thinks the scoring model ultimately will replace the basic one for home purchases and refinancings because in early testing it was able to identify about 25 percent more high-risk mortgages and home-equity loans.

When the score is in widespread use nationally, homeowners will be able to get a copy of their score as well.

FICO doesn’t share the nitty gritty of how its scoring models work. However, Careen Foster, FICO’s senior manager of global scoring, said the score takes the baseline FICO score and then adds onto it by taking into account the number of mortgages and home equity loans a consumer might have and the payment performance just on those loans. What’s not factored in is the type of properties and their locations. Scores fall in the same 300-850 range as the traditional FICO score.

“Most consumers are going to see a bump in score,” Foster said. “If you have a clean credit score, you’re going to see a bump. If you have a blemished credit score, you could see your score go up or down. If you have isolated situations of delinquency but your mortgage and home equity line are clean, you’re more likely to see a slight bump. If you have a severe challenge, you may see your score go down.”

For the past year, FICO has taken heat from critics who said its credit-scoring methods were meaningless because they didn’t successfully predict consumers at risk of defaulting on their mortgages. The new Beacon product seems to address those concerns but here’s the rub, according to Foster. Almost a decade ago, FICO came out with a mortgage-only score but there wasn’t much interest in it.

Now, apparently, the tide has turned.

“Early indications are [lenders] are champing at the bit to get their hands on this score,” said Tom Madison, Equifax’s senior vice president of mortgage services. “We have had a lot of interest from some of the largest lenders that want to pilot it.”

Equifax has exclusive rights to the scoring model for an undisclosed period, after which it will be offered to other credit reporting agencies. However, a spokesman for Chicago-based TransUnion said it had no interest in the product.

Housing rescue update: The federal government last week went live with its makinghomeaffordable.gov Web site, which is tied to the Obama administration’s efforts of the same name. It’s a more direct route to homeowner assistance than the financialstability.gov site unveiled earlier this month, and may help swamped housing counselors because it puts more tools right at the consumer’s fingertips.

Beyond a rather simplistic yes/no test to see if homeowners might qualify for a loan modification or refinancing, it spells out all the documents needed to prove you need help. It also has an incredibly user-friendly and quick way to find out whether your mortgage is owned by Fannie Mae or Freddie Mac, another requirement for participating in the program. Beforehand, finding this out required picking up the phone and dealing with your mortgage servicer.

The site also has a calculator so you can estimate your current mortgage debt-to-income ratio and what your payments might be if the loan was modified down to the program’s 31 percent ratio.

One critical piece of information, however, is still missing from this easy-to-use site: a list of loan servicers and investors that are participating in the Making Home Affordable program. That data, according to the site, should be available in the near future.

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