The Recovery Strategy: A Business Method for Mortgage Brokers

August 23, 2008

In November of 2007 new software – which costs nothing – was introduced to mortgage originators nationwide. I’m referring to the latest version of our Funding Suite credit management platform.
While I try to avoid mentioning our products specifically, I’m forced to in this case because without Funding Suite – and its advanced credit proofreading tools – The Recovery Strategy for mortgage originators would not even be possible.

In this post I’ll describe what the Recovery Strategy is, and why it can dramatically improve any mortgage originators’ business. In my next post, I’ll explain how you can easily implement a Recovery Strategy in your business.

Recovery is the concept of using software to “recover” initially declined applicants. Using a Recovery Strategy will qualify (recover) 15% – 20% of your initially declined applicants immediately – and the remaining applicants sometime within the next 12 months. Further, you will be able to do this without any additional cost or resources – and with very little extra work.

Phase One Recovery: Saving 15% – 20% of your initially declined applicants.
Upon the initial credit review, the loan is usually lost either because the applicant’s scores are simply too low. These low scores may disqualify the applicant altogether, or they may indicate a rate and/or terms unacceptable to the prospective borrower. Either way, you’re forced to disengage from the applicant.

An originator using the Recovery Strategy realizes that 15% to 20% of mortgage scores are actually calculated incorrectly due to credit data errors or credit usage errors. By using credit proofreading software, applicants in this category are instantly identified and then moved to a processor trained to resolve these issues immediately, which provides a new qualifying credit score within 24 to 72 hours.

It’s important to remember that these recovered applicants never left the qualifying pipeline – they were simply moved to Phase One Recovery. Through the process the applicants are positively impacted by a level of professionalism and qualifying expertise in the originator’s business that will generate additional word of mouth business. This is a very pleasant side effect of using a Recovery strategy.

Phase Two Recovery: Saving the remaining 80% of initially declined applicants.
After investing time and money to attract an applicant to your office the last thing you want to do is to disengage from any applicant – even those which can not be immediately recovered. Now you don’t have to. For the first time, software makes it possible to nurture these applicants to qualifying status over the next twelve moths without any effort on the part of the originator. Even better, this turn-key, software driven “mortgage qualifying” service can be sold to your applicants, generating a profit up front.

Instead of sending your declined applicants away, instead enroll them your own private, secured program that will educate them about mortgage qualifying and even give them a step by step plan toward better credit health. Without any effort by the originator, the client receives twelve months of ongoing education, coaching and guidance to help them achieve qualifying status. The moment they do, the system notifies the originator so that the loan process can begin.

How much additional income would you receive by qualifying an immediate 20% of your initially declined applicants? How pleased would your remaining declines be to discover you can offer them a personal credit health program to help them qualify within the next 12 months?

The Recovery Strategy is made possible only because new software has been invented to deliver it. Its free and available for originators right now. Its very easy to actually implement an effective Recovery Strategy in your mortgage business.

2 Comments | credit proofreading, credit reports, mortgage broker | Tagged: , , , , | Permalink
Posted by Caped Crusader

The Ticking Time Bomb in Mortgage Portfolios

August 9, 2008

While it’s newsworthy to note that mortgage foreclosures are hitting all time record numbers – the fact itself is nothing new. What is new is that additional foreclosures, above and beyond what banks are predicting, will likely exasperate the situation. The reason is that every mortgage loan portfolio contains an as yet undetected ticking time bomb, a risk factor so significant that two percent of loans could have additional foreclosure risk. Ironically, this risk was never even considered when deciding to fund the mortgage loan in the first place.

The risk I’m referring to is the so called Authorized User account, a ridiculous legacy based credit reporting methodology that allows a borrower’s credit score to be calculated using someone else’s payment history. Saying it another way, a bank grants a mortgage to a borrower whose credit report contains the tradelines and payment records of other people. While this would seem incredulous, its common mortgage lending practice.

Authorized user accounts occur when a credit card account holder asks for a credit card to give to someone else. This practice makes sense as its quite common for one to give their spouse or child a card. But what doesn’t make sense is the way in which these new cards (called “authorized user” accounts) are reported by the credit bureaus.

To illustrate this lunacy further, let me share an actual example.  I’ve had an American Express card since 1990, I charge a good amount on it every month and have always paid on time. My credit report reflects this account, which seasoning and payment record boost my credit score. Years after I opened this account I got married and requested an American Express card for my wife. Although she has no income and does not pay for this credit account, her credit file now contains a tradeline that reflects a credit card opened since 1990 with excellent payment history; basically an exact copy of my credit history with American Express shows up on her credit report. And her credit score gets the same exact boost as mine does – even though she is not the one responsible for this card.

Maybe your initial response is that it doesn’t matter because she is my wife, or that it’s not a big deal because if we apply for a mortgage loan we’re looked at as a couple. Well, you’re not alone in your thinking because when I’ve discussed this with banks they express the same idea. But the logic is fatally flawed and these authorized user accounts create a very big problem. Allow me one more example – this one fictitious, yet illustrative nonetheless.

Let’s assume my wife and I are applying jointly for a mortgage loan. Let’s also assume my wife is the authorized user on several of my accounts, each with a good payment history. However, in this example let’s also assume I have some derogatory accounts, maybe even a bankruptcy. Now the bank, knowing we are applying jointly, decide to approve the mortgage based my wife’s good credit. (This too is common mortgage lending practice). However, what has the bank actually done? Since my wife’s credit is based on authorized user accounts she actually has no real credit of her own – but what she does have is a “subset” of my credit – just the good stuff. What really happened is the bank gave a go decision based entirely on my few good tradelines, while completely disregarding all the derogatory history. It’s unlikely the bank would have made this loan if they understood how the authorized user accounts were masking true credit risk.

Cogent Road has spent the past year researching this phenomenon – and I’ll share some rather alarming data points.

  1. More than 3 out of 10 people  have authorized user accounts in the credit files
  2. 2 out of 100 people have a credit score raised by more than 10% because of someone else’s credit. This means that someone whose actual credit history should reflect a 648 credit score, would instead produce a 720 score for lenders.
  3. Most shocking of all: 1 out of 200 people actually would have no score if you discard the authorized user accounts. In these cases banks are approving mortgage loans for people with absolutely no credit history at all.

Today’s mortgage portfolios must be screened to asses which loans were approved based on credit scores elevated by authorized user accounts. These loans should then be routed to a call center that can regularly monitor the borrower’s ability to pay during this foreclosure crisis. More importantly, every new loan should be screened to detect how much influence authorized user accounts have on the credit score. Depending on the results, some applications (regardless of a high credit score) should be declined altogether – while others would be sidelined for review prior to approval.

The good news is that new technologies can help banks do this immediately.

4 Comments | credit reports, mortgage | Tagged: , , , , | Permalink
Posted by Caped Crusader