Freddie Mac announced it is releasing a list of the factors used by Loan Prospector®, Freddie Mac’s state-of-the-art automated underwriting service, to analyze mortgages for sale to Freddie Mac, and is calling for mortgage applicants to receive the credit scores used in the loan decision.

“Freddie Mac is committed to working with our lenders to help more borrowers understand the mortgage process and improve their ability to qualify for an affordable mortgage,” explained David Andrukonis, Freddie Mac’s Chief Credit Officer. “Giving consumers the Loan Prospector factors used in a loan decision will enhance the clarity of the lending process and further demonstrate the reliability and objectivity of Freddie Mac’s automated underwriting service.”

Freddie Mac is also calling on Fair, Isaac and Co. and the nation’s credit reporting industry to take whatever steps are necessary to ensure that borrowers can receive and interpret the FICO credit scores used in the mortgage decision. Freddie Mac began meeting with Fair, Isaac earlier this year to help it find ways to make its credit scores readily accessible and more understandable to consumers. Based in San Rafael, CA, Fair, Isaac is the nation’s largest provider of credit scores.

Today’s announcement is part of Freddie Mac’s long-term commitment to work with the lending industry and consumer groups to enhance homeownership opportunities by educating consumers about mortgages and sound credit.

Introduced in 1995, Loan Prospector and Loan Prospector on the Internet are used daily by thousands of lenders and brokers to make the mortgage underwriting process faster and more objective. Loan Prospector’s statistical model is based on traditional underwriting criteria involving factors such as the collateral (property), plus the borrower’s credit experience and capacity to repay the loan. Under Freddie Mac guidelines, lenders should not reject mortgage applications solely on the basis of a Loan Prospector classification or a credit score, like the FICO score. Factors in use by Freddie Mac in Loan Prospector are:

Collateral

• Borrower’s total equity or downpayment
• Property type: 1-unit house, 2-unit or duplex house, etc.
• Property use: investment property or owner-occupied home

Credit

• Credit bureau score
• Foreclosures and bankruptcies
• Liens or judgments
• Credit delinquencies, collections or charge-offs
• Credit accounts: type, age, limits, usage and status of credit cards, store charge cards, etc.
• Borrower applications for new credit in last 12 months

Capacity

• Debt ratios: total monthly payments-to-income and housing payment-to-income ratios
• Salaried vs. Self-employed borrower
• Cash reserves

Loan

• Loan type (e.g., 30-year fixed-rate, 1-year adjustable-rate mortgage with 30-year term, etc.)
• Loan purpose (purchase, rate and term refinance, cash-out refinance)

While all of these factors help predict a borrower’s likelihood to repay a mortgage loan, the three most important individual factors are the borrower’s total equity, loan type and credit bureau scores.

Freddie Mac also called on Fair, Isaac and the credit reporting industry to ensure borrowers can receive and interpret their FICO credit score. Contract agreements between lenders, credit repositories, and Fair, Isaac reportedly may inhibit credit score disclosures to consumers.

“We think that Fair, Isaac and the credit reporting industry have an opportunity and obligation to work together so that FICO scores are as clear and as understandable as possible to the borrowing public,” said Andrukonis. “Such disclosures will help consumers better understand how to prepare themselves financially for homeownership.”

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders. By supplying lenders with the money to make mortgages and packaging the mortgages into marketable securities, Freddie Mac sustains a stable mortgage credit system and reduces the mortgage rates paid by homebuyers. Over the years, the corporation has helped finance one in six American homes.