While credit scoring is not the black hole some consumer groups make it out to be, scoring and the companies which compute the scores could stand some fine tuning, according to a California mortgage broker who has spent the last three years dissecting statistical modeling.

Credit scoring is not perfect, says Ginny Ferguson of Heritage Valley Mortgage in Pleasonton. But it s not a magic block box, either. In fact, it s not that different from logical underwriting without the personal baggage that humans tend to bring to the table.

Ferguson, who testified recently at a hearing on credit scoring held by the Federal Trade Commission in Washington, believes that in most cases, statistical modeling is a better system than any that has gone before it. Yet, she says federal regulators hear only the horror stories about scoring and nothing about the thousands of loans the system pops out without a problem.

A few individuals may be forced into more expensive loans or denied mortgages outright because of credit scoring, she admits. But dozens more people qualify who might not have otherwise made the grade before scoring came into vogue.

Still, there are some shortcomings that Ferguson, an 18-year mortgage industry veteran who co-chaired the National Association of Mortgage Brokers credit scoring task force, and many others would like to see addressed. Mortgage brokers now originate more than six out of ten home loans.

One is the fact that some tradelines don t report regularly to the three credit repositories. Another is that the three bureaus use either numerical or alphabetical codes to explain why a borrower s score wasn t as high as it might be. But one thing Ferguson wouldn't change is not giving loan applicants their scores.

Opponents of credit scoring question why applicants are not told their scores, suggesting that something sinister is afoot. But Ferguson says consumers aren t notified of their score simply because they can t do anything with it.

It s the loan originator s job, not the credit bureau s, to tell their clients their scores and explain exactly what the number means, she maintains. It s our duty to tell our borrowers where they stand and why, and to explain to them why they might not have access to the best products and what they can do to improve their profiles.

But because a credit score is a snapshot of a would-be borrower s credit standing at a isolated point in time, the mortgage professional believes that information in the file must be as current as possible. If it s not, she explains, the score might come in lower than it should. And if the number is too low, it could take anywhere from 90 days to a year to move back up to where it belongs.

Yet some tradelines don t report to their credit bureaus more than once every few months, she says, noting that NAMB has asked the credit bureaus to put pressure on their clients to file their reports on a more consistent, month-by-month basis.

And although the repositories each report four different reason codes, each listed in the order of importance, to show which areas of the consumer s credit didn t score well, Ferguson would prefer more a detailed explanation. We need reasons, not codes, she complains.

Until these and other improvements are made, the mortgage broker advised her colleagues to be ever vigil when analyzing their clients credit reports and scores, and to be extremely careful in counseling them on how to boost their chances of qualifying for a mortgage.

For one thing, she points out, don t suggest that borrowers close or consolidate accounts without first reviewing their entire credit picture. To do otherwise might be sentencing a consumer to a lower score that can t be fixed right away, she explains.

If a consumer needs to reduce the amount of credit extended to him, she adds, it s better to have several cards with low balances than one or two that are near their limits. Consequently, closing accounts with zero balances or transferring several balances to a single account could have a negative impact.

Loan agents also should be wary of misdated account closures. Often, Ferguson explains, when companies are notified that they have failed to close accounts as previously requested, they close the file on the date of the second request instead of the original one. And that could be taken as a sign of trouble.

The more recent the occurrence, she says, the greater effect it will have on a score. But the older and more isolated the occurrence, the less the risk.

Ferguson also reports that under Fannie Mae and Freddie Mac guidelines, if it can be proven that a borrower s credit file contains an error, the score can be ignored and the mortgage can be underwritten manually.

Published: August 30, 1999

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.