Tuesday, January 02, 2007

Trend: Credit back in focus

Borrower credit has always been important to the mortgage lender, originally as an indicator of the borrower's capacity to repay the loan and more recently as a hurdle to overcome in the underwriting process. Today, if lenders think about credit at all it's when a loan falls out of the automated underwriting system and needs to be "reworked" to make the deal. But that's likely to change this year.

The first reason you're going to be hearing more about credit this year is because more deals are going to go bad. While the numbers are still coming in and the experts will argue about what they mean for a while, delinquencies will rise in 2007 and 2006 will likely be the most popular vintage of seriously delinquent paper.

The second reason you're going to be hearing more about credit is because credit information providers are getting tired of being ignored. We're already hearing about new products (see Scott Kersnar's article in the most recent National Mortgage News Daily Briefing Weekend Edition) and price hikes (see Ken Harney's column in last month's Washington Post.com column).

Finally, this year we're going to see a lot of ARM loans adjust. When that happens, borrowers who spent the money they were saving on their mortgage payment (and more) will come back to the table. Their collateral will be the same, but their credit situations are likely to be much different. They're also likely to be angry, whether they have any right to be or not.

I expect that lenders will be spending a lot of time pouring over borrower credit reports in an effort to help them get into loans. This could be a very good year for those firms that provide tools to help brokers and loan officers explain and repair consumer credit files.