A high three-digit credit score can definitely make a mortgage look more attractive to the secondary market and investors.
But in the wake of the 2008 mortgage market meltdown, a solid credit score is only the proverbial icing on the cake.
Risk managers and investors want more specific loan-level data, and there’s a segment of the servicing market itching to provide it. One such example is Fay Servicing out of Chicago, which launched in 2008, creating systems and processes that can drill down to provide financial firms and investors a taste of what lies beneath a loan’s surface.
Ed Fay, CEO and founder of Fay Servicing, said the company is intent to always take “the next step” by going beyond the most basic borrower data.
It’s not just looking at debt-to-income ratios, he said while speaking at the SourceMedia mortgage servicing conference in Dallas, it’s also about cash flow – or how much money is coming in and going out.
The takeaway from his presentation: a 780 FICO means very little once a person’s monthly cash-flow is cut in half, leaving them without an ability to make monthly payments.
"You have to look at cash flows. At the end of the day, it’s not DTI that pays a mortgage, it’s cash flow," Fay said while leading a panel discussion on maximizing borrower engagement and loan performance.&
What’s even clearer now is how much the investment community is pushing for very specific borrower data — or at least data that can give them a complete picture of a borrower's financial situation.
Dmitry Gasinsky a senior vice president at asset management and investment advisory firm Neuberger Berman Fixed Income, already sees a more intense focus on providing specific loan level data to institutional invenstors.
It may seem strange to know how much a borrower spends on cigarettes, gas and their cars each month, but Fay and Gasinsky view these expenditures as potential cash-flow leeches, creating an incentive to put them into the debt-to-income analysis when evaluating a loan’s long-term viability.
Neuberger Berman works with investors, offering them customized investment solutions. Looking ahead into what will happen as the private market steps back into the mortgage investments space, Gasinsky expects deeper levels of rich data to be in demand.
"When we evaluate a pool (of mortgages) for purchase, we will go beyond the three-digit number (or FICO score)," he said. "We will look at the stability of the payments, how many payments were missed, what debt a borrower has outside their mortgage debt."
"It is all about cash flow," he added. "It has to do with the borrower’s ability to make a payment on time. You do pay for things like childcare and entertainment expenses, and things like that may figure into the calculations."
When picking a servicing firm, Gasinsky said his firm reaches out to servicers who have "demonstrated their increased ability to reach out to borrowers" and those that have increased loss mitigation solutions, creating the right long-term solutions for nonperforming loans.