When times are tough, consumers, increasingly, are paying their credit card bills first and worrying about the mortgage later.

That was one of several themes emerging during a panel addressing consumer debt at the Mortgage Bankers Association's annual convention in Atlanta.

Changes in borrower mentality toward debt began during the onset of the foreclosure crisis.
Real estate debt has historically seen fewer instances of default than credit cards, according to Joanne Gaskin, director of mortgage at credit score provider FICO. But those spreads are narrowing across all quality of borrowers. What's more troublesome Gaskin said, is that even with so-called "prime" borrowers, credit cards balances are getting paid over monthly mortgage obligations.

Michelle Raneri, a senior analytics director at Experian said the average VantageScore of U.S. borrowers is 749 in 2010, down from an average of 755 in 2007. In addition, "the credit file is changing," Raneri said, meaning that debt types are changing and the same credit score number in two different years represent different borrower characteristics.

The panel also addressed how credit score modeling technology accounts for foreclosures, short sales and other real estate defaults. Gaskin said that in both a foreclosure and a short sale or deed in lieu of foreclosure, the borrower can expect to take a 100-point to 150-point hit on their credit score.

But because the foreclosure gets notated on the credit file once the process begins—and stays on the rating as an active negative mark—it takes longer for the borrower to recover and become eligible to borrow again. With a short sale, the borrower's credit doesn't get impacted until the short sale transaction occurs, and then it's marked as a completed instance. While a short seller can get to a place to buy another home in two years, a foreclosed borrower typically ends up waiting significantly longer.

The major credit scoring agencies have recently launched technology to account for a change to a mortgage agreement, and the technology allows lenders to report whether a modification was done through a government or proprietary program. The panel encouraged the assembled crowd to utilize those resources to help improve borrower credit reporting.

New technology is also coming to allow lenders to verify income and employment information with the Internal Revenue Service, according to Steve Seoane, vice president of analytics at the LexisNexis risk and information analytics group. There is a great industry push to allow for e-signatures on 4506T requests, but the IRS has so far been reluctant to allow the change. The document allows the IRS to release borrower information to lenders.

The panel also discussed the appropriate use of borrower income in factoring an individual's willingness and ability to pay. No two borrowers are the same. Gaskin used the example that even if two people make the same annual salary, one borrower who eats ramen noodles for lunch and the other eats at a steakhouse every day have very different abilities to pay. On top of that, the panel said income is not a predictive indicator of willingness to pay. New technologies look to evaluate those factors and improve how lenders can evaluate borrowers.

Analytics data provided during the panel showed that credit standards are starting to loosen and lenders are beginning to open mortgage lending to more borrowers. Raneri said the average VantageScore of U.S. mortgage borrowers in 2010 was 853, compared to an average of 871 in 2009.

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