In response to a need for guidance on how to prove a borrower's level of income and how to determine the appropriate method of appraisal for mortgages in the non-conforming arena, Standard & Poor's is rolling out Documentation and Collateral Scoring System (DACSS).
Non-conforming collateral includes traditional jumbo loans as well as Alt-A mortgages.
"DACSS is the only tool in the non-conforming market that provides lenders at point of sale with our approved income and appraisal alternatives, and that's critical because those loans then result in no additional loss coverage requirement," said Patrick Mahoney, project manager for DACSS, at a conference call last Wednesday.
DACSS was described as a front-end analytic tool for non-conforming residential mortgage loans. It is designed to evaluate the attributes of a residential mortgage loan application and the credit of the borrower at point of sale.
This scoring system will assign both the document and collateral requirements in line with S&P's ratings criteria without assigning a corresponding increase to the foreclosure frequency or loss severity expectations.
DACSS will also determine which loans are approved for reduced documentation. Prior to DACSS, if a loan was submitted to S&P for a rating and it was a limited-documentation loan, that loan would have been given an increase in terms of the foreclosure frequency and subsequently higher loss coverage enhancement requirement.
According to a release from the rating agency, with this new system, it would be possible for salaried or self-employed borrowers to walk into a mortgage lender's office with only a pay stub and the address of the property they wish to buy and receive an approval for a nonconforming mortgage loan within minutes
By using this new scoring tool, S&P is now able to differentiate both borrower and loan characteristics by using an associated default rate. Based on those charactertics, a loan may be supplied to the rating agency on a limited documentation fashion and the loan will not receive any increased foreclosure frequency.
According to Mahoney, the product will allow for shorter approval and closing times, increased loan volumes to the originator as well as reduced originator costs.
On the back-end, it will provide risk-based pricing for later securitization. It will also give greater flexibility to the borrower in terms of choice documentation and price trade off.
