Collateral risk scores weigh

A home’s value often holds the deciding factor of whether a seller wants to sell and a buyer wants to buy.

The home’s value obviously changes as the market changes, so one has to try and predict the future value of the home.

Collateral has always been an important aspect of the underwriting process of a loan, for it ensures the lender that the borrower will not default on payment.

As home sales have been declining and home values are ever-changing, collateral is less important in the underwriting process because lenders are just lucky to sell any loan nowadays.

Broderick Perkin’s August 30, 2006 article, “Lenders Growing Less Jittery About Collateral,” located in Realty Times, explains how as the market continues its downturn, collateral risk scores become less important.

“Knowing how well home values will hold up in a given market is a key point of knowledge for both sellers and buyers.”

“Sellers who overprice a home for sale will alienate buyers, frustrate their real estate agent and get left holding the bag.”

“Buyers who pay too much for a home will suffer immediate equity drain and, perhaps, an ‘upside down mortgage’ should the loan balance exceed the property's value. Later, if there's a quick resale, the buyer could lose big.”

“An overvalued home is a no win situation on both ends of a deal -- that is supposed to be win-win for both parties.”

With the market saturated with overvalued homes, lenders are suffering just as much as buyers and sellers.

During the housing boom, if a lender lost a loan here or there because they did not completely qualify, it did not really matter. But now, every loan’s importance is intensified.

In an attempt to increase mortgage originations, lenders are easing back on their strict borrower requirements by reducing the importance of collateral risk.

“With 1 being the lowest risk score and 100 being the highest, collateral-based risk scores dropped nationwide from 3.27, during the period of August 2005 to January 2006, down to 2.95 during the more recent February to July 2006 period -- a 9.8 percent decline.”

But according to Mike Ela, president of HomeSmartReports.com, there are some drastic increases and decreases in collateral risk. Wyoming experienced a 35.3 percent decline in risk, while Louisiana showed a 38.2 percent risk increase, Ela reported.

Overall, less underwriting scrutiny, such as less collateral risk emphasis, results in more loan originations.

“Wyoming, one of the destinations in a national reverse migration trend, was an out-migration state in the 1990s, but become an in-migration state, with more people moving in than out beginning in the early 2000s, according to the U.S. Census. It also showed up recently on Ela's ‘slam-dunk’ list as a state with the second greatest increase in loans quickly approved with the least amount of underwriting scrutiny.”

These are adjustable figures as markets are central to their locations and loan originations differ by region

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