Who is a B or a C borrower?

It could be anyone walking down the street, says Joe Harvey, president of Full Spectrum Lending.

It was, in fact, Ed and Vivian, whose business suffered following the Northridge earthquake in California in 1994.

Ed and Vivian were three years away from paying off the mortgage on their home when the earthquake hit. Although their own home was not badly damaged, Ed’s three largest clients from his printing business moved out of state. The couple eventually file for bankruptcy.

They are, says Harvey, the typical B-C customer.

“It’s someone who, through no fault of their own, got downsized and lost their job. It’s someone who went from a decent income to unemployment and couldn’t make their credit card payments. They’ve been 30-days late twice in the past year.”

They’re primarily good people who have a bad credit problem, echoes Rick Bechtel, a vice president with Chase Manhattan Mortgage.

“If you’ve had a bankruptcy any time within the past 7 to 10 years, or if you’ve had medical bill problems, or other situations where your credit score is so low you can’t get a mortgage through the regular channel,” Bechtel adds.

You may also be a B-C borrower if you own too many pieces of investment property, need a “no-document” loan because you don’t wish to disclose all of your income, you’ve been self-employed for too short a period of time, or you’re purchasing a unique piece of property that doesn’t fit into the secondary lending market’s A-borrower mold.

While there have always small mom-and-pop lending shops that catered to folks who had major problems with their credit, the B-C industry has only really come into its own in the past 3 years, as credit scoring has emerged into a fine art, Bechtel says.

Full Spectrum Lending, which is a sister company to Countrywide Home Loans, funds more than $118 million in B-C loans each month. Chase Manhattan Mortgage has committed resources to fund more than 15 offices nationwide.

“Credit scoring drives the entire market,” he notes, adding that the credit scoring model has improved to the point where a lender can pull up a credit report and guess with an 85 percent accuracy rate whether the borrower should get the loan or not.

Bechtel and Harvey say that B-C lending depends on different criteria than if you have good or only slightly-tarnished credit.

The most important component is the loan-to-value ratio, that is, the percent of the total value of the home that is represented by the loan. If you don’t have equity in the property, no legitimate B-C lender can help you, Harvey notes. “Everything we do is based on loan-to-value ratios.”

The types of late payments you’ve made is important, too. You get a much heavier ding for a late payment on a mortgage than if you’ve been late on your student loan or on a local department store charge card. (In fact, the order of importance for late pays is mortgage, car loans, credit cards, student loans, and charge cards, Bechtel notes.)

Other important components are your credit score, any collection accounts you have and if you’ve gone bankrupt.

Surprisingly, neither your income (other than making sure you can afford the monthly payments) nor your job history counts for much.

Mortgage experts say that the B-C lending business is all about risk-based pricing. The bigger risk the bank takes, the more you pay.

For example, while an A borrower might get a $240,000 loan for zero points at 7.5 percent at Chase Manhattan Mortgage, a B borrower would pay zero points and 10.5 percent for the same loan. A C borrower would pay zero points and 12.5 percent.

Harvey and Bechtel agree that almost every B-C loan is tailor-made. For example, on these loans, you could put down 5 points, and lower the rate from 10.5 percent to 8.5 percent.

Your loan-to-value ratio also has an impact on the interest rate your loan carries and the points and fees you’ll pay. If you get a loan that has an 80 percent loan-to-value ratio, meaning you only have 20 percent equity, you’ll pay more than if you get a 60 percent loan to value ratio loan, and have 40 percent equity.

Because the B-C lending business has been so small-time up to this time, unacceptable practices have become commonplace, says Bechtel.

In a typical set-up, a home buyer with fairly good credit who doesn’t understand the process, doesn’t speak the language, or hasn’t been through a mortgage process before will sit down with a lender. The buyer’s credit report will get pulled up and the lender will see two or three late payments over the course of the past few years.

The lender will make a big deal about these late payments and tell the borrower he no longer qualifies as an A borrower, but that he does have a loan for which he can qualify.

The only catch? The loan carries a much higher interest rate. But if the borrower makes good and keeps the loan for six months, the broker will be able to refinance him into a lower rate loan.

According to Bechtel, what’s happening is that an A or even an A- borrower is getting shoved into a B loan, which is hugely profitable to the broker.

Bechtel says Chase loan officers can’t pull that scam because the company requires them to try and raise the borrower’s grade.

“If they’re an A, they go to the regular side of the table. If they’re a B, or any of the fine gradations of B or C, they get moved over to the B-C side of the table,” Bechtel says.

Full Spectrum Lending says it works closely with its sister company, Countrywide Home Loans, in the same way.

If we find that the borrower really isn’t a B or C borrower, but can qualify for a better loan, we try to send them over to Countrywide, says Harvey.

“We view our loans as credit repair loans because we tell the customer, you’ve had challenges in the past, so we’ll take your debts, consolidate them for you, reduce your monthly payments, give you a fixed rate for 24 to 36 months, and the opportunity to get back on your fee. In 12 to 36 months, their credit is repaired by their hard work and they can go elsewhere,” Harvey explains.

Bechtel believes soon all loans, whether the borrower is classified A, B, C, or D, will move to risk-based pricing. He said credit score modeling improvements is paving the way.

“Why should the guy with golden credit pay the same for a loan as the guy who is barely an A-?”

Published: Jun 7, 1999