Glass Box - U.S. Department of Housing and Urban...

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U.S. Department of Housing and Urban Development White Paper on Risks/Issues Surrounding the “Glass Box” Policy for FHA’s Universal Mortgage Scorecard January 14, 2000 – DRAFT Executive Summary The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) has contracted KPMG LLP (KPMG) to assist in deploying FHA’s mortgage scorecard. HUD’s initiative to deploy its universal mortgage scorecard includes the objective of educating borrowers about mortgage scoring. HUD contends that other mortgage scoring models in the industry are enclosed in a “black box,” which does not adequately educate the borrower about what steps need to be performed in order to become eligible for a mortgage. HUD Secretary Andrew Cuomo told industry participants attending an MBA Conference in November 1999 that “in effect, FHA's new automated underwriting system will be like a glass box, exposed to the light of day and public scrutiny." The purpose of this document is to identify the risks/issues surrounding making HUD’s universal scorecard a “glass box.” If the scorecard is deployed as a “glass box,” HUD wants to have a complete understanding of the issues relating to opening its scorecard to the public. This document is organized into the following three sections: 1. Overview of the Glass Box Policy 2. Risks/Issues 3. Discussion of Next Steps The document identifies five primary risks/issues associated with opening the scorecard, and KPMG has classified each risk/issue into three categories by the estimated marginal increase in the level of HUD’s risk exposure: High, Medium, Low. In other words, a “Low” classification can be interpreted as a nominal increase in risk relative to HUD’s current risk exposure. KPMG’s classifications are based on consultation with in-house KPMG professionals with significant industry experience and external industry economists. A summary of KPMG’s preliminary risk assessment follows: Risk/Issue Estimated Level of Exposure Borrower Fraud Low Lender Fraud Low Strategic Borrower Behavior Medium Model Risk (“Econometric Scrutiny”) High Fair Lending Risk Medium It is KPMG’s understanding that economists have expressed concern to HUD that opening the scorecard will foster an environment where borrowers and lenders can “game” the system either through fraudulent activities or exploiting “loopholes” in the process. Based on discussions with economists, the most susceptible factors to “gaming” are the credit variables, which are not in HUD’s two-stage logit model. Because the model uses the FICO score and basic application variables, KPMG believes that the opportunities to “game” the system will be less significant than if the factors were more elaborate. There will likely be some increase in HUD’s risk DRAFT - 05/24/11 Page 1
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U.S. Department of Housing and Urban Development White Paper on Risks/Issues Surrounding the “Glass Box” Policy for FHA’s Universal Mortgage Scorecard
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This note was uploaded on 05/24/2011 for the course ECON 488 taught by Professor Brunton during the Spring '11 term at James Madison University.

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Glass Box - U.S. Department of Housing and Urban...

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