The federal government has been working for more than 60 years to make it easier for Americans to buy a house. One of the government's tools is Freddie Mac, a company that invests in home loans to stabilize the mortgage market. In the mortgage industry, "LP" is Freddie Mac's Loan Prospector, which makes it easier for lenders to appraise whether a loan is a good risk, and whether it's one Freddie Mac might buy up.
Loan Prospector offers lenders a quick, automatic system that calculates the risk of underwriting a mortgage. LP uses the borrower's loan application and statistical models to evaluate the application based on the home buyer's debt-to-income ratio, her credit history and how big a down payment she can make. The end result tells the lender the level of risk involved and whether Freddie Mac is willing to buy the mortgage. If the loan violates state or local laws for any reason, LP won't spot this -- it's up to the lender to know that stuff.
Freddie Mac doesn't loan home buyers money. Instead, by buying home loans, it pumps money back into lenders' coffers so that they have more cash on hand to lend out to new home buyers. Freddie Mac collects a fee from lenders, sells off the mortgages to investors and, if the homeowner defaults, uses the lender fees to pay the investors back. LP simplifies the process by checking immediately if the loan is eligible for purchase. If Freddie Mac doesn't want it, knowing that saves the lender a lot of paperwork, time and cost.
LP is cheap: As of 2012, a $20 application fee gets the lender an evaluation within 15 minutes, plus credit reports on the borrower. A lender who gets a "no" from Freddie Mac can resubmit the borrower's application 15 times, using different formulas, such as a higher down payment, to find out if there's a way to make the deal go through. Once a lender gets an ID number in the LP system, he can log in to LP from his company website.
Freddie Mac says on its website that using Loan Prospector to evaluate loans helps lenders avoid making money-losing loans. The company says LP is especially useful if the borrower has a poor credit history or is otherwise a bad risk. Loan Prospector also works with mortgage brokers -- "third party originators" in mortgage-speak -- to help them find lenders who can underwrite a particular loan. Like lenders, brokers can submit and resubmit loans if the initial application doesn't get good results.
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