What is scratch and dent mortgage?

Answer

As it applies to mortgage loans, "Scratch and Dent" has come to mean any one or combination of 'defects' stemming from originations made outside a lender's implemented credit guidelines, deficiencies in loan documentation, errors made in following regulatory compliance laws, irregular payment history or borrower defaults.

There may be other reasons but these five categories are usually the most common.

Here are a few examples:

1. Outside Guidelines: Borrower with a 605 credit score but the product guidelines called for a minimum score of 620
2. Document Deficiencies: loan file is missing an origination appraisal
3. Regulatory Compliance: funds were disbursed to the borrower prior to expiration of a three day rescission period
4. Pay History: in the past 6 months the borrower has been 30 days late with his payments on two occasions
5. Borrower Defaults: borrower misses payment(s) completely

"Scratch and Dent" may also include loans to borrowers who have filed for bankruptcy (in the past or after subject loan was made), borrowers currently in the foreclosure process (any stage) or loans found to be fraudulent after closing (occupancy, income, employment, etc.)

Years ago, it primarily referred to loans that were either 'sub-performing', 're-performing' or 'non-performing' in their cash flows/payments.

So you see, it has really become something of a catch-all definition these days!