There has been much discussion and several studies over the years regarding the potential value of leveraging rental data in assessing consumer credit risk. Which raises the question: Should rental data be widely reported to the three primary consumer credit agencies (CRAs)? If rental data was reported, this might mean some consumers without loans or credit cards would get a FICO® Score, and gain access to more affordable credit. But how many? And how many of these consumers would be considered creditworthy by prospective lenders? In 2015, FICO introduced FICO® Score 9, which scores rental data. This coincided with the first evidence of sufficient positive and negative rental data at the CRAs, a necessary condition for adding this data into the FICO Score algorithm. Great news, right? Well let’s take a deeper look at some of the facts around rental data in the credit report. Not Enough Rental Data in... [Read More]
One of the hottest analytic technologies in mortgage lending is price optimization. This is the application of advanced analytics to pricing strategies, in order to determine the ideal price for every customer that maximizes profitability, given factors such as take-up, affordability, etc. That’s great for banks, but what about building societies and credit unions? If profit isn’t your primary goal — if you exist to serve your members — does price optimization have a place? The answer is definitely yes. Using pricing optimization, building societies and credit unions can develop strategic mortgage offers that target specific objectives, such as customer retention, without hurting the bottom line and ensuring that targets around Treating the Customer Fairly are met. This kind of optimization can really pay off – making an appropriate offer, to the right customer at the right time, typically results in 10-15% higher retention of existing customers. When building societies... [Read More]
Nothing fascinates us more in the world of demographics than what the Millennial generation think, do and how they act. One thing for sure is that, as they vie with the Baby Boomers to be the largest demographic group here in the USA, what they do is important. And we don’t need to be statisticians to know that the Baby Boomer generation isn’t going to be getting any bigger. The question for many in financial service boils down to this: Are Millennials really abandoning us? The topic came to mind for me recently as I was asked to be part of a panel discussion on credit and the economy at an ABS East conference. Since much of what gets said about Millennials seems to be more opinion than fact, I decided to look at a few stats and see if we could cast any light on what might be happening.... [Read More]
Participants and Influencers throughout the mortgage ecosystem have been told by the three main US credit bureaus through their jointly owned and controlled credit scoring firm, VantageScore, that the VantageScore can enable millions more consumers to gain access to a mortgage. It’s an appealing story — but is it true? Claim: Loosening credit scoring criteria will bring lenders an additional 3.4 million potential borrowers, over 2.6 million of whom will qualify for mortgage credit. Truth: Very few new people will both qualify for mortgages and want mortgages. The “innovation” VantageScore claims can score more people is simply the weakening of credit score criteria. The minimum criteria needed to produce the FICO Score aren’t arbitrary — they are the result of decades of research into risk assessment. As a reminder, reliable credit scores can only be calculated from credit files with at least one open credit account for at least six... [Read More]
Access to credit and the path to homeownership are important parts of the American way of life. That’s why it’s critical to understand what can be done to improve financial inclusion — and what won’t work. For months now, the three main US consumer reporting agencies – through their VantageScore business – have been claiming that millions of credit-starved Americans can get access to mortgages through the “innovation” of simply eliminating long-standing and essential minimum credit scoring criteria. This isn’t innovation, and it won’t help borrowers. It’s time to set the record straight. Claim: By loosening the minimum scoring criteria, VantageScore can give millions of currently unscoreable Americans a credit score, making them mortgage-ready. Truth: Scoring sparse and old data may give more Americans a score, but it won’t help those Americans who are actually seeking homeownership credit. Even worse, it locks millions of Americans into unfairly low scores. To... [Read More]
The student loan crisis in the US is getting much worse — student loan debt is over $1.3 trillion and is increasing by more than $2,700 per second. Lenders cannot ignore the impact of that debt on individual borrowing. Our latest research shows that: The number of US consumers aged 25-34 with student loan debt of at least $50,000 doubled from 2005 to 2015. During that same time, the average student loan debt across all age 25-34 consumers also doubled — by comparison, average credit card debt and mortgage debt for this population actually fell. While the number of consumers age 25-34 with student loans grew from 2005 to 2015 (from 27% of this population to 40%), there are fewer 25-34 year olds with mortgages or credit cards than 10 years ago. In fact, our data shows that people with active student loans are far less likely to have... [Read More]
FICO research consistently shows that older consumers have higher FICO® Scores than their younger counterparts. But a recent report by the Mortgage Bankers Association (MBA) provides evidence that people become less reliable at making their mortgage payments as they age. Can both of these assertions be right? To get to the bottom of this, FICO conducted fresh research on credit behavior trends by age. Our study revealed not only that mortgage delinquency rates rise for US consumers beyond a certain age, but that these delinquency increases were observable across other loan types. Is this cause for concern? And was the MBA correct in their conclusion that declining memory and other cognitive skills are the main contributing factor? In this post, I’ll share our research findings and draw a few conclusions based on what we see in the data. Delinquency Trends by Age For this research, we examined payment behavior using... [Read More]
For mortgage professionals still recovering from clearing the latest compliance hurdle, it is time to lace up for the next challenge—the Home Mortgage Disclosure Act (HMDA) decathlon. Less than two weeks after the compliance deadline for the TILA-RESPA Integrated Disclosure (TRID) rule, the CFPB issued its final rule revising HMDA (Regulation C). Expansive changes to the rule mean mortgage lenders don’t get much of a compliance breather, despite an effective date that for many is still nearly two years away. Adopted in 1975, HMDA requires certain mortgage lenders to collect and report a wide array of home loan application information. This information was intended to help assess whether lenders were serving the housing needs of communities. In addition, HMDA data is an integral focus for the Department of Justice and Consumer Financial Protection Bureau (CFPB) in identifying red-lining and other fair lending violations. The Dodd-Frank Act directed the CFPB to... [Read More]
With some US housing markets heating up, new FICO research shows a potentially troubling trend: credit standards appear to be loosening, particularly in parts of California and Texas. In this blog post, I’ll share key findings from this mortgage research study. First, we identified the cities experiencing the largest home price increases since the Great Recession – specifically, Q1 2015 home prices compared to the minimum home price since Q4 2009. The chart below illustrates the Federal Housing Finance Agency’s (FHFA) House Price Index (HPI) for the five Metropolitan Statistical Areas (MSAs) with the largest housing price increases during this timeframe: Las Vegas was one of the hardest hit cities during the recession. But what’s most striking about this analysis is the concentration of Central California MSAs among the top five. All of these cities saw severe home price decreases, but in recent years, it’s very much a story of... [Read More]
In my last post, I shared new FICO research on home equity line of credit (HELOC) resets. The good news: after examining credit performance of HELOCs older than 10 years, we found little evidence that HELOC bad rates increase dramatically after their reset dates. However, our research uncovered a potential new concern: with the US housing market recovering, consumer appetite for HELOCs appears to be increasing again. Consider the current balances of HELOCs by the year booked: As house prices fell during the Great Recession, significantly fewer HELOC loans were booked. However, as house prices recover, consumers are once again taking advantage of these loans in large numbers, as shown by the increase in the blue line in the graphic above. In the past year, we find balances on HELOCs similar to what was booked in 2003. While recent HELOC growth is slightly less pronounced compared to the years prior... [Read More]
