This blog explores the role credit scores have in the mortgage lending and automated underwriting process. This is particularly important for conforming mortgages or mortgages sold to government-sponsored enterprises (GSEs).
Can scoring trended data, or more accurately, trended credit bureau data, as some credit score companies claim, actually help expand credit access to these consumers?
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]
Securitization plays a key role in driving increased liquidity in the mortgage market, ensuring that banks can fund more loans, at lower cost. This in turn gives consumers greater access to affordable mortgages. FICO Scores, of course, play an important role in the risk management and transparency that powers the secondary market. Now VantageScore is claiming that its score can be used instead in GSE underwriting (and by extension, securitization), as a one-to-one replacement for the FICO Score. Could a clean swap-out work? It’s time to set the record straight. Claim: A seamless mapping exists between FICO Score and VantageScore, one that will hold up over time. Truth: The FICO Score and VantageScore, while sharing the same score range, do not share the same odds-to-score relationship, meaning the risk at a given score is different. The relationship between the two scores is not constant and any analysis that attempted to... [Read More]
In the era of Big Data, so-called alternative data holds a special promise — to shine a new light on consumer behavior. When it comes to credit scoring, alternative data means data not being used today for risk assessment, and specifically data not found in the credit bureaus. Lenders hope scoring this data could allow them to make faster, better decisions on people who don’t have FICO® Scores — the “unscorables” with sparse or no credit bureau data on file. Hoping to jump on the alt-data bandwagon, the three main US credit reporting agencies – through their VantageScore business – have been claiming that their score uses alternative data to score more consumers than the industry-leading FICO® Score. It sounds good, but is it true? Claim: VantageScore leverages alternative data to score millions more consumers than FICO Scores. Truth: The “alternative” data VantageScore uses is utilities and cell phone bills... [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]
More than 100 million credit accounts in the US are now getting free FICO® Scores from their lenders through the FICO® Score Open Access program. This program is helping consumers understand their financial picture — but how can it help credit and financial counsellors in their work with consumers? That’s where FICO® Score Open Access for Credit and Financial Counseling comes in. Through this program, credit and financial counseling providers in the US can share FICO® Scores they have already purchased — for example, for initial customer contact or for financial management plan review — with their customers with no additional score fees or program fees. (The sharing of FICO® Scores with counselling customers is otherwise not permitted by the credit bureaus or by FICO.) Knowledge about FICO® Scores may support a customer’s progress and commitment to more responsible financial health management, and reinforce behavior changes that last long after... [Read More]
I recently had the opportunity to participate in a panel discussion: “What is happening with underwriting and credit standards” during The Future of Housing Finance Conference at George Washington University. One of the topics covered, which garnered a great deal of interest from the audience, was how a more predictive score will allow lenders to safely qualify more consumers for a mortgage. More specifically, the interest was around the analytic advancements within FICO® Score 9. As we’ve shared previously, new features in the score include a multi-faceted modeling approach and a more refined treatment of third-party collections (differentiating between medical and non-medical collections, and ignoring paid collections), which significantly enhance mortgage origination prediction. We recently conducted a research study to illustrate the benefit of using FICO® Score 9 for mortgage originations. We used a swap set analysis that captures both the change in consumer distribution across the FICO® Score range... [Read More]
We’ve been blogging about how financial institutions are struggling to implement many critical best practices around model management and capital adequacy, including many practices mandated by regulators. This is exemplified by a recent survey of global FIs, which we conducted with Chartis. In many best practice areas, larger institutions are at the vanguard, perhaps because they are under greater regulatory scrutiny. However, these larger institutions still have major issues to address, and smaller FIs should anticipate that greater scrutiny is on its way. Comparison of larger and smaller FIs in best practice areas Source: Chartis Research 2015 Among the numerous challenges reported by survey participants, data quality issues still plague many institutions. Our survey found that approaches to data quality varied across organizational type. Generally, Tier 1 institutions delegated the responsibility to individual business lines, whereas smaller institutions have greater centralization of responsibility around data quality and data strategy. Leaders... [Read More]