FICO Survey: Secondary Market Expects Higher Volatility in 2023
FICO pulse survey finds that secondary market wants more information on transition to FICO Score 10T
FICO recently sponsored the Structured Finance Association’s annual conference on capital markets in Las Vegas, an event that always features insightful guest speakers and draws attendance from a wide range of investors and secondary market participants across sectors. The conference boasted a record total of 8,000+ registered attendees, and FICO experts shared their insights in various panel discussions.
Like in years past, we also surveyed SFVegas 2023 attendees on the overall economic climate and how they use credit scores to support securitization risk management. Here are a few key takeaways about how the secondary market sees the overall state of the economy, the role of credit scores in securitization, and the upcoming transition to FICO® Score 10T in the conforming mortgage market.
- Secondary mortgage market participants expect a U.S. recession in 2023.
Conference attendees were skeptical of the overall state of the U.S. economy. More than 75% of respondents said a recession was likely or very likely in 2023, and only 7% said it was unlikely. Inflation was by far the most likely source of respondents’ alarm, with 87% citing it as a source of concern for the overall U.S. economic outlook, while only approximately 3% of respondents cited COVID-19. Notably, this poll took place before the recent liquidity challenges faced by several financial institutions.
- But they view their own companies’ financial outlook more positively.
Still, attendees remain more optimistic about their own companies and investment portfolios. 14% said the financial outlook for their company was very strong, and another 50% assessed the outlook as strong. Less than 5% believe their company is heading into 2023 in a weak financial position.
- Greater volatility in the securitization market is anticipated this year.
Just over 40% of respondents said that volatility in the securitization market in 2023 would be higher than 2022, and another 36% believe it will be about the same. Only 23% expect volatility to be lower in 2023 than it was in 2022.
- Investors and other secondary market participants want a credit score that is predictive of credit risk and proven over time.
When asked what factors were most important to them in selecting a credit score model, more than half (55%) ranked a score’s ability to predict credit risk highest on their list, followed by a score that was proven over time (32%). The FICO® Score has been trusted across consumer credit markets for more than 30 years as a proven and reliable measure of credit risk which helps secondary market participants feel confident about their investments.
- Secondary market participants want to learn more about the upcoming transition to FICO® Score 10T in conforming mortgages.
Only a third of respondents said they were at least somewhat familiar with the upcoming requirement that FICO® Score 10T be used in the origination of conforming mortgages that can then be delivered to the government-sponsored enterprises, Fannie Mae and Freddie Mac. And less than 20% said that they were prepared for the transition (which is expected to take several years). The vast majority said they would benefit from additional information.
FICO® Score 10T is FICO’s most powerful credit score to date, and it incorporates new characteristics such as trended data to give lenders unparalleled flexibility and predictive power while preserving the trusted and proven FICO Score minimum scoring criteria. We always work with lenders and investors throughout the process of updating their FICO Score models to make the process as seamless as possible, offering resources and information to support the migration to our newest, most powerful models.
To learn more about the upcoming transition to FICO® Score 10T, please register for more information on the FICO Score ABS website: https://www.fico.com/en/abs.
Findings reflect 127 respondents’ answers to a survey administered in person at SFVegas 2023, from February 26 - March 1, 2023.
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<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
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