It’s a common belief among lenders and news pundits that home price depreciation (HPD) is a top predictor of consumer repayment risk—perhaps even more so than a FICO® Score. The argument is that in today’s market, declining HPD must be affecting consumer risk behaviors. Many point to the growing number of strategic defaults as proof positive that an underwater property is a leading indicator of foreclosure. Certainly seems logical, right?
New FICO research puts these notions into perspective. While HPD does show some ability to rank-order risk, it is still nowhere near the predictive strength of FICO® Score.
In the study, FICO analyzed HPD as a predictive variable for mortgage, bankcard and auto loans as compared to FICO Scores. We found that HPD at an MSA level (Metropolitan Statistical Area) is predictive of mortgage risk. Consumers in the lowest third of HPD are 2 times more likely to become delinquent on their mortgage compared to those in the highest third.
However, we found that consumers in the lowest third of the FICO® Score range (riskiest consumers) are 50+ times more likely to become delinquent on their mortgage compared to those in the highest third (least risky consumers).
Our study looked at consumers with at least one mortgage as of October 2009. We measured HPD declines by MSA during October 2008-2009 and performance of the loans from November 2009 to April 2010. We grouped these consumers into three equal deciles to compare performance. The summarized results below show that the delinquency rates (90+ days delinquent) for mortgages are much higher in the MSAs that experienced both the boom and bust in real estate, such as Phoenix and Las Vegas. MSAs that had relatively stable house prices, such as Austin and Denver, did not experience the same delinquency rates.
We conducted the same study the year prior, with similar results. Both studies demonstrate that while there are clear differences in real estate performance based upon HPDs, the FICO® Score continues to be the most effective predictor of consumer credit performance.