The New Era in Mortgage Credit Risk
How migrating to FICO® Score 10T can help you gain first-mover advantage on non-conforming mortgage loans
At FICO World, I discussed how mortgage lenders can attain first-mover advantage on their non-conforming mortgage loan products by migrating to FICO® Score 10T. I particularly focused on how the application of FICO’s latest and greatest credit scoring analytics may safely help grow your lending business by enhancing your credit risk portfolio scoring process and yield up to a 5% relative increase in mortgage loan origination volume without additional credit risk.
It appears the number of lenders tightening credit to borrowers is increasing and margins continue to compress, which has compounded the issue of decreasing mortgage volume. As the U.S. 10 Year Treasury approaches 5% and interest rates near 8%, lenders will need every tool available to continue to generate volume. FICO® Score 10T can help lenders expand their credit box, directly translating to more approvals and more closed loans while simultaneously reducing overall credit risk.
One of the most immediate ways FICO’s most recent credit score can positively impact mortgage lenders is on their HELOC production. Lenders who originate HELOCs could experience a reduction in delinquencies of up to 9% percent by adopting FICO® Score 10T. As with most mortgage products, HELOCs are expensive to originate, which means that if borrowers are not utilizing their line, it will be very difficult for the lender to realize profits. A significant reduction in delinquencies – which FICO® Score 10T can provide – can have an immediate positive impact on a lender's cash flow on these products.
Jumbo loans is another area where FICO® Score 10T can make a significant impact, as historically these loans have been a significant portion of many lenders' overall credit portfolios. Jumbo mortgage rates have reached 7.34%, the highest level since 2011. Such high interest rates have unsurprisingly resulted in a slowdown in borrower demand. FICO® Score 10T can increase jumbo mortgage loan approval rates by up to 8% without adding incremental risk. The impact on all lenders – from large to small – would be significant. Jumbo products have more stringent underwriting guidelines and with FICO ® Score 10T increasing approvals and lending opportunities, this will provide an immediate boost to volume.
As mentioned earlier, using FICO® Score 10T may reduce the number of borrower delinquencies in a lenders book of business; doing so can help lender balance sheets as cash flows become more predictive. Loan loss reserves can be adjusted downward due to fewer credit borrower delinquencies, which in turn can allow you to re-deploy that capital in technology or other growth drivers for your business.
“Approximately 60% of mortgages will be required to follow the FHFA (Federal Housing Finance Administration) guidelines, but there are almost 40% of products (non-conforming) that don’t need to follow these guidelines where you can take action now.”
Watch the FICO World presentation to discover more about the benefits of leveraging FICO Score® 10T to realize portfolio growth on non-conforming loans. At the same time, proactive adoption of FICO® Score 10T will put lenders one step closer to GSE readiness for conforming mortgages when that transition occurs in the coming years. FICO® Score 10T — the most powerful FICO Score ever — will be required for all conforming mortgage loans submitted to Fannie Mae and Freddie Mac in the coming years. As mortgage lenders, it is important to be thinking about what you can do today to prepare for these upcoming changes.
FICO stands by ready to assist you and support you with your adoption of FICO Score 10T. Visit our FICO® Score Migration Resource Center for more information. Contact us at ScoreSupport@fico.com to get started.
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FICO® Score High Achievers: Is Age the Only Factor?
<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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