The New Era in Mortgage Credit Risk

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 10 T. 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 10 T 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 10 T. 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 10 T 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 10 T 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 10 T 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 10 T increasing approvals and lending opportunities, this will provide an immediate boost to volume.

As mentioned earlier, using FICO® Score 10 T 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® 10 T to realize portfolio growth on non-conforming loans. At the same time, proactive adoption of FICO® Score 10 T will put lenders one step closer to GSE readiness for conforming mortgages when that transition occurs in the coming years. FICO® Score 10 T — 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 10 T. Visit our FICO® Score Migration Resource Center for more information. Contact us at ScoreSupport@fico.com to get started.