Tag Archives: Economic Trends

Risk & Compliance Are FICO Scores “Artificially Inflated?”

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A recent Bloomberg article asserted that “consumer credit scores have been artificially inflated over the past decade,” as credit scores have steadily increased over the past decade of economic expansion.  The conclusion cited is that “debtors are riskier than their scores indicate because the metrics don’t account for the robust economy, skewing perception of borrowers’ ability to pay bills on time”. So are FICO® Scores “artificially inflated?”  The simple answer is no. FICO Scores Are Not Fixed Estimates of Credit Risk The FICO® Score is designed to rank-order the likelihood that a borrower will repay their loan(s), with higher scoring borrowers representing lower risk, and lower scoring borrowers representing higher risk.  The aim of the FICO® Score is to ensure that a pool of borrowers scored as a 660 at a given point in time represent lower risk of default than a pool of borrowers scored as a 620 at that... [Read More]

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Risk & Compliance Examining the Credit Cycle: Is This as Good as it Gets?


More than 70 straight months of US job growth, the official unemployment rate down below 5%, and average hourly earnings growing at a seven-year high of 2.9%. Signs of approaching full employment finally allowed the Fed to see enough stability to inch up rates without being seemingly blown off course by events elsewhere. There will be more rate hikes to come if the economy stays on this course, and in the event the deficits grow, it will pretty much guarantee what we already expect on the interest rate front. With all this in mind, it’s a good time to ask: Has the US credit cycle reached the top? Is it as good as it gets? Of course, we never know that for sure. This is all opinion (some would say speculation), especially on the economic policy front. But you have to feel that if it isn’t the top we are... [Read More]

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Risk & Compliance The 2016 Road Ahead: Top Banking Trends and Challenges


What does the road ahead hold for bank risk managers? As 2015 winds down, I’ve been visiting many banks all over the world. During these conversations, several themes keep recurring, suggesting both opportunity and challenges for banks in 2016. Here’s where I see things heading next year: Expanding the onramp to credit. Finding new ways to serve the “credit underserved” is top-of-mind at many institutions, particularly in the US. The growth of alternative lending, combined with the desire of more traditional lenders to find new customers in a saturated market, appears to have created momentum for expanding services to many people who have not utilized mainstream banking products in the past. Caution ahead: rising interest rates. I don’t think rates themselves will be a big deal because the rise will likely be gradual. The bigger concern is the impact of a stronger dollar. This will cause capital to flow into... [Read More]

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Risk & Compliance HELOC Resets: Here We Go Again?


In my last post, I shared new FICO research on home equity line of credit (HELOC) resets. The good news: after examining credit performance of HELOCs older than 10 years, we found little evidence that HELOC bad rates increase dramatically after their reset dates. However, our research uncovered a potential new concern: with the US housing market recovering, consumer appetite for HELOCs appears to be increasing again. Consider the current balances of HELOCs by the year booked: As house prices fell during the Great Recession, significantly fewer HELOC loans were booked. However, as house prices recover, consumers are once again taking advantage of these loans in large numbers, as shown by the increase in the blue line in the graphic above. In the past year, we find balances on HELOCs similar to what was booked in 2003. While recent HELOC growth is slightly less pronounced compared to the years prior... [Read More]

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Risk & Compliance HELOC Resets: Greater Risk on the Horizon?


In the run-up to the Great Recession, millions of US consumers borrowed large amounts via home equity lines of credit (HELOCs). Since these loans are about to hit their 10-year reset marks, I’ve been sharing research findings from our latest study on HELOCs. We’ve found good evidence that, after these HELOCs hit their reset dates, borrowers are indeed paying more and/or refinancing. This begs the question: do HELOCs that continue beyond their reset date have a drop in credit performance? In other words, are higher payments causing more borrowers to default on these loans? To answer this, we examined HELOC one-year delinquency rates (90 or more days past due) across three different points in time, comparing a recent timeframe to one at the height of the Great Recession and another prior to the recession. Here’s the recent snapshot: While bad rates start to increase around the fifth year of maturity,... [Read More]

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Risk & Compliance HELOC Resets: Cause for Concern?


Worries about widespread home equity line of credit (HELOC) resets have been growing slowly but steadily in recent years. Over the next few years, HELOCs granted to millions of US homeowners prior to the Great Recession will reach their 10-year mark, which is when the bulk of HELOCs “reset” – that is, they become closed-end loans, and any remaining balance must be paid off in the following years. When these lines of credit convert from interest-only to principal + interest, consumers will likely see significant increases in their monthly payments. While some may refinance into another loan, there is concern that those who do not refinance may charge-off at increased rates. As a result, the banking industry faces a potential double-whammy of larger volumes of HELOCs hitting their reset dates, along with greater loss rates on those larger volumes. With that in mind, we undertook a research study to better... [Read More]

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Customer Engagement How Can Auto Financing Keep Pace with Market Change?


The auto financing industry has seen major market fluctuation over the past decade. When the recession hit and more cautious consumers deferred borrowing for new cars, auto financing sources consolidated and looked towards more conservative options themselves. 2013 saw the market start to rebound. Consumers once again became optimistic borrowers, and the industry took the opportunity to increase financing options to meet demand. For the most part, these loans have fueled strong growth for automotive financing sources. However, since subprime financing has also grown, there has been an increase in borrowers getting loans who don’t have the ability to pay. To protect profitability, auto financing sources should employ two important tactics: Identify customers likely to become delinquent and take preemptive action. By taking a proactive and analytic approach to customer management, auto financing sources can prepare for the likelihood that certain customers may go delinquent and require greater attention. Understanding... [Read More]

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Risk & Compliance Three Things We Learned from Our Latest Banker Survey


Happy New Year! We’re kicking off 2015 with the release of our latest credit risk survey results. The bank risk officers we polled in December offered interesting insights into the potential financial and economic pitfalls we may face this year. Here are three results that grabbed my attention. Credit card debt is expected to rise. In the banker survey, 57 percent of respondents said they expected credit card debt to rise. In addition, 42 percent expected consumer loan delinquencies to rise, while 11 percent expected delinquencies to decline. However, respondents did not see consumer demand for credit slowing – 58 percent expected the amount of new credit requested to increase, and just 6 percent expected a decrease. The wealth gap is perceived to be a big deal.Nearly 74 percent of those surveyed said “the wealth gap poses a risk to the financial system in North America.” That is an increase... [Read More]

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Customer Engagement 5 Trends Triggering the Decline of Black Friday


Starting in 2004, Black Friday (the Friday after Thanksgiving) became the busiest shopping day of the year in the US. This year, 95.5 million US consumers are expected to spend more than $40 billion on Black Friday. This is nearly 7 percent of the total that the National Retail Federation forecasts for the 2014 holiday season. This holiday season promises to be lucrative for retailers, with sales rising 4.1 percent to $616.9 billion, higher than 2013’s actual 3.1 percent rise. However, 7 percent marks a six-year low (as a percentage of overall retail sales for the season) for Black Friday, more in line with the recession years. Deloitte concurs. According to its 29th annual holiday survey, nearly half of consumers no longer rely on Black Friday for shopping and deals the way they once did. And 43 percent of respondents plan to do most of their holiday shopping in December... [Read More]

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Risk & Compliance Credit Research Part 4: Second Mortgages Decline Post-Recession


I’ve been blogging about the impact of the Great Recession on first mortgages, most recently examining mortgage delinquency rates. In this entry, I turn my attention to second mortgages. Recent FICO research shows that there are now significantly fewer US consumers with such loans. And despite the fact that housing prices have steadily recovered over the past 2+ years, there is no indication that consumers are beginning to leverage any of that additional equity. As in my prior posts, I’ll focus on mortgage-related trends in six Metropolitan Statistical Areas (MSAs): Miami, Phoenix and Las Vegas as examples of cities that had a more pronounced contraction during the recession, and San Francisco, New York and Washington D.C. as areas that weathered the crisis comparatively well. In the first phase of our analysis, we classified second mortgages into two broad categories: revolving Home Equity Lines Of Credit (HELOCs) and closed-end home equity... [Read More]

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