A World Without FICO Credit Scores: What Was It Like?
Movement Mortgage’s Anna Benz discusses the importance of FICO Scores in the credit ecosystem
What you will learn:
The impact of FICO® Scores on modern mortgage underwriting, credit risk assessment, and credit risk management.
The advantages of FICO’s latest credit scoring model in enhancing predictive accuracy.
The influence of different credit scoring models and how they impact the efficiency and loan liquidity in the mortgage market.
The importance of FICO’s newest credit score and how it enhances predictive credit risk management through inclusion of trended credit data.
With 28 years of experience in the mortgage industry, Anna Benz is a seasoned professional known for her exceptional leadership and expertise. She is currently the Senior Vice President of Non-Agency Lending at Movement Mortgage. Prior to joining Movement Mortgage, Anna held key positions at Union Bank, NAF, and People’s Choice as well as the Federal Reserve Bank of San Francisco. She has the reputation as a top, highly skilled industry leader and innovator which she now displays with Movement Mortgage.
Joe: You have been an industry leader for many years, including when getting a mortgage loan was often subject to personal whims. In fact, you have said, “I lived through a world without FICO® Scores, and I am scared to ever return to that world.” Describe what you mean by that? What was mortgage loan underwriting like before the FICO Score was widely used.
Anna: Before the introduction of the FICO® Score to mortgage underwriting in 1989, underwriters followed an often subjective process to qualify applicants. The individual judgment of underwriters played an outsized role in determining a borrower's creditworthiness.
For example, before the days of automated mortgage underwriting and FICO® Scores, there were manual credit reviews. Underwriters reviewed credit reports, looking at the number of accounts, types of credit used, length of credit history, and payment history to determine the risk profile. This required an often inefficient, time-intensive, and manual deep dive into each applicant’s financial background.
Along with this, there were often character assessments. Mortgage lenders would evaluate the character of the borrower through personal interviews, letters of recommendation, and sometimes even community reputation. This was especially common in smaller, community-based banks where personal relationships and the borrower’s reputation could significantly influence underwriting decisions.
The introduction of the FICO® Score standardized credit risk assessment and made the process more objective, efficient, and consistent across lenders. This shift allowed for a more streamlined underwriting process, reduced the potential risk of disparate treatment, and facilitated the development of automated underwriting systems.
Joe: Your company, Movement Mortgage, is a major retail lender and an early adopter of FICO® Score 10T, the newest and most predictive FICO® Score ever. What were the considerations that went into Movement’s decision to begin using FICO Score 10T?
Anna: One of the biggest reasons Movement Mortgage decided to use this credit score is its enhanced predictive power. FICO® Score 10T incorporates trended credit data, which looks at the borrower’s credit behaviors over a longer period of time. This allows us to gain deeper insights into how mortgage borrowers manage their credit, providing a more accurate prediction of their future credit risk profile.
To us, the inclusion of trended data in FICO’s newest scoring model helps differentiate between borrowers with similar scores but different credit behaviors. For example, borrowers who consistently pay off their credit card balances in full every month can be distinguished from borrowers who only make minimum payments. This differentiation allows us to make more informed lending decisions to assess a mortgage borrower’s creditworthiness.
By using a more comprehensive view of a person’s credit history, we can better identify high-risk borrowers and potentially reduce default rates. This benefits both lenders and borrowers, as it leads to more sustainable lending practices.
The ability of FICO® Score 10T to track credit utilization trends over time also enables us to make more informed decisions about credit limit adjustments. We can more accurately assess a borrower’s ability to handle additional credit, leading to more responsible lending.
In short, the adoption of FICO® Score 10T aligns with our mission to provide responsible, innovative, and customer-focused mortgage lending solutions. It enhances our ability to assess credit risk accurately, offer competitive terms, and compete effectively as a leader in the mortgage industry.
It also demonstrates our commitment to leveraging the latest technology to provide superior service and more tailored mortgage lending solutions for our clients. With a more accurate and comprehensive assessment of creditworthiness, we can offer better terms and conditions to our clients. This leads to higher customer satisfaction and expands credit access to more borrowers.
Joe: The FICO® Score has served as a great equalizer, allowing mortgage lenders to compare buy-boxes, and governments and banks around the world to buy and sell mortgage-backed securities with known and commonly understood credit risk assessments. What might the global landscape look like if everyone just used their own credit scoring models?
Anna: I believe that without a common standard, each lender’s unique model would produce different results, making it hard to assess and compare credit risk consistently. This would increase complexity in mortgage-backed security trading, as trading relies on the ability to assess the risk of the underlying mortgage loans in various pools across lenders. A standardized credit score provides a proven way to assess credit risk factors, facilitating the buying and selling of mortgage-backed securities globally. Without it, investors would struggle to evaluate the credit risks associated with different mortgage-backed securities of different lenders, leading to reduced liquidity and potentially higher costs of capital.
In fact, the use of different models could seriously fragment the market. Lenders and investors would need to understand and evaluate each unique scoring model, increasing due diligence costs and complexity. This fragmentation could hinder the flow of capital and reduce overall market efficiency. For lenders managing large loan portfolios, a standardized credit score simplifies credit risk assessment and management. Without it, portfolio managers would face difficulties in aggregating and comparing risk across different loans, potentially leading to suboptimal decision-making and increased risk exposure.
In a globalized financial market, standardized metrics are essential for facilitating cross-border trade and investment. The absence of a common credit score would create barriers for international investors and institutions, reducing the flow of capital and hindering global economic growth.
What’s more, regulators rely on standardized metrics to ensure that lending practices are fair and non-discriminatory, particularly in the area of regulatory oversight to prevent biases. A standardized credit score like the FICO® Score helps to mitigate these biases by providing a consistent framework for credit risk assessment. Without it, the risk of inconsistent and potentially unfair lending practices would increase.
In short, the use of a standardized credit score provides a common language for assessing credit risk, ensuring that lenders, investors, regulators, and consumers can operate within a consistent and transparent framework. While it’s beneficial to customize and enhance credit assessment models to meet specific needs, retaining a core standardized credit score is essential for the stability and growth of the financial system.
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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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