Assessing the Risks: Different Credit Scoring Models and Impacts on the Mortgage Market

This independent research report shows why minimum scoring criteria adds reliability to a credit score and how removing it makes the credit score both less predictive and in the long run more costly for everyone. Kroll analyzed the credit failure rate over a two-year period across a data set of 40 million credit scores from individuals who had either a FICO Score or an alternative score in which FICO’s minimum scoring criteria are not used. The research showed higher credit risks for both consumers and lenders when using the alternative scoring model. In particular, alternative credit scores used in Residential Mortgage-Backed Securities (RMBS) ratings carry significant risks. Kroll’s research finds that the economics of securitization will be less efficient and may result in the transfer of the cost of both increased default and prepayment uncertainty back to the consumer. In short, minimum credit scoring criteria provide an important protection against unnecessary credit risk.