Mortgage Lending Shouldn’t Replace FICO Score with Trended Data


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Participants and influencers throughout the mortgage ecosystem have been told by the three main U.S. credit bureaus through their jointly owned credit scoring firm, VantageScore, that the VantageScore can enable millions more consumers to gain access to a mortgage — 2.6 million people out of a sampled five million, in fact.

In reality, very few new people will qualify for, and want, mortgages. The “innovation” VantageScore claims can score more people is simply the weakening of credit score criteria. The minimum criteria needed to produce the FICO score aren’t arbitrary — they are the result of decades of risk assessment research. Reliable credit scores can only be calculated from credit files with at least one open credit account for at least six months, and that have had an update reported to the credit bureau in the last six months. These criteria are necessary because credit scores need to reflect a person’s true creditworthiness to a degree that lenders, regulators and investors can rely upon. It’s just impossible to produce an accurate score based on too little data, or data that’s very old.

Let’s set that problem aside and look at the numbers to judge this claim. Our research shows that out of a sample of 20 million people, around 7.4 million Americans who don’t have a FICO score today could receive a research score of 620 and above if we weakened the minimum criteria to exclude the deceased or inquiry-only.

Around 7.4 million sounds like a lot of new borrowers, but let’s dig deeper.

First, remove people under 25. Consumers of that demographic are generally more concerned about getting their first job and paying off student debt than buying a home. Our research shows that over half of the population between 18 and 25 has at least one open student loan and more than half of them owe more than $8,000.

Now, remove people over 65. These people are focused on planning for retirement, not taking on a 30-year mortgage.

Focusing on the 25-65 demographic reduces 7.4 million down to 3.2 million potential borrowers.

Additionally,people who are already homeowners are not the target market for mortgage expansion. Removing them from the equation brings the number of possible home buyers to 2.05 million.

Consumers that experienced a foreclosure in the last 24 months, had a 90-day delinquency or have collections only on file will not make it through the mortgage underwriting process. Few people with those records are scoring above 620 even with the reduced-criteria research score, so the number drops to two million.

Of the two million consumers remaining, about 1.8 million are not actively using credit. In fact, more than 65% of this population has not seen an update in over 48 months.

Making a decision regarding a consumer’s mortgage application using a credit score calculated on a credit file from over four years ago is unacceptable. All market participants require a current score. (For mortgages, the credit score may not be older than 120 days at closing.) Further, while VantageScore chooses to produce a score on them, we know that these consumers are not seeking credit; typical application rates are lower than 4%.

Excluding them, the number drops to fewer than 200,000 potential mortgage candidates.

Some of those included within that group may not have a FICO score because they don’t have at least six months of credit history. The question then becomes whether they have sufficient credit experience to handle a 30-year mortgage.

Of the new-to-credit consumers, 73% are managing less than $250 of debt, and 72% have never managed a credit limit greater than $1,000. A mortgage would be a big leap up the credit ladder — these people need more credit experience before they will be ready for a mortgage, and by that time they’ll have a FICO score.

Applying common sense to the equation takes the 7.4 million newly scorable Americans down to just a few thousand potential mortgage applicants. Including more consumers by weakening the minimum scoring criteria is not a game-changer for America’s mortgage market. In fact, it can actually be harmful to consumers and delay their return to mainstream credit products.

The primary obstacle for many consumers to qualify for a mortgage is meeting the required debt-to-income ratios. Rather than weakening our risk management measures, the more impactful goal for the industry is to find ways to help consumers improve their financial picture through legitimate credit counseling so that they qualify for a mortgage. The only party that benefits from weakening the minimum scoring criteria is the company selling these scores.

Joanne Gaskin is the senior director of scores and analytics at FICO.

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