Evidence is growing that more borrowers will be approved for a
mortgage without increasing risk to lenders through more sophisticated
credit risk scoring that uses alternative data, such as unsecured credit
and property history in consumer credit report analysis, according to a
new report by the CEB TowerGroup.
“Traditional credit data and analytics continue to be relevant, but
are not sufficient to satisfy the consumer credit reformation of today,”
says the CEB TowerGroup’s senior research director, Craig Focardi. “As a
result of the changes in consumer behavior, lenders cannot revert back
to their prior mortgage underwriting policies. Too much damage has
already been done to the market, consumers, shareholders and investors.”
CEB TowerGroup evaluated data from a joint analysis conducted by
CoreLogic and FICO that compares the FICO® Score used by most lenders
today with a new score launched in July that evaluates the traditional
credit data from national credit data repositories and the unique
alternative credit data contained in the recently launched CoreScoreTM
credit report. The analysis of 300,000 mortgage applications found that
3,100 more applicants would receive a qualifying credit score of 700 and
approximately 70 percent of a sample population saw their credit score
improve.
The report included a joint analysis by CoreLogic and FICO that found
that enhancing the process of determining risk with new alternative
data and analytics would allow lenders to approve loan applications that
might otherwise be denied, or deny problem loans that might otherwise
be approved. Both outcomes would help consumers and the market itself,
says Tim Grace, senior vice president of Product Management at
CoreLogic.
The report, titled “Enhanced Credit Data and Scoring: Deeper Insight
into Mortgage Applicants,” notes that consumers used to pay mortgage
debts first, but because of the recent financial crisis some consumers
now treat paying other debts, such as credit card bills and car
payments, as a higher priority to maintain personal financial liquidity.
Key findings in the CEB TowerGroup report include:
• Alternative credit information can support loan applicants with
newly established credit files with good credit, those with minimal
information in their traditional credit files but with good alternative
credit payment histories, and long-time renters with no serious payment
issues.
• More complete loan applicant, property and related information will
bring greater transparency and efficiency to the mortgage lending
markets and help reduce risk.
• The new FICO/Corelogic score is more accurate than the prior FICO®
Score in identifying the riskiest loans improving lenders ability to
discern consumer credit risk at origination. For applicants identified
as the riskiest 10 percent of the lending population (those most likely
to become past due on their mortgage loan), it identified 10 percent
more seriously delinquent mortgage loans – loans 90 days or more past
due.
For more information, visit www.realestateeconomywatch.com [2].