How’s Your Credit?

How’s Your Credit?

What, if anything, is holding the mortgage market back? One culprit that Nations Lending sees is that credit scores are not working the way they should. Our loan officers know that perhaps no number is more important to U.S. consumers than their credit score. It can determine everything from the size of the required deposit on a rental apartment to the interest rate on an auto loan.

In the mortgage market, however, credit scores aren’t doing their job properly because Fannie Mae and Freddie Mac require lenders to use only one score, known as Classic FICO. A product of Fair Isaac Corporation developed using consumer data from the late 1990s. Unfortunately, it can’t distinguish between overdue medical and non-medical bills for example which have very different implications. It also dings people for debt already paid to collectors. These and other shortcomings can score people inaccurately or sometimes not at all.

Nations Lending is closely following developments for an improved method of evaluating credit. Candidates include FICO 9, released in 2014, and VantageScore 3.0, produced by a joint venture of the three big credit bureaus. VantageScore’s purveyors say that, by taking a different approach to the available data, it can produce scores for as many as 35 million added Americans. This could help identify a lot of creditworthy borrowers, including blacks and Hispanics, whom conventional models miss.

In the future lenders like Nations Lending may be able to choose among various credit scoring models. This would give credit-scoring companies an incentive to incorporate the latest data and technology, and create an opening for firms that have been exploring unconventional data sources such as social media and mobile-phone accounts.

But would competing credit-scoring companies engage in a “race to the bottom,” becoming increasingly lenient to gain market share? That danger needs to be watched, but post-crisis mortgage rules have placed strict limits on the loosening of lending standards. The Urban Institute’s Housing Finance Policy Center estimates that the mortgage market is taking on less than half the risk it did in 2001, before the housing bubble started to inflate.