The recession and its aftermath, including stubbornly high unemployment, did a number on Americans’ credit scores. The average person’s credit score is 655, according to Credit Karma. Unfortunately, the average credit score you’ll need to get a mortgage is 764, or 770 if you want to refinance. Into this gap, two companies have partnered to create a new credit score they say does a better job of measuring mortgage risk — and found that most of us have better credit than we thought. Over 70% of consumers scored higher with this new score, and 24% saw increases of more than 50 points. The big X factor is when — or if — lenders will flock to this new standard.
The score is derived from a new credit scoring model developed by FICO score creator Fair Issac Co. and data company CoreLogic, who say it offers a more accurate assessment of borrowers’ creditworthiness by using data not usually connected to credit scoring. The two companies announced the model several months ago, and the new score — which bears the somewhat unwieldy title of the FICO Mortgage Score Powered by CoreLogic — just made its debut.
While prime and even subprime lending are back in full force in credit cards and auto financing, mortgage-lending standards remain tighter than normal. It makes sense that banks don’t want to get back into the bubble-era of giving out loans to anyone with a pulse, but the pendulum has swung too far in the other direction, and many borrowers who would have qualified for prime rates five years ago are locked out entirely or can’t get the record-low rates currently being offered.
Tim Grace, senior vice president of product management at CoreLogic, says the scoring formula looks at nontraditional metrics like rent payments, utilities and public records. When plans for this were initially announced, consumer advocates worried that this expansion of data collection would lead to borrowers being penalized and their scores dragged down.
This seems not to be the case for many people. Grace says the people who fare best are those at the very top and very bottom of the credit scoring spectrum. The percentage of people in the highest bracket, with credit from 800 to 850, jumps from roughly 18% to around 44% — more than a 100% increase.
But will banks bite? Grace says four small lenders are using the new scoring formula, and 25 lenders he characterizes as “the top mortgage lenders in the U.S.” are testing it. “The response has been much higher than I even expected, in a very quick amount of time,” he says. He predicts lenders will finish their tests and start integrating the new system in less than a year.
It’s true that banks are on the lookout for tools that help them avoid risk, but that might not necessarily translate into higher loan volume, especially in today’s economic climate. “In the wake of the financial crisis, almost every player, including banks, credit rating agencies, and especially the regulators are taking tougher and more conservative views of safety and soundness” of loans, says banking analyst Ken Thomas. “Bankers may not really be looking for ways to make more loans, but to make more safe and sound loans,” he says.
Thomas says most banks today are focused on growing capital and in getting out from under the junk loans they still have on their books, not growing their mortgage portfolios. “This product would have been more of a hit if it were released during the mortgage heydays of 2002 to 2006,” he says.
Initially, the question about this new, more detailed scoring model was whether it would benefit borrowers or injure them. Add to that a second question: Will it make a difference?