Credit Scores To Be Revised Amid Soaring Mortgage Defaults

This is a reprint of an article by Kenneth Harney,
a columnist for the Washington Post Writers Group.

***

With foreclosures soaring - and some homeowners
with unblemished payment histories walking away
from their houses with no advance warning - the
two major producers of credit scores have begun
changing how they evaluate consumer risks of
default. The revisions could touch you the next
time you apply for a loan.

In late October, both FICO score developer Fair
Isaac and VantageScore Solutions, a joint venture
by the three national credit bureaus and marketer
of competing VantageScore, outlined modifications
they are making to handle the vast credit disrup-
tions caused by the housing bust, the recession,
high unemployment and behavioral changes.

Overall, credit industry experts agree, consumer
creditworthiness has deteriorated in the United
States since 2006 - especially among what used
to be considered the credit elite, people with the
highest scores.

For example, a study this year by VantageScore
found that the probability of serious delinquency
- defined as nonpayment for 90 days or more -
had increased by 417 percent among "super-
prime" borrowers between June 2007 and June
2009. Default risk during the same period rose
by 406 percent for the second-highest rated
category of "prime" consumers and nearly
doubled for those at the "near prime" scoring
level.

The driving force, said Sarah Davies, Vantage-
Score's senior vice president for analytics and
research, is the "significant change in consumer
credit repayment behavior" that began during
the housing bust and recession.

Not only are borrowers who previously were
rated outstanding credit risks far more likely
to default today, she said, but many home-
owners are defying longstanding credit industry
assumptions by going delinquent on their first
mortgage payments while simultaneously
continuing to pay their credit card balances
and second mortgages on time. Strategic
defaults - walkaways - by high score borrowers
also have been an unexpected and shocking
development, she said.

To adjust its statistical models to these new
realities, VantageScore says it conducted
extensive research on 45 million active credit
files obtained from the databases of its joint
venture partners, Equifax, Experian and
TransUnion.

The research examined the same files - with
personal identifiers removed - during set
time periods between 2006 and 2009 in order
to capture emerging behavioral patterns
associated with defaults on various types of
credit accounts.

The resulting VantageScore 2.0, which is
expected to be rolled out nationwide to lenders
in January, focuses in on the subtle warning
signs of credit stress that might have been
missed earlier - and penalizes or rewards
consumers with higher or lower risk scores
than they would have received before.

Joanne Gaskin, director of mortgage scoring
solutions for Fair Isaac, said her company's
new FICO 8 Mortgage Score is based on
similarly exhaustive research into consumer
credit-behavior changes over the past four
years. When used by a lender to rate the risk
of new applicants or existing mortgage customers,
Gaskin says the Mortgage Score is likely to be
anywhere from 15 percent to 25 percent more
accurate in detecting signs of future default,
compared with the standard FICO model.

Though she would not discuss proprietary
details about the early warning signs that the
new score monitors, Gaskin said they include
broad patterns such as the following: A borrower
with a current 720 FICO score might have average
balances on a first mortgage, home equity lines
and other accounts that are higher than norms
pinpointed by the revised scoring software. A 720
FICO is considered a good score by most mortgage
lenders - often qualifying for favorable rates and
terms.

However, the same applicant might rate just a
680 FICO or lower if the lender used the new
Mortgage Score. The lender would then have a
choice: reject the applicant, quote a higher interest
rate on the mortgage or require a larger down
payment.

Gaskin said the reverse could also occur: The FICO
8 Mortgage Score could come in higher than the
standard FICO - indicating lower risk for the future -
in situations in which formerly troubled borrowers
manage to put themselves back on a healthier credit
track.

Experts in the credit industry say the new scoring
efforts by Fair Isaac and VantageScore should prove
to be a net positive for the housing and the mortgage
industries if they can do what they claim: spot subtle
risk patterns and nascent hints of improvement.

But as a mortgage applicant you should know that
your next score might not look anything like the
score you thought you had. You might end up
getting a better deal - or worse - when lenders
quote you rates and terms.