Credit Scoring Changes and Banks Loosen Requirements
Credit requirements for obtaining a mortgage are easing and credit scoring companies, along with banks, are leading the way. FICO recently introduced its new FICO Score 9. The new scoring will bypass paid collection accounts and will differentiate between non-medical and medical collection agency accounts. Consumers with median credit scores who only have unpaid medical debts as their major negative credit, should see their FICO scores increase by 25 points. FICO says the update is more predictive of whether a consumer will repay a debt than previous versions. FICO Score 9 will assess recent consumer behavior which gives lenders better risk assessment throughout the credit lifecycle and all credit products.
FICO’s latest update joins competitor VantageScore’s changes. VantageScore was created by the three national credit bureaus. Back in March, VantageScore released VantageScore 3.0, which has similar characteristics to FICO Score 9.
“The VantageScore 3.0 model provides risk managers a level of predictiveness that will allow them to confidently extend credit to tens of millions of consumers that were previously invisible to them so that those consumers have a greater chance to access mainstream credit, which is one of our principle goals,” Barrett Burns, President and CEO of VantageScore Solutions said.
U.S. banks are relaxing credit standards in search for a middle ground between insuring a firm bottom line and being profitable after years of reckless home lending which gave way to stricter lending rules in decades. This slowed down the housing recovery. Earlier in the year, Wells Fargo & Company (WFC), the nation’s largest home lender, reduced its minimum credit score for borrowers of Fannie Mae and Freddie Mac backed loans to 620 from 660. Home buyers with higher debt and lower FICO credit scores are now a growing minority among borrowers of loans backed by Fannie Mae and Freddie Mac.
In the days following the 2008 housing crash, banks raised their credit standards to the highest level in more than two decades. Fannie Mae raised its score requirement to 620 from 580 in 2009 and by 2011, the average credit score of an approved mortgage reached 750, according to mortgage processor Ellie Mae. The tightened credit prevented as many as 1.2 million loans from being made in 2012, according to an Urban Institute paper. All this credit tightening reduced the amount of approved mortgages and negatively affected lender bottom lines. Lenders survived in the short term with a rash of refinancing activity until borrowing costs rose too fast and cut demand. This forced the larger banks to cut more than 25,000 mortgage jobs. Banks are now removing barriers for some borrowers with the hopes of reinvigorating a shrinking market.
“The pendulum swung too far,” said John Taylor, CEO of the National Community Reinvestment Coalition, a Washington-based organization that brings credit and banking services to middle- and low-income consumers. “They over-tightened the standards to the point where qualified borrowers couldn’t get access to credit.”
At the beginning of the year, Western Bancorp started offering mortgages with alternative income verification. At this point, the loans are only available to borrowers who can make a down payment of at least 35 percent. Western Bancorp sells mortgages to community banks. While they don’t examine tax returns and pay stubs, they use a technology that converts borrower bank statement information into data and analyzes what it says about their cash flow.
Karen Mayfield, Mortgage Banking National Sales Manager of San Francisco-based Bank of the West, say they make exceptions to their guidelines for borrowers whose credit issues were mostly caused by the recession which doesn’t give an accurate portrait of their financial situations.
“Whether it’s the private institutions or government-loan programs, we’re trying to do a better job of recognizing there were millions of people in this country that got bad marks in their credit that they wouldn’t have had, and shouldn’t have to pay life-long consequences,” Mayfield said.
With banks loosening credit requirements and credit scoring companies’ tweaking their algorithms to take into consideration the differences between non-medical and medical debt, the housing market may see the ice thawing among hesitant Millennials and other groups.
See New Report Disputes Negative Housing News
See Mortgage Credit Crisis or Potential Buyer Fears?
Resources:
Bloomberg News. “Wells Fargo Joins Lenders Lowering Credit Standards” 8 August 2014. http://www.bloomberg.com/news/2014-05-01/easier-homeowner-credit-compelling-wells-fargo-mortgages.html
HousingWire. “FICO’s latest update draws VantageScore ire” 8 August 2014. http://www.housingwire.com/articles/30964-ficos-latest-update-draws-vantagescore-ire
New York Times. “Credit Scores Could Rise With FICO’s New Model” 8 August 2014. http://www.nytimes.com/2014/08/08/your-money/credit-scores-could-rise-with-ficos-new-model.html?_r=1