Black Knight Financial Services is apparently working on its own “mortgage-specific FICO score” to better determine individual mortgage borrower risk, instead of simply looking at the overall credit profile of borrowers.
The news came from a webinar that Black Knight participated in with the Consumer Bankers Association back in December titled, “Hidden Opportunities with Subprime Borrowers.” Hat tip Inside Mortgage Finance.
The gist is that there are a lot of homeowners out there with imperfect credit, more specifically subprime credit (sub-620 FICO scores) who could stand to benefit from a mortgage refinance to a much lower interest rate, instead of paying say 8-10% currently.
But many are unable to do so using traditional credit scoring models, despite the fact that they actually pose less mortgage default risk than those credit scores might let on.
For example, even if they have a random unrelated collection or miss a credit card payment here and there, they might never, ever miss a mortgage payment.
A New Mortgage Score Is in the Works
Black Knight Senior Modeler Wesley Winter fielded a question from the audience about developing a mortgage FICO score, and said “we are working on that right now.”
He added that they “have access to the full dataset from one of the credit reporting agencies,” and are looking at similar credit behavior elements for the basis of a mortgage score “that could be offered as a standalone product.”
Whether heavyweights like Fannie Mae and Freddie Mac would actually use them is another question, but it could be used by portfolio lenders.
“It could also be used to enhance our mortgage models, that also take into account very specific loan characteristics, as well as other characteristics specific to the mortgage under analysis, including the macroeconomic environment and history to predict specific forecasts on that individual loan,” he said.
As it stands, “analysts at FICO producing those scores are hamstrung” to offering an all-encompassing score, but there’s a “great amount of data to produce something more specific” such as a true mortgage credit score.
And Black Knight believes some 100,000 to 200,000 of the roughly 600,000 performing subprime loans out there could be “great candidates” for a refinance if loan originators can “get over the taboo of originating low-credit loans.”
Might Utilize Macroeconomic and Loan-Specific Conditions
Mortgages are unique in that they can react pretty strongly to what’s going on in the economy. For example, during the housing crisis a ton of mortgages defaulted simply because home values went down, not necessarily because the borrowers all of a sudden became higher credit risks.
There was essentially less incentive to stay in a losing investment so homeowners decided to walk away. This isn’t really the case for a credit card debt or an auto loan.
To that same point, this risk can vary over time depending on how home prices are faring. If they’re projected to rise, one could argue that the future risk of default on the associated mortgages will be lower. And vice versa.
And again, if a borrower went through that mega crisis and didn’t miss a single mortgage payment, despite facing some really tough times (and likely an underwater mortgage), there’s a good chance they won’t default on that mortgage in the future, even if they missed credit card payments and other things.
This is referred to as “default exposure” – when mortgages are faced with things like a bad credit score, negative equity, and other default drivers, but still continue to perform, it’s less likely for that mortgage to default in the future.
Winter said it’s similar to “prepayment burnout,” where refinance candidates who didn’t refi when given the chance in the past probably won’t refi in the future…
With a mortgage-specific credit score in place, lenders could get better insight into mortgage borrower behavior to determine if more aggressively offering a refinance (loosening credit requirements) would be prudent and cost-effective.
Put simply, you could have not-so-great credit overall but be a really good mortgage borrower, and thus continue to receive relatively favorable mortgage financing options.
It should be noted that there are already industry-specific versions of FICO scores in existence, including those for the mortgage industry.
However, they tend to just compare consumers with mortgage tradelines (multiple population segments), instead of digging deeper into the actual mortgage loan’s attributes or the broader economy.
In any case, you might not want to hold your breath for a new scoring model, and instead avoid missteps that can lower your scores and cost you in the way of higher mortgage costs. That way you’ll be good to go no matter what credit score is ultimately used.