There’s a new credit score in town, ladies and gentleman, and it’s just for mortgages. The score is formally called the FICO Mortgage Score Powered by CoreLogic, which brings to mind the mouthful of a name change the Anaheim Angels underwent in 2005 when they became the Los Angeles Angels of Anaheim, but that’s a whole other story.
This new score is said to better predict mortgage applicant risk and is obviously looking to capitalize on the recent memory of the housing crisis and the ensuing Great Recession. It supposedly does so by incorporating information that is not typically included in credit scores, such as rent and utility payments and certain public records.
The idea, it seems, is that your typical credit score doesn’t include all the various factors needed to paint a complete picture of whether you are financially responsible or not, especially when it comes to your living situation. Someone who somehow manages to always make their credit card and loan payments on time might seem like an ideal candidate for a mortgage, after all, but if they’re constantly behind on rent, that could be a bad omen for a mortgage provider. At the very least, it’s something that should be considered. Besides, not everyone uses credit, but most people are responsible for rent, utilities, and avoiding having liens attached to their property.
Still, questions about this new score abound. Skeptics most notably want to know 1) Whether most consumers will end up with better or worse credit scores as a result of the new model; and, in turn, 2) Will it result in increased loan availability?
The good news for you and me is that the new scoring model seems to reflect our financial capabilities in a more favorable light. A recent test of the score on a sample of 300,000 mortgage applicants showed that it assigned 70% of the people higher scores than they would have received with typical credit scoring models. Twenty-four percent of the people saw at least a 50-point bump in their scores, and 45% of those who would have been barely able to meet the requirements for certain mortgage programs with their traditional credit scores would at least qualify using the new score.
Whoa, do we really think our economy needs 45% more home loans being taken out? If the Great Recession taught us anything it’s that neither borrowers, nor the country as a whole benefits from expanding credit availability to marginal borrowers.
Those numbers don’t necessarily mean that consumers would ultimately benefit either. What people seem to forget, especially in a credit-constrained environment, is that credit scores are somewhat relative. Banks are only going to give loans to a certain percentage of people, so even if everyone has higher scores, those with the best scores will likely still have the best scores and will be the most likely to garner loan approval. So, how your score changes compared to others’ (i.e. how your position in the hierarchy of applicants improves) is far more important than any absolute change in score.
There’s also no guarantee that the new score will result in an uptick in the number of loans being issued, or that they’ll even use the FICO Mortgage Score to begin with. Lenders these days are more concerned with sorting out the troublesome loans already in their portfolios than issuing new ones, and are in no mood to take chances (whether it be with risky borrowers or new credit scores) after the ordeal they went through during the Great Recession. Perhaps that’s why only four small lenders have yet adopted the new scoring model and all of the big boys are merely testing it.
Ultimately, only time will reveal the effect this new credit score has on the mortgage market, but at the very least, it’s launch should provide some reason for optimism among people who may have had a bit of trouble paying their credit card bills on time during the downturn but never once missed paying rent or keeping the water running and the electricity on.