Millennials’ unconventional credit habits may change scoring models
This generation has similar income and asset levels as most homebuyers, but they think about carrying credit differently, according to VantageScore Solutions’ latest study
Because millennials don’t look at credit the same way generations before them did, lenders — and by association, if nothing else, real estate agents — are missing out on thousands of mortgage fees and sales commissions.
According to the latest study by data scientists at VantageScore Solutions, a scoring model still struggling to gain acceptance by the federal agency that regulates the two secondary mortgage giants Fannie Mae and Freddie Mac, millennials have similar income and asset levels as most homebuyers.
But they are more debt averse and keep their credit balances lower, lower, in fact, then older generations. That’s not necessarily a bad thing. But when they do have credit accounts — and many do not — they often don’t have enough to produce a credit score.
They have what’s known in the trade as “thin” credit files, or those with two or less active accounts. Those with what are considered “thick” files have three or more accounts.
Recent data produced by Vantage Score, a rival to the various and more popular FICO score most lenders use to approve or reject borrowers wanting to finance a home purchase, “shows (millennials) are writing their own story when it comes to using credit,” says the company’s president, Barrett Burns.
Conventional wisdom has it that those with more assets and higher incomes make more use of credit and have higher incomes than those with thin files. Some lenders don’t even make loans to would-be borrowers with little credit histories, while others offer them more expensive subprime-like products.
But the VantageScore research found that millennials “are anything but conventional.”
Indeed, unlike other generations, those with thin files generally have similar income and asset levels as persons with thicker files.
And in what the study calls “prudent credit management,” those with student loans “appear reluctant” to add any more debt on top of what they already are carrying. “This is smart credit behavior, not riskier,” the report maintains. And since their income and asset levels don’t translate to greater uses of credit, “they likely have the capacity to handle new credit accounts.”
Meanwhile, according to VantageScore, “older models and lending strategies penalize them simply because they haven’t opened new loan accounts.”
Among millennials with revolving accounts, the analysts also found, balances are low, about a third less than their full-file counterparts. “Thin-file millennials either cannot or will not charge up high balances on revolving accounts,” the study also concluded.
For these and other reasons, VantageScore’s Burns says conventional scoring models such as the FICO scores used by mortgage lenders — FICO has developed a score for each of the three main credit repositories, Equifax, TransUnion and Experian — may be shortchanging otherwise credit-worthy young wanna-be homebuyers.
Burns believes scoring models need to be updated periodically to “maintain their peak level of predictiveness,” he wrote in a recent company newsletter.
“Not only does the data available to modelers get better and model building techniques improve, but the mix of credit products changes, as do consumer behaviors and the way the treat their finances.”
VantageScore, which tracks rent payments, utility bills, cell phone bills and other types of credit FICO doesn’t, has some skin in this game, of course. It has been trying since 2006, when it was created by the three big repositories to compete with FICO, to get its nose in the door at Fannie and Freddie. If the two government-sponsored enterprises say they’ll accept aVantageScore score, then lenders will start using it.
But this summer, the Federal Housing Finance Agency, which not only regulates the GSEs but also has had them under conservatorship for a decade, suspended its review of new and alternative scoring models. Instead, it said it would create a regulatory framework for providers of such models to apply and be evaluated by Fannie and Freddie, themselves.
“After careful evaluation, we have determined that proceeding with efforts to reach a decision based on our Conservatorship Scorecard Initiative process and timetable would be duplicative of, and in some respects inconsistent with, the work we are mandated to do under Sec. 310 of the Act,” FHFA Director Mel Watt said in a press release at the time.
(Sec. 310 refers to a section of the regulatory reform bill signed by President Trump in May requiring the FHFA to define, through rule-making, the standards and criteria Fannie Mae and Freddie Mac will use to validate new and alternative credit scoring models.)
To say that Burns and his crew were rocked by the decision is an understatement. After all, 12 years and counting is a long time to try to gain approval. But Even FICO was let down. It has a new score — UltraFICO — that counts a consumer’s cash flow right alongside his score that it says promises to expand access to credit.
FICO is testing Ultra with Experian and data aggregator Fincity that draws on several month’s worth of data from people’s bank accounts, the idea being to create a “second chance” score, so to speak, that would give those who have been denied credit under a traditional scoring model another shot at the brass ring.
Before the regulatory reform measure passed, the FHFA had given itself a 2018 year-end deadline to decide on new scores. Now, it’s anyone’s guess when the framework under which Fannie and Freddie can test new scoring models, let alone when a new model or two will finally win approval.
As for VantageScore, it is hoping “we’ll finally get there” in 2021, if then, says spokesman Jeff Richardson.
Meanwhile, Burns, while saying his firm “looks forward” to working with the FHFA and the GSEs, could not hide his disappointment. “With every day that passes,” he said, “mortgage applicants are mispriced, locked out and discouraged from pursuing homeownership.”
Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.