Predicting good news for the mortgage industry
A dominant trend shaping the single-family mortgage sector over the last several years is that of homeowners refinancing to take advantage of historically low interest rates. A backlog of foreclosures and short sales is also slowly working its way through the real estate market.
The number of originations (new purchase money mortgages) has remained tepid, however. And until that trend improves, particularly among first-time buyers, the real estate market is unlikely to recover fully.
But positive signs that the market is heading toward recovery have started to appear. Lenders wrote off $43.1 billion in home finance balances in the first quarter, according to Equifax’s March National Consumer Credit Trends Report. That’s a decrease of nearly 23 percent from the $55.4 billion written off in the year-ago quarter, and it reflects a five-year low.
Equifax Chief Economist Amy Crews Cutts said the amount of homeowner debt being paid down or off now exceeds the amount lenders are writing off. “This shift is important, as increased home purchases are finally leading to more demand for mortgage credit and may soon stop the decline in mortgage debt outstanding,” she said.
That improvement in credit risk is good news for mortgage lenders. I am confident that the market can move forward in a dramatic way, especially given the new and more powerful predictive tools available to lenders.
Case in point: the VantageScore 3.0 credit scoring model, which was developed using post-recession consumer data. It’s worth driving home the notion that a model built on the latest data reflects the most current consumer behaviors and thus is more predictive.
Moreover, the VantageScore 3.0 model takes advantage of more granular data. Instead of treating all real estate loans the same, for instance, the model can distinguish between first mortgages, home equity loans, and home equity lines of credit. It can also discern different types of installment loans, such as auto loans, student loans, and personal loans. These credit products, and the consumer behaviors associated with them, are very different from one another, and each provides the VantageScore 3.0 model its own particular insights.
The different and more granular treatment of credit products and behaviors translates into what I believe is transformative predictiveness. Overall, the VantageScore 3.0 model delivers up to a 25 percent predictive improvement over earlier models among prime and near-prime consumers, typically the most desirable segment for any lender. That performance boost gives lenders a far better ability to assess the potential risks to their own portfolios, delivering an increased safety and soundness benefit.
Plus, the VantageScore 3.0 model can generate scores for 30-35 million previously “unscoreable” consumers because it considers at least 24 months of credit history rather than the traditional six months. That’s a whole new universe of potential customers for lenders. That is good for consumers, good for lenders, and good for the economy.
The VantageScore 3.0 model can and will be part of the mortgage market’s recovery, which, along with real estate market, are the themes of this month’s The Score. In it you’ll find:
- Answers to a big question on everyone’s mind: Can someone with a previous foreclosure or short sale get a mortgage loan? In partnership with SourceMedia Research, we ask lenders this question about the outlook for so-called “boomerang borrowers.”
- An update on the Index of Banking Activity, which shows encouraging growth for the second month in a row.
- A consumer-friendly article about how to stand out as a desirable buyer to a home seller considering multiple offers.
- Our monthly “Did You Know” column, which this month looks at why lenders, particularly mortgage lenders, pull multiple scores when they assess a consumer’s creditworthiness.
- Our “Five Questions With” column, which this month features Gary Acosta, co-founder and CEO of the 20,000-member National Association of Hispanic Real Estate Professionals (NAHREP), who will offer his perspective on the market and also share NAHREP’s annual State of Hispanic Housing Report.
All the best,