Dear Colleague,
The current state of the “credit box” has been a frequent topic in this newsletter, and the source of countless news articles. Most industry participants, advocates and economists say credit is too tight in the mortgage market. And last month, I shared a mathematical view of how the probability of default (PD) that underlies any given credit score changes over time, and how lowering a credit score cut-off doesn’t necessarily mean acceptance of additional risk, assuming all other credit criteria remain unchanged.
In an article published this month in Mortgage Banking magazine, titled “Risk Redefined and Why Credit Scores are Changing,” I dive deeper into this issue, and also cover the economic implications. A significant challenge we all face is that credit scores are often considered absolute measures of consumer credit risk.
This mistaken belief can lead to a common, erroneous tendency to view any lender’s lowering of its credit score cut-offs as an indication the institution is willing to accept significantly higher amounts of risk or that the lender is going back to habits that contributed to the credit problems. Such comparisons are misleading. A credit score of 700 calculated five years ago typically represents significantly more risk than the same score calculated today. As consumer behaviors change, the PD associated with a credit score shifts as well over time.
We have included excerpts of the article in this edition of The Score, but you can also access it in full on our website. Special thanks to Mortgage Banking magazine’s editorial staff. Thanks as well to Mark Zandi, chief economist with Moody’s Analytics; and Jim Parrott, former HUD and White House senior housing advisor, founder of Falling Creek Advisors and senior fellow at the Urban Institute: My article included excerpts from their excellent paper, “Opening the Credit Box.”
We have another excellent lineup of articles for you in this month’s newsletter. In addition to the Mortgage Banking excerpt, you will find a terrific consumer-focused article on best practices for credit-card users who want to keep credit scores as high as possible.
This month’s “Did You Know” article focuses on the important issue of what makes a lender’s proprietary, or “custom,” model different from a generic credit scoring model like the VantageScore model.
And answering our “Five Questions” this month is Raj Date. Date headed up the Consumer Financial Protection Bureau before founding and serving as managing partner of Fenway Summer LLC. Fenway Summer, which provides consumer-finance consulting services and venture investment, recently made news with its acquisition of a startup mortgage lender.
Please enjoy.
Regards,
Barrett Burns