FICO Emphasizes Customer-Led Recovery Need
Insight into the relationships between banks and consumers deemed critical to the recovery of both the housing market and the overall economy indicate mortgage banks need be aware of misperceptions about how mortgage delinquency and economic stress impacted borrower behavior--including "strategic default."
The recession of 2008 was the first since World War II that was consumer-driven due to consumer debt issues and mortgage problems that were inevitably followed by a contraction in spending, said FICO CEO Mark Greene in his keynote address at FICO World Forum event in November. And “a consumer-led recession needs a consumer-led recovery” that requires banks place more efforts in understanding borrower needs and rebuilding their relationship with consumers.
Banks are still looking for the “new normal” in their relationship with consumers, he said, and the reason why they have not found it yet is because they “haven’t reset the rules, to both sides’ satisfaction.”
Findings from: “How Much Is US Credit Behavior changing?” a FICO white paper that focuses on how the mortgage crisis and the recession of recent years helped swing consumer credit behavior between extremes, show it is a delicate balance. Such behavioral changes also lead to misperceptions that include the media celebrated decrease in card delinquencies and newer perceptions of behavior change.
FICO analyzed score movement in a national random sample of 10 million US consumers from October 2006 to April 2011. During these economically volatile years it identified four behavioral segments that together accounted for just over 51% of the sample population based on an extrapolated population of 200 million.
Credit score fluctuates between “Rising Stars” and “Fallen Angels” illustrate “migration patterns” that offer “significant insight into consumer credit attitudes,” FICO analysts said.
Key findings however defy expectations and public perception.
For example, the number of “Fallen Angels” or consumers whose scores fell over 150 points does not consist of the majority of borrowers, as indicated by the “press coverage of delinquencies and defaults.”
Mortgage issues did not cause the financial problems faced during that time frame for almost 72% of these borrowers—of which 40% had no mortgages, and of those that did, 53% had clean mortgage payment records.
The study also shows the 34% who had defaulted mortgages “look to be strategic defaulters,” as they continued to pay other credit obligations.
The size of the segment of borrowers whose scores increased over 100 points, whom FICO calls “Rising Stars,” is only slightly smaller than the “Fallen Angel” segment. It shows there is a healthy segment of people who have taken steps to significantly improve their credit worthiness, in addition to those who have improved their credit scores while taking on significant new debt obligations. In this group only 45% have mortgages.
Surprisingly fully one third of the credit population belong to “Prime Holders” the third customer group identified by FICO whose scores remained at low-risk levels during the crisis because they managed to maintain “a stable level of high credit worthiness during a severe economic downturn.”
Nonetheless, “a significant segment of consumers” whose scores remained in medium and high-risk ranges fell into the “Moderate & Subprime Holders” category and continue to struggle with credit management.
In this group, up to 39% have mortgages. However 63.8% of them “have not yet defaulted on those mortgages though they have problems on other trade lines.” Only 6% with defaulted mortgages appear to be strategic defaulters.
More than anything these findings indicate it may be easier than perceived to open up communication lines and reach mutually beneficial solutions with most homeowners.