Fitch: FICO Best Default Risk Indicator

FICO scores are the best indicator of mortgage default risk, and underwriting standards used to distinguish between prime, alternative-A, and subprime borrowers have a "substantial influence" on default and loss, according to Fitch Ratings.In a new report setting out the rating agency's new loan default model, Fitch has identified three major predictors of mortgage loan defaults -- FICO scores, credit sector, and combined loan-to-value ratios. The new model identifies 13 mortgage credit factors for projecting loan-level defaults, and incorporates regional economic stress factors to reflect the varying regional levels of risk. "Fitch’s new model is based on actual historical loss severity data, rather than projections of home price movements and expenses," the rating agency said. "The model provides insight into which loan attributes are predictive of higher loss severity, and fully captures the difference in severity among the various credit sectors." Fitch said ResiLogic, the public version of the new default model, will be available for beta testing beginning Nov. 6. The rating agency can be found online at http://www.fitchratings.com.