In sports, we expect the rules to be fair. But at this year's San Francisco Half Marathon, something happened that made me question its rules and reminded me of what's taking place in the mortgage industry today.
A runner in the women's division ran the race a full minute faster than any other female athlete, but she was not declared the winner. That's because under half marathon rules, the official timer for all runners' starts at "gun time," the moment the race officially begins even for runners in the middle and back of the starting pack, who have to wait their turn to reach the starting line to begin the race. The woman who ran the course fastest based on "chip time," measured from starting line to finish line, had to wait so long to get started that her top performance was effectively erased in the official timekeeping.
The half marathon rules were probably just fine in the race's early days, when a relatively small field of runners could begin the race all at once, at gun time. But as the race grew more popular over the years, the rules didn't change to reflect the reality of long backups at the starting line. No one conspired to deny the runner what she deserved, but that's exactly what happened, thanks to outdated methods.
Just like our unfortunate runner, not all consumers are measured fairly when it comes to credit scoring. In fact, millions of creditworthy consumers are not even ranked at all, and thus find it difficult to access credit and nearly impossible to finance a home, given lenders' heavy reliance on automated underwriting.
Factors outside the scope of credit scores, such as income, assets, and ability to make a down payment all influence a lender's final decision to offer a loan, but a credit score is often the gateway to determinations about whether or not to consider those other factors. Applicants without credit scores are effectively out of the running before the race begins.
And, again like our half marathon runner, many of these "credit-invisible" consumers miss out on what they deserve, not because they perform poorly, but because they are evaluated using antiquated methods. This occurs because the major players in our housing industry rely on credit scoring models that use very narrow standards for determining creditworthiness, largely based on recent credit activity, credit availability and history of payments. But when information about a borrower is lacking in one of these areas, the borrower can't be scored, and no score usually means he or she is not getting a loan.
There are many reasons borrowers, including highly creditworthy consumers, might not use credit on a regular basis. For example, in the aftermath of the recent economic downturn, many Americans reduced their debt and even stopped using credit cards altogether. This seems like a perfectly reasonable reaction during hard times. But in the mortgage world, borrowers who use credit too infrequently more often than not can't be scored by a traditional credit scoring model.
Another category of "credit-invisible" consumers are retirees and other consumers who have paid off their mortgages and other long-term debts, and who use their available credit (typically credit cards) only sparingly. These consumers may have excellent credit histories, but if they go as little as six months without using their credit, they can "fall off the radar" and become unscoreable using traditional credit scoring models.
So you could have plenty of assets and a spotless record of payments yet you can't finance the purchase of a house because you didn't behave exactly the way the scoring models expected. In other words, like the half-marathoner, you were out of luck simply because you couldn't start the race at "gun time." In fact, it's as if you were never in the race at all.
So who are these "unscoreables?" We've crunched the numbers and estimate that 30 to 35 million people are not scored by the most popular credit scoring models. When measured by more modern scoring methodologies — methods that better leverage the data that exists in a person's credit file — as many as 10 million of these unscoreable consumers were found to have scores of 600 and above, making them well worth considering for mortgage loans.
Consumers who can't get scored are often stuck in a cycle of oppressive loan terms and lending schemes, leaving them victim to exorbitant interest rates, fees and conditions. A fact that should be worrisome to anyone concerned about equal access to homeownership is that approximately 9.5 million of unscoreable consumers are of African-American or Hispanic ancestry.
So how often do mortgage lenders receive loan applications from consumers without credit scores? According to a survey of lenders both large and small, conducted by SourceMedia and commissioned by VantageScore Solutions, one-third of lenders claim it happens either "sometimes" or "frequently."
Finding a solution for the unscoreable consumer is important to lenders, prospective borrowers and our nation as a whole, which is why I'll be continuing to write about it.
When it comes to homeownership, most borrowers are not out to win any marathons. But at the very least, they should all get a fair chance to compete.
Barrett Burns is president and chief executive officer (CEO) of VantageScore Solutions LLC, an independently managed joint venture of the three national credit reporting companies, Equifax, Experian and TransUnion, and the company behind the VantageScore® consumer credit scoring model. He is a 2011 member of the Federal Reserve Board’s Consumer Advisory Council and a director of the Homeownership Preservation Foundation.