Right now policy makers, industry participants and advocates are no doubt discussing how to remedy the housing industry's problems. Their discussions are based on assumptions that might not be correct.
Nearly 80% of lenders significantly underestimate the number of people in this country who belong to a group we call "credit invisibles." To provide additional context to this issue, we surveyed lenders to understand their perceptions about this group.
A sample of our findings include:
- Roughly 62% of large lenders (those with at least 1,000 employees), think providing credit scores to more people would give more Americans access to credit and improve the economy.
- Roughly 63% of all lenders view unscored consumers as an opportunity instead of an additional cost and risk. Seven out of ten survey respondents with at least 20 years of experience held this opinion.
- An overwhelming majority — 69% — of lenders said there was a demand for more than one credit scoring model in their origination business.
- About 64% of all lenders would like to lend to borrowers with thinner credit files.
Our data scientists analyzed consumers who are not scoreable by conventional credit scoring models - the so-called credit invisibles. We discovered some 30 million to 35 million consumers cannot be quantified by a credit score because their credit behaviors don't meet the criteria of traditional models. In fact, about 7.6 million of these consumers earn scores of 620 or higher, placing each consumer well within the desirable range for many mortgage lenders.
We also found that credit invisibles actually have first-year default rates that are nearly identical to those of conventionally scored consumers. Using more modern scoring methodologies — methods that better leverage the data that exists in a person's credit file — our scientists compared the unscoreable consumers to conventionally scoreable consumers, grouping them in similar scoring bands (580-600, etc.). We then took a look at first-year payment default rates for each group and found the default rates were nearly identical. In other words, the risk levels for both groups were essentially the same.
But just as interesting, most lenders said they see consumers without conventional credit scores — at least those they are aware of — as an opportunity, not an unnecessary risk.
Previously I wrote about who the credit invisibles are and why they are important. I also wrote about how Fannie Mae and Freddie Mac's seller/servicer guidelines prevent lenders from using models that score more of these consumers and about the welcome news that the two GSEs are examining this issue. That's good news and a step in the right direction.
One key assumption prevalent in the mortgage industry is that borrowers who lack credit scores resulting from legacy credit scoring models pose unacceptable risk for lenders. Another assumption is that no lender is interested in these borrowers. Yet, the more we investigate these assumptions, the more we find out how false they really are.
Barrett Burns is president and chief executive officer of VantageScore Solutions.