Some experts argue that today's credit score criteria for potential homeowners are too high and do not match their actual risk of default. Executives at FICO and up-and-coming rival VantageScore Solutions agree that mortgage lenders could relax these steep requirements without raising the risk of loss, giving some prospective buyers a better chance at loan approval.
FICO's Joanne Gaskins says her company's statistical studies confirm that "the risk of default on more recent mortgages is better than at the onset of recession" and that real risk essentially has reverted to the early 2000s. More people pay on time, meaning that lenders can afford to examine and consider lowering their current strict scoring requirements. One internal FICO study looked at mortgage default data through 2011. At a FICO score level of 700 in 2005, about 36 borrowers paid their loans on time for every one who went into serious default. In 2011, about 91 paid on time for each one who defaulted.
In an article to be published this week in Mortgage Banking, VantageScore President and CEO Barrett Burns describes an analysis based on scores of 680 and 620 from 2003 through 2012. Burns says the probability of default at both score levels was lowest in 2003-2005, then rose between 2006 and 2008 with the poor economy. By 2012, both scores were just slightly higher than in 2005.
While auto lenders and credit card issuers have adjusted underwriting standards to changes in borrower risk, "the mortgage industry has been hesitant," Burns said. He suggests that lenders could expand home purchase possibilities for large numbers of consumers by lowering score cutoffs. The Urban Institute and Moody's Analytics last year estimated that every 10-point reduction in mandatory credit scores on mortgages increases the pool of potential borrowers by 2.5 percent.