Tag: VantageScore

In my last blog, I discussed the presence of strategic defaulters and outlined the definitions used to identify these consumers, as well as other pools of consumers within the mortgage population that are currently showing some measure of mortgage repayment distress. In this section, I will focus on the characteristics of strategic defaulters, drilling deeper into the details behind the population and learning how one might begin to recognize them within that population. What characteristics differentiate strategic defaulters? Early in the mortgage delinquency stage, mortgage defaulters and cash flow managers look quite similar – both are delinquent on their mortgage, but are not going bad on any other trades. Despite their similarities, it is important to segment these groups, since mortgage defaulters are far more likely to charge-off and far less likely to cure than cash flow managers. So, given the need to distinguish between these two segments, here are a few key measures that can be used to define each population. Origination VantageScore® credit score • Despite lower overall default rates, prime and super-prime consumers are more likely to be strategic defaulters  Origination Mortgage Balance • Consumers with higher mortgage balances at origination are more likely to be strategic defaulters, we conclude this is a result of being further underwater on their real estate property than lower-balance consumers Number of Mortgages • Consumers with multiple first mortgages show higher incidence of strategic default.  This trend represents consumers with investment properties making strategic repayment decisions on investments (although the majority of defaults still occur on first mortgages where the consumer has only one first mortgage) Home Equity Line Performance • Strategic defaulters are more likely to remain current on Home Equity Lines until mortgage delinquency occurs, potentially a result of drawing down the HELOC line as much as possible before becoming delinquent on the mortgage Clearly, there are several attributes that identify strategic defaulters and can assist in differentiating them from cash flow managers. The ability to distinguish between these two populations is extremely valuable when considering its usefulness in the application of account management and collections management, improving collections, and loan modification, which is my next topic. Source: Experian-Oliver Wyman Market Intelligence Reports; Understanding strategic default in mortgage topical study/webinar, August 2009.

By: Kari Michel Most lenders use a credit scoring model in their decision process for opening new accounts; however, between 35 and 50 million adults in the US may be considered unscoreable with traditional credit scoring models. That is equivalent to 18-to-25 percent of the adult population. Due to recent market conditions and shrinking qualified candidates, lenders have placed a renewed interest in assessing the risk of this under served population.  Unscoreable consumers could be a pocket of missed opportunity for many lenders. To assess these consumers, lenders must have the ability to better distinguish between consumers with a clear track record of unfavorable credit behaviors versus those that are just beginning to develop their credit history and credit risk models. Unscoreable consumers can be divided into three populations: • Infrequent credit users:  Consumers who have not been active on their accounts for the past six months, and who prefer to use non-traditional credit tools for their financial needs. • New entrants:  Consumers who do not have at least one account with more than six months of activity; including young adults just entering the workforce, recently divorced or widowed individuals with little or no credit history in their name, newly arrived immigrants, or people who avoid the traditional system by choice. • Thin file consumers:  Consumers who have less than three accounts and rarely utilize traditional credit and likely prefer using alternative credit tools and credit score trends. A study done by VantageScore® Solutions, LLC shows that a large percentage of the unscoreable population can be scored with the VantageScore® credit score* and a portion of these are credit-worthy (defined as the population of consumers who have a cumulative likelihood to become 90 days or more delinquent is less than 5 percent).  The following is a high-level summary of the findings for consumers who had at least one trade: Lenders can review their credit decisioning process to determine if they have the tools in place to assess the risk of those unscoreable consumers.  As with this population there is an opportunity for portfolio expansion as demonstrated by the VantageScore® study. *The VantageScore® credit score model is a generic credit scoring model introduced to meet the market demands for a highly predictive consumer score. Developed as a joint venture among the three major credit reporting companies (CRCs) – Equifax, Experian and TransUnion.    

-- By Kari Michel What is your credit risk score?  Is it 300, 700, 900 or something in between?  In order to understand what it means, you need to know which score you are referencing.  Lenders use many different scoring models to determine who qualifies for a loan and at what interest rate. For example, Experian has developed many scores, such as VantageScore®.  Think of VantageScore® as just one of many credit scores available in the marketplace. While all credit risk models have the same purpose, to use credit information to assess risk, each credit model is unique in that each one has its own proprietary formula that combines and calculates various credit information from your credit report.  Even if lenders used the same credit risk score, the interpretation of risk depends on the lender, and their lending policies and criteria may vary. Additionally, each credit risk model has its own score range as well.  While the score range may be relatively similar to another score range, the meaning of the score may not necessarily be the same. For example, a 640 in one score may not mean the same thing or have the same credit risk as a 640 for another score.  It is also possible for two different scores to represent the same level of risk. If you have a good credit score with one lender, you will likely have a good score with other lenders, even if the number is different.