Dennis' Mortgage Blog

One interesting phenomenon I have noticed in the past couple of weeks with the credit/liquidity crunch in the mortgage markets is in FICO scores: they appear to be dropping for those with derogatory credit.

Quick tutorial/reminder on credit scores: they are generated by computer models that analyze millions of credit users in several categories. Using the past credit of consumers and their current credit the score is a predictor of future credit behavior. The higher a consumer’s score the lower the risk to a creditor extending credit to say buy a home; and conversely the lower the score the higher the risk of default or late payments.

Recently I have seen several clients with derogatory credit on their reports whose scores have dropped, even though their current credit is better than previous reports with more derogatory information. Example: Jack and Jill came to me in the spring, we ran their credit reports and they had on them a bankruptcy from 2006 and several accounts that were reporting late payments through the bankruptcy. Jill contacted the credit bureaus with copy of her bankruptcy filing and had the late payments all removed. As well they paid off a few accounts and lowered the balance on others. In the past all these positive changes to their report would raise Jack and Jill’s scores. Not this time, they went up. I have had a few clients in the past month or so where this has happened—some delinquencies from the past, activity on the report that in the past would result in a higher score but today showing scores dropping somewhat significantly. Why?

Because Fair Isaac (FICO) and other credit score models use past behavior and results to predict future performance the models are reinterpreting scores in light of the increasing number of mortgage lates and defaults being reported to the bureaus. The software programs are now receiving significant data on mortgage payment delinquencies that have been missing from the statistical analysis for the past decade or so (almost the advent of credit scoring in our industry). With refinement of the software programs and increased analytical capability of the software and hardware the credit scoring companies are able to process a tremendous amount of data, and this data includes the prior credit histories of those currently late or in default. From what I am seeing on current credit reports it appears that the credit scoring models are deducting considerably more points from reports with serious past delinquencies (defined as bankruptcies, multiple collections, accounts with 90+ days late, mortgage and auto lates). As well it appears that more points are being deducted for more recent derogatory reporting than before (i.e. in the past lets say a 30 day late on a Visa payment that occurred within six months of the report was worth 15 points, today it may be worth 30. These are not actual numbers; I am merely using them as an example.).

As more data is available for the programs to analyze payment patterns and histories the software programs will correct their scoring. In this same line of thinking I am wondering if we will see improved scores from those with good credit histories—unlikely but possibly since the purpose of the score is to predict future payment patterns.

I have no hard data or commentary on the change in scores I have been noticing, just passing along an interesting observation based on my own client database.

Dennis

 Monday, September 10, 2007