Millennials’
unconventional credit habits may change scoring models
Because millennials don’t
look at credit the same way generations before them did, lenders are missing
out on thousands of mortgages from well-qualified applicants.
According to the latest
study by data scientists at VantageScore Solutions, a scoring model still
struggling to gain acceptance by the federal agency that regulates the two
secondary mortgage giants Fannie Mae and Freddie Mac, millennials have similar
income and asset levels as most homebuyers, but they think about carrying
credit differently.
They are more debt averse and keep their credit balances
lower. Lower, in fact, then older
generations. That’s not necessarily a bad thing. But when they do have credit
accounts — and many do not — they often don’t have enough to produce a credit
score.
They have what’s known in
the trade as “thin” credit files, or those with two or less active accounts.
Those with what are considered “thick” files have three or more accounts.
Recent data produced by
Vantage Score, a rival to the various and more popular FICO score most lenders
use to approve or reject borrowers wanting to finance a home purchase, “shows
(millennials) are writing their own story when it comes to using credit,” says
the company’s president, Barrett Burns.
Conventional wisdom has
it that those with more assets and higher incomes make more use of credit and
have higher incomes than those with thin files. Some lenders don’t even make
loans to would-be borrowers with little credit histories, while others offer
them more expensive subprime-like products.
But the VantageScore research found that millennials “are
anything but conventional.”
Indeed, unlike other
generations, those with thin files generally have similar income and asset
levels as persons with thicker files.
And in what the study calls “prudent credit management,” those with student loans “appear
reluctant” to add any more debt on top of what they already are carrying. “This is smart credit behavior, not
riskier,” the report maintains. And since their income and asset levels don’t
translate to greater uses of credit, “they likely have the capacity to handle
new credit accounts.”
Meanwhile, according to
VantageScore, “older models and lending strategies penalize them simply because they
haven’t opened new loan accounts.”
Among millennials with
revolving accounts, the analysts also found, balances are low, about a third
less than their full-file counterparts. “Thin-file
millennials either cannot or will not charge up high balances on revolving
accounts,” the study also concluded.
For these and other
reasons, VantageScore’s Burns says conventional scoring models such as the FICO scores used by mortgage lenders —
FICO has developed a score for each of the three main credit repositories,
Equifax, TransUnion and Experian — may
be shortchanging otherwise credit-worthy young wanna-be homebuyers.
Burns believes scoring
models need to be updated periodically to “maintain their peak level of
predictiveness,” he wrote in a recent company newsletter.
“Not only does the data
available to modelers get better and model building techniques improve, but the
mix of credit products changes, as do consumer behaviors and the way the treat
their finances.”
VantageScore, which
tracks rent payments, utility bills, cell phone bills and other types of credit
FICO doesn’t, has some skin in this game, of course. It has been trying since
2006, when it was created by the three big repositories to compete with FICO,
to get its nose in the door at Fannie and Freddie. If the two
government-sponsored enterprises say they’ll accept aVantageScore score, then
lenders will start using it.
But this summer, the
Federal Housing Finance Agency, which not only regulates the GSEs but also has
had them under conservatorship for a decade, suspended its review of new and
alternative scoring models. Instead, it said it would create a regulatory
framework for providers of such models to apply and be evaluated by Fannie and
Freddie, themselves.
“After careful
evaluation, we have determined that proceeding with efforts to reach a decision
based on our Conservatorship Scorecard Initiative process and timetable would
be duplicative of, and in some respects inconsistent with, the work we are
mandated to do under Sec. 310 of the Act,” FHFA Director Mel Watt said in a
press release at the time.
(Sec. 310 refers to a
section of the regulatory reform bill signed by President Trump in May
requiring the FHFA to define, through rule-making, the standards and criteria
Fannie Mae and Freddie Mac will use to validate new and alternative credit
scoring models.)
To say that Burns and his
crew were rocked by the decision is an understatement. After all, 12 years and
counting is a long time to try to gain approval. But Even FICO was let down. It
has a new score — UltraFICO — that counts a consumer’s cash flow right
alongside his score that it says promises to expand access to credit.
FICO is testing Ultra
with Experian and data aggregator Fincity that draws on several month’s worth
of data from people’s bank accounts, the idea being to create a “second chance”
score, so to speak, that would give those who have been denied credit under a
traditional scoring model another shot at the brass ring.
Before the regulatory
reform measure passed, the FHFA had given itself a 2018 year-end deadline to
decide on new scores. Now, it’s anyone’s guess when the framework under which
Fannie and Freddie can test new scoring models, let alone when a new model or
two will finally win approval.
As for VantageScore, it
is hoping “we’ll finally get there” in 2021, if then, says spokesman Jeff
Richardson.
Meanwhile, Burns, while
saying his firm “looks forward” to working with the FHFA and the GSEs, could
not hide his disappointment. “With every day that passes,” he said, “mortgage
applicants are mispriced, locked out and discouraged from pursuing
homeownership.”
Article
written by: LEW SICHELMAN
Published
December 11, 2018 in INMAN
NEWS
Lew
Sichelman is a seasoned writer with 50 years of covering the housing and
mortgage markets under his belt. His biweekly Inman column publishes on
Tuesdays.
Compliments
of:
Julius F Zatopek III
Licensed
Texas Real Estate Broker
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