The way companies calculate people’s credit scores needs to change to reflect how people live their lives today, otherwise millions of people will continue to fall outside traditional calculation models and not be able to become homeowners.
That was the consensus view of a dozen real estate and mortgage industry experts who met April 1, 2015, at NAR headquarters in Washington to look at the state of credit scoring and what can be done to improve what’s become a key part of the mortgage finance process.
Also at the meeting, which NAR President Chris Polychron opened, was Julian Castro, the secretary of the U.S. Department of Housing and Urban Development, who said his agency is looking at the credit scoring issue as part of its effort to improve credit access to Americans.
“We do hear about the need to look at new ways of incorporating and analyzing data so that it’s more sensitive to getting at the responsibility folks have shown in their lives that would indicate—be predictive of—their future behavior and paying down that mortgage,” Castro said. “There’s been a disconnect there.”
The credit scoring industry has already taken a number of steps to revamp the way people’s credit worthiness is calculated. Among other things, Fair Isaac Corp., which produces the widely used FICO score, has changed the way it handles medical collections, so people aren’t unfairly penalized for non-recurring problems. The company and Vantage Score, which is another credit scoring company, are also experimenting with non-traditional charges such as monthly rental and utility payments, although those efforts are not yet built into the companies’ regular models.
Experts around the table, including Mark Zandi of Moody’s Analytics, Jude Landis of Fannie Mae, andLaurie Goodman of the Urban Institute, said the housing market has recovered in many respects since the economic downturn of almost eight years ago, but one way in which it hasn’t come back is in the return to more balanced credit scores as a threshold for obtaining financing.
Among the recommendations to come out of the meeting is a need to add measurement standards that better reflect changing technology, lifestyles, and demographic trends in the U.S., because up-and-coming minority and millennial consumers don’t use credit in the same way households did in the past. For that reason, experts suggested credit scoring companies build in those non-traditional payments like monthly rent and utility bills into their models.
Representatives from FICO and Vantage Score at the meeting said they’re are doing that and intend to build on innovations that they’ve already recently incorporated into their models.
“It’s such a critical topic,” NAR President Chris Polychron said in closing the meeting. “We’d like to see these scoring models that rely on non-traditional histories. We just have a lot to do.”
The Asian Real Estate Association of America and the National Association of Hispanic Real Estate Professionals partnered with NAR on the meeting. Other participants at the meeting were Vanessa Perry of George Washington University, Barrett Burns of Vantage Score, Julie Steinhagen of the Homeownership Preservation Foundation, and Jim Wehmann of Fair Isaac Corp.
Representing AREAA was Jim Park, a past chairman of the association, and representing NARHREP was Jerry Ascencio, a REALTOR® from the San Fernando Valley in California.