Decoding the FICO 8 and FICO 8 Mortgage Score
With the recession deepening, and consumer spending and debt-paying patterns changing, the company decided to give its flagship product, the FICO score, a tune-up, so the score's predictive models would be sharpened against tough economic conditions.
The company's data picked up a growing distinction between consumers who started paying late on a handful of credit lines (known as "tradelines" in the credit reporting industry) "not simply because they were bad borrowers but because they were sloppy payers," explained
But the company wanted to be able to predict whether a consumer would pay late on an occasional basis on one or two tradelines or would go delinquent across the board.
It was the eighth such revision of the FICO credit scoring model, and when the FICO 8 Score was launched in 2009, the company said it improved its credit risk prediction by 15 percent.
Which might work for general credit, but when it comes to approving mortgages, lenders have become so conservative that they wanted even more detailed information about whether someone might default specifically on a mortgage or home equity line of credit, while continuing to pay a credit card debt on time.
Gaskin said FICO had already created a specific scoring model for those consumers who are shopping around for an auto loan or a credit card. In October, they introduced the FICO 8 Mortgage Score to help lenders more easily predict consumer behavior no matter what happens in the economy.
In creating the FICO 8 and FICO 8 Mortgage Score, Gaskin said the company took a deeper look at the following issues and refined their impact on the credit scoring model:
During the housing boom,
How do you take what you know today and predict the future? Gaskin said that the FICO 8 has incorporated economic forecasting based on six macroeconomic outlook alternative scenarios from Moody's Economy.com, ranging from a stronger recovery to a fiscal crisis where the dollar crashes and the U.S. experiences hyperinflation. "Incorporating macroeconomic data allows lenders to adjust their policies. We see it as the next wave of predictive analytics," she noted.
Gaskin said one of the most interesting things about credit and the recession is that the median FICO credit score remains 712. But the score distribution has changed. "When you go into an economic downturn, those consumers who score higher in the FICO Score ranges move higher yet, and those in the lower bands move further down the chart," she said.
Gaskin noted that the interesting idea is that consumers who manage credit well and have higher scores tend to get more conservative with their finances, so they move further up in the score distribution. Those who are in trouble financially will get hurt worse by an economic downturn, and so their credit scores will drop further.
Since the FICO 8 Mortgage Score looks at credit a little differently, the median score is around 760, or significantly higher than the median FICO 8 Score. What that shows, Gaskin said, is that the vast majority of Americans pay their mortgages "as agreed."
"There's just a lot of (media) coverage about the 10 percent that are not paying as agreed," she added.
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Real Estate - Decoding the FICO 8 and FICO 8 Mortgage Score
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