Whether it’s in California or Alabama, young families are having trouble obtaining a mortgage for their first home. A blog post from the Urban Institute by Ellen Seidman asks, “can new scoring models, or data about rent and utility payments, help these families become homeowners?”
Representatives Ed Royce (R-CA) and Terri Sewell (D-AL) discussed the difficulties their constituents have in obtaining a first home at an Urban Institute Event. For one, the traditional credit-scoring system does not serve the needs of homebuyers, especially young buyers. Credit scoring currently serves as the gateway to the mortgage process, and plays a small role in mortgage underwriting according to Vantage Solutions SVP Mike Trapanese.
Still, credit scores are critical in determining the eligibility of a candidate. Innovating the credit scoring process could increase the number of people with credit scores, and expand the mortgage gateway without increasing risk.
Many consumers fear they won’t apply for any type of credit, according to The SCE Credit Access Survey . The survey revealed that the amount of respondents likely to apply for at least one type of credit over the next 12 months decreased. Consumers were generally more pessimistic of future approval rates, while involuntary account closures rose to their highest level since the series’ start.
Alternative payment records could provide valuable routes to better credit for low-income people, and open up the path to a mortgage. Data from checking accounts rent, telecommunications, and utility accounts could all supplement the negative collections data.
The problem is, very few consumers have rent data, utility data, or telecommunications data. Joanne Gaskin, senior director at FICO, noted that as an alternative, many issuers are issuing low-balance credit cards to previously unscorable customers as an on-ramp to credit.
By July 2017, public records that do not meet high standards of accuracy must be rejected by credit bureaus, as required by the National Consume Assistance Plan. Bankruptcy records will pass the test to be included, while almost all civil judgements and half of tax liens will be excluded. However, this should have no effect on credit scores, as 92 percent of affected consumers have other derogatory information on their file.
“Modernizing the credit-scoring system, both the models and the data, would be valuable to California and Alabama residents and everyone in between,” said Seidman. “The industry, Congress, and the Federal Housing Finance Agency are poised to make that happen.”