Officials Agree Credit Scoring System Needs Improvement

The National Association of Realtors®rn(NAR) recently hosted a meeting of about a dozen real estate and mortgagernindustry experts to examine the current state of credit scoring and how itrnmight be improved.  The group, whichrnincluded Housing and Urban Development (HUD) Secretary Julian Castro, concludedrnthat the calculation of credit scores “needs to change to reflect how peoplernlive their lives today, or millions of people will continue to fall outsiderntraditional calculation models and not be able to become home owners.”</p

Castro told the group that HUD wasrnlooking at the credit scoring issue as part of its effort to improve Americans’rncredit access.  There is a need to lookrnat new ways of analyzing data to reflect the responsibility people show inrntheir lives that is predictive of future behavior and paying down a mortgage.rn”There’s been a disconnect there,” the Secretary said.</p

Attendees agreed that though thernhousing market has recovered in many respects it hasn’t returned to morernbalanced credit scores as a threshold for obtaining financing.  NAR said most conventional loans today arernmade to borrowers with a credit score of around 740, up 20 points from beforernthe housing boom, when the typical score was around 720.</p

Mark Zandi of Moody’s Analytics notedrnthat, although the difference seems small, the 20-point gap represents millionsrnof borrowers. What’s more, a 740 score today is much harder to obtain than itrnwas before the downturn, simply because the economy is so much tougher today.</p

Among the recommendations to come outrnof the meeting is a need to add measurement standards that better reflectrnchanging technology, lifestyles, and demographic trends in the U.S., becausernup-and-coming minority and millennial consumers don’t use credit in the samernway that households did in the past.  Meeting attendees, which includedrnrepresentatives of Fannie Mae, the Urban Institute, the Asian Real EstaternAssociation, National Association of Hispanic Real Estate Professionals, the HomeownershiprnPreservation Foundation and George Washington University, expressed support forrncredit scoring companies building in payments like monthly rent and utilityrnbills into their models. </p

Representatives from two of the majorrncredit scorers, Fair Isaac Corporation and VantageScore also attended the meeting.  They said their companies were alreadyrnexperimenting with such non-traditional charges as rent and utility payments</balthough they are not yet incorporated into their scoring models.  Fair Isaac Corp, which produces FICO scores, said it hasrnalso changed the way it handles medical collections, among other things, sornpeople aren't unfairly penalized for non-recurring problems. </p