Mortgage lenders now have access to a new credit score designed to uncover potential borrowers’ hidden credit histories and more accurately predict mortgage loan performance.
Last fall, Santa Ana, Calif.-based real estate and mortgage data aggregator CoreLogic signed an agreement with Fair Isaac Corp., the owner of the widely used FICO score, to develop new credit risk scores for the U.S. mortgage industry.
The result is the FICO Mortgage Score Powered by CoreLogic, which includes data reported to the three main credit bureaus — TransUnion, Equifax and Experian — and supplementary "alternative credit" data gleaned from CoreLogic’s proprietary databases and public records and included in the company’s CoreScore credit report.
These data include property ownership and mortgage obligation records, including properties paid with cash and mortgages held with smaller, nonreporting lenders; property legal filings and tax payment status; rental applications and evictions; inquiries and charge-offs from payday and online lenders; installment and rent-to-own information; and consumer-specific bankruptcies, liens, judgments and child support obligations.
"We’ve found that for 1 in 13 mortgage applications, CoreLogic has supplemental data that was not reported to the traditional credit bureaus," said Tim Grace, senior vice president of product solutions at CoreLogic. "It’s a significant amount of data that we bring to the table."
While such data may reveal previously undiscovered bad debts, according to an analysis by the company it is more likely to uncover positive credit information and therefore more likely to result in safer, increased mortgage lending, Grace said.
When developing the new credit score, CoreLogic analyzed a batch of 300,000 loan applications and found that factoring in the supplementary data improved the credit scores of 70 percent of borrowers within a typical mortgage portfolio; 24 percent of borrowers’ scores rose by more than 50 points, Grace said.
"Of borrowers in the 580 to 619 ranges — that range is typically close to a lender’s credit score minimum — 45 percent saw their scores improve enough to meet the credit score threshold. So we thought that was pretty significant in our analysis," Grace said.
The analysis found that the new credit score was 7.5 percent more predictive of mortgage risk than the classic, general-purpose FICO scores most commonly used.
"The new scoring model was designed specifically to predict mortgage loan performance and has shown a substantial improvement in risk prediction over other generally available risk scores in use today," the companies said in an announcement.
"As a result, this new scoring model developed by FICO to leverage data only available on the CoreLogic CoreScore credit report, will help mortgage lenders more safely and profitably expand their origination volumes, ultimately strengthening and growing the overall mortgage lending market."
Using the new score, lenders could potentially make thousands more loan applications every year and net millions more in profit, CoreLogic said.
For example, a lender specializing in conforming loans of $417,000 or less and using a cutoff score of 700 on an industry-standard FICO risk score could incorporate the new score into its existing underwriting strategy and increase its acceptance rate by more than 1 percent and slightly reduce its overall rate of bad loans at the same time, CoreLogic said on its website.
"Assuming the revenue from a good loan equals $2,000 and the loss from a bad loan is $50,000, the new scoring model would generate a net financial benefit of $38.59 per application. On a pool of 300,000 applications, this equates to a financial impact of approximately $11.6 million, attributed to profitably approving more than 3,100 new applications and mitigating potential credit losses of $5.5 million," CoreLogic said.
The FICO Mortgage Score Powered by CoreLogic is available only from CoreLogic Credco, which the company says is the leading provider of tri-bureau credit reports to lenders and has 53 percent market share.
The new credit score will be available as part of CoreLogic’s CoreScore product, which has two components, each of which can be purchased separately: an expanded credit report including both traditional credit information and CoreLogic’s alternative credit information and the predictive mortgage score.
"The score is designed to augment, not replace, the credit risk scores and policies you use today. This means that you can continue to reap the benefit from your existing standard and customized rules and scores, while adding additional insight from CoreScore with minimal IT investment. Furthermore, the new scoring model maintains consistency with features of the FICO scores in use by mortgage lenders today, including … the same 300-850 scoring range," CoreLogic said.
Both FICO and CoreLogic have extensive connections with lenders and are "proactively" reaching out to encourage adoption of the new score, Grace said. Thus far, four lenders have gone live with the new credit score and more than 25 other lenders — mostly mortgage lenders, though not all — are waiting in the wings to test the new score, he added.
Grace declined to divulge the specific cost of the new product, saying the pricing varies from lender to lender and industry to industry.
"Basically a few dollars for the score and a few dollars for the credit report," Grace said.
As of first-quarter 2013, the new credit report and score will be available on AnnualCreditReport.com, a site that allows consumers to obtain free credit reports from the three main credit bureaus once a year; credit scores are available for a fee. For now, consumers interested in obtaining their CoreScore credit report can seek assistance on the Credco website, Grace said.