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Credit reports lower lending bar, increase default risks
By Jeff Lazerson
What I think: In March 2017, I wrote that the deletion of federal tax liens and judgments were on their way, coming to your credit report by July 1, 2017, because of the difficulty in accurately matching the correct credit smudge to the right person in this privacy-laden era.
Today, all tax liens, judgments and medical collections less than 180 days old or medical collections where your insurance company eventually pays the piper are no longer being reported by the credit bureaus, according to Experian senior director of public relations Greg Young.
Ok then. What does this mean for your all-important mortgage application FICO scores?
Keep in mind that almost all lenders take the lowest middle credit score from credit reports generated by Experian, Transunion and Equifax as one component in the mortgage pricing paradox.
When medical collections were removed, three in four saw changes of less than 20 points to their FICO scores. When tax liens and judgments were removed, more than 75 percent of FICO scores increased less than 20 points, according to Erika Willrodt, FICO spokesperson.
“Our results showed that NCAP (National Consumer Assistance Plan) related medical collection and public record removals have no material impact on the aggregate population to the FICO score’s predictive performance, odds-to-score relationship, or score distribution,” said Willrodt.
Well, tell that to mortgage shoppers for whom a one-point improvement of, say, a 619 score to a 620 score means you can now celebrate and plan your housewarming party.
Good news all the way, right? Well, not so fast.
“Ten to 11 percent (now) have or have had a lien or judgment on their record. Seven percent have an active judgment,” said Nick Larson, LexisNexis Risk Solutions Business Development Director. “They have a 5.5 times greater likelihood of going into default or foreclosure.”
The LexisNexis research did not focus on whether these more likely defaulters were already so financially damaged from something else (like a job loss, for example) that they were already circling the drain. Or, is it just in their DNA to be less financially responsible.
Either way, it’s yikes to me!
So, lenders have an obvious reason to fret.
What don’t I know? Will this borrower fail to pay?
Neighbors too! You don’t want the joker who moved in next door to end up in foreclosure. All it takes is a few foreclosures to have a cascading effect on neighborhood values.
Credit scores now are diluted and give less than the full credit picture for underwriters. Bank statement loans and stated income loans are back. Aggressive underwriting is all the rage. Lenders are getting really hungry again because this year loan funding volume is seeing a huge drop-off.
I see the clouds coming. Beyond that, we may see another perfect storm of providing home loans to unqualified borrowers — and its predictable aftermath.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011