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By Jeff Lazerson
What I think: In the 1990’s, the mortgage world largely adapted FICO credit scoring as a mathematical predictor of your future creditworthiness.
Just like the secret Coca-Cola formula, the public, much less the mortgage industry, never found out exactly how the scoring model worked.
We were all patted on the head and told to just accept this. And, we did!
Credit reports and credit scores have certainly evolved, for the worse in my view.
Today’s credit reports from Experian, Transunion and Equifax may provide an imperfect picture of your payment history — especially if you’ve lost in a monetary dispute, suffered in any credit events and had payment challenges.
In some instances, conduct that indicates you could be a possible credit risk (tax liens, judgments and certain medical collections) won’t be reported, much less factored into your FICO score when a mortgage lender is evaluating your loan application.
In other instances, many mortgage lenders don’t report your on-time installment payment history after a bankruptcy has been discharged, making it that much harder for you to re-establish higher credit scores.
Worse than that, some mortgage lenders don’t report at all to protect their portfolio from refinance marketers.
A single stinking point drop in your middle credit score can mean the difference between loan approval and loan denial.
About 20 years after Fannie and Freddie embraced FICO credit scores, and one Great Recession later, Congress crafted S.2155-Economic Growth, Regulatory Relief and Consumer Protection Act. Section 310 requires Fannie and Freddie to open up competition for integrity, reliability and accuracy when it comes to credit scores.
President Trump recently signed the measure.
Experian, Equifax and Transunion, owners of a competing scoring model named Vantage Score, were clamoring for this opportunity to get into the mortgage market.
But is the Vantage Score model truly any better or different than the FICO scoring model? And is there a better mousetrap on the horizon?
Inventors of a third credit measure say both the FICO and Vantage scoring models may be flawed.
As part of the MIT Media Lab (60 Minutes recently ran a story about the lab), MIT Professor Alex Pentland came up with a predictive analytics model that he calls Social Physics.
This does not appear to have the constraints of the FICO modeling — especially when it comes to roughly 60 million unbanked and underbanked Americans.
“Ask questions to get better answers,” Pentland said.
Pentland co-founded Distilled Analytics with David Shrier, who is the CEO.
Shrier points out that FICO uses 60-year-old linear regression (rear view mirror).
Besides comparing your budget and spending habits with your liquid assets, Distilled Analytics looks at geospatial behaviors (how you move around a city) to predict credit behavior.
“This is a completely new way of looking at things that conventional bureau-based scoring cannot comprehend,” said Shrier.
Can Distilled Analytics provide new lenses for evaluating behaviors that can provide greater access for consumers and better risk management for institutions, as Shrier claims?
Who knows? But certainly, our Swiss cheese-like credit reporting and scoring system has a lot of holes that desperately need filling.
Even Congress figured that out.
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.
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