Reversing a long historic trend, mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, Minneapolis-based FICO recently reported. The provider of analytics and decision management technology said it uncovered this disturbing trend through observations taken from its subscription service for businesses, FICO Score Trends.
Through its analysis, FICO discovered a parallel rise in mortgage delinquencies for higher-scoring U.S. consumers, and it found recent repayment behavior across the financial services industry has shifted significantly from historical norms. In 2005, bankcard accounts were three times more likely than mortgage loans to become 90 days delinquent, but in 2008 and 2009, bankcard accounts were just 1.6 times more likely to become 90 days delinquent.
The company also found that for borrowers who scored high on the FICO’s 300-850 score range, the level of repayment risk has become greater for real estate loans than for bankcards. In 2009, 0.3 percent of consumers with FICO scores between 760 and 789 defaulted on real estate loans, notably higher than the 0.1 percent who defaulted on bankcards.
“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”
Greene said even low-risk consumers are changing the value they give different credit lines, and he believes the CARD Act, which goes into effect next week, will likely create additional, unhelpful pressures on the banking business.
In FICO Score Trends, company experts found evidence that lenders tightened their criteria for new loans in 2008 through 2009 and began “cherry picking” the kinds of borrowers to whom they would extend credit. Likewise, mortgage loans opened last year between April and October reflected significantly tighter standards than in prior years. As lenders tightened their credit standards, it became correspondingly more difficult for consumers with delinquencies in their credit histories and lower FICO scores to qualify for additional credit.
In 2005, nearly 46 percent of consumers who opened a new mortgage had a FICO score of less than 700, but by 2008, this percentage had dropped to just 25 percent of the newly-booked mortgage population. In the bankcard sector, 51 percent of consumers with a new credit card had FICO scores less than 700 in 2005, but that dropped to just 38 percent in 2008.
FICO also used its analysis to learn how credit risk of real estate loans and bankcards varied across U.S. regions.
The most dramatic shift was found in the Pacific region. In 2005, bankcard accounts in this area were 6.4 times more likely to default than were mortgage loans, but in 2009, bankcard accounts were only 1.3 times more likely to default. The smallest relative change was demonstrated by consumers in the Midwest. There, bankcards were 2.5 times more risky of default than were mortgages in 2005, and in 2009, bankcards were 1.5 times more likely to default. Nationally, borrowers in the Northeast continue to present the least amount of default risk for real estate loans.
FICO’s findings echo a study published by TransUnion in early February. As DSNews.com reported, TransUnion found a continuing trend of consumers who pay their credit card payments prior to their mortgages. According to the study, the percentage of consumers who are delinquent on their mortgages and current on their credit cards rose to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008.
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