How more granular information will change lending behavior
With foreclosures at a 10-year low, a good case can be made to take a look at strict lending standards that may be doing more harm than good.
For example, during the period immediately following the housing bust, from 2009 to 2014, 5.2 million mortgages that would have passed muster under cautious lending standards in place for many years before they slackened during the housing boom were denied.
Today’s standards, except for FHA borrowers, haven’t changed much since then.
Some proponents believe new techniques to analyze creditworthiness, like trended data, will also help some marginal borrowers qualify for loans.
Trended credit data takes a deeper dive into creditworthiness than the snapshots provided by credit scores and looks at multiple snapshots going backward in time to track trends in past behavior.
Trended data reports include up to 24 months of tradeline level credit information such as balance, credit limit, high credit, scheduled payment and actual payment. It exposes much more granular data about a borrower’s payment history on a monthly basis than traditional credit histories.
Will trended credit result in more approvals?
Late last year, Fannie Mae required trended data for its automated underwriting software, Desktop Underwriter.
“Leveraging trended data in the DU risk assessment allows a smarter, more thorough analysis of the borrower’s credit history. The use of trended data is a powerful predictor of risk, and its use enhances the DU risk assessment to better support access to credit for creditworthy borrowers,” said Fannie in its release notes to lenders.
An Equifax December 2016 Consumer Credit Impact analysis found that on an annual basis the addition of trended credit data could result in 4 percent, or 267,000, more mortgages or improved loan terms for consumers who may have previously been ineligible.
Also, 4.1 percent or 65,000 more home equity lines of credit (HELOC) were issued to consumers who may have previously been ineligible.
In fact, in its notes to underwriters accompanying the new release of Desktop Underwriter, Fannie Mae said trended credit is expected to have minimal to no impact on the percentage of Approve/Eligible recommendations that lenders receive today.