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Experian analyst: Credit standards are stable

There has been an ongoing debate about how relatively tight credit conditions are for today's mortgage borrowers. Michele Raneri, vice president of analytics and business development at Experian, recently spoke with Scotsman Guide News about what credit scores can tell us about current lending conditions.  

How relatively loose or tight are the credit standards?

I looked at VantageScore originations from the third quarter for the last four years. That gives you a really good idea of what the credit-quality expectation is of lenders who are underwriting new loans, mortgages, bank cards, whatever.  What I got was that it is really stable. There hasn’t been a lot of changes over the last year. Mortgage-credit quality has gone down just a little bit, two points. My rule of thumb is that if it goes down 10 points, then there is something happening. Lenders are changing their policies, probably big lenders. It is a change in the marketplace. Under 10 points, and certainly two points, means that it is stable and I wouldn’t even call it loosening.

The mortgage market is really competitive right now with lenders vying fiercely for a relatively small pie due to the drop in refinancing. Given these tough conditions, do you expect credit standards to loosen?

mraneriLooking at it for the past four years, it hasn’t changed very much for the credit quality as demonstrated by the credit score. It will continue to stay pretty stable. There are changes in the marketplace, like interest rates. A lot of times when there is a variable that starts to change, lenders don’t make a lot of other changes at the same time. They hold some of the variables static, so they are able to evaluate the marketplace slower and know what the impacts are. So, I don’t see in [the mortgage market] much of a shift or change in the credit quality, especially in a time of volatility.  

Is there any area where access to credit has loosened up a little bit, where you are seeing a change?

I am not. The only one that decreased year over year was mortgage, two points. The rest increased. The biggest increases were seen in HELOCs. The home equity lines of credit went up 17 points and then home equity loans and retail cards — the ones you can only use at one place — both went up nine points.

You evaluate credit conditions solely through changes in VantageScore, then?

For this analysis it’s what I used because that encapsulates a lot. It encapsulates the delinquency and how much credit overutilization the consumer has. And so if you just look at the credit quality via score of who is being originated, you can tell which direction the lenders are going. This is saying that they are all very stable and there is a little bit of risk aversion for the home equity lines of credit — maybe a little bit for the home equity loans and retail cards. But the rest — bank cards, personal loans and mortgages — are all really stable.

What is the average score for a mortgage?

The average is 722. The average in 2015 in the third quarter was 725; 2016, it was 728; and 2017, 724. So, it inched up a little bit [from] 2015 to 2016, but it has been inching down and [has been] very stable for the last two years. But I am going to emphasize, it is really stable, because it is not that nine-point shift or 17-point shift that we saw in some of the other products.

Why hasn’t it come down a little more? 

Lenders want to make sure that they are making quality loans. It doesn’t mean that they don’t consider individual situations in making those loans. They are manually underwritten quite often. I don’t think anybody is in a race to build a really subprime portfolio.  

One widespread complaint is that traditional credit-scoring models don't capture a percentage of creditworthy borrowers, including a disproportionate number of minorities who are effectively unscored. Is there a way to capture people to get a fuller picture of their creditworthiness?

Let me remove the part about minorities or any ethnicity, because we don’t have that [information in] the credit bureau. I will say that organizations, as well as lenders that I talk to, are interested in providing access to credit to more people and better evaluating their risk, and using data that wasn’t traditionally [in] the credit bureau, so they can give people a fair shake. I would say that everyone is interested in that.

One of the ways that they are doing that is with UltraFICO, which is a new score that we built in conjunction with FICO, that pulls the bank-account information from a consumer at their discretion. The consumer opts into it, and we can pull that data in [and] calculate the UltraFICO score, which is a new score. With that, it might be able to give them a better credit score [and qualify them] for different types of loans, whether mortgage or bank cards. It can help to demonstrate that they have better cash flow and habits that are indicative of consumers who pay well on credit.

Some analysts say credit conditions for mortgages are already too loose, and other say they are too tight. Given that credit conditions have been stable over the past four years as indicated by the VantageScore data, is this the new normal going forward?

I don’t know if this is new. I think this is pretty normal. I do get that they [lenders] are weighing or balancing the access to credit with the risk associated with going deeper in the file. That is always the challenge. I came from a large bank and worked in risk [management]. The challenge has always been, how do you give more people access to credit, [but] don’t go so deep that it creates a problem for the lender or for the consumer. It is not a new problem and there is a lot of data out there. Probably the alternative data is going to help mitigate that risk for lenders and still allow them to go a little bit deeper.  


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