Officials Agree Credit Scoring System Needs Improvement

The National Association of Realtors® (NAR) recently hosted a meeting of about a dozen real estate and mortgage industry experts to examine the current state of credit scoring and how it might be improved.  The group, which included Housing and Urban Development (HUD) Secretary Julian Castro, concluded that the calculation of credit scores "needs to change to reflect how people live their lives today, or millions of people will continue to fall outside traditional calculation models and not be able to become home owners."

Castro told the group that HUD was looking at the credit scoring issue as part of its effort to improve Americans' credit access.  There is a need to look at new ways of analyzing data to reflect the responsibility people show in their lives that is predictive of future behavior and paying down a mortgage. "There's been a disconnect there," the Secretary said.

Attendees agreed that though the housing market has recovered in many respects it hasn't returned to more balanced credit scores as a threshold for obtaining financing.  NAR said most conventional loans today are made to borrowers with a credit score of around 740, up 20 points from before the housing boom, when the typical score was around 720.

Mark Zandi of Moody's Analytics noted that, although the difference seems small, the 20-point gap represents millions of borrowers. What's more, a 740 score today is much harder to obtain than it was before the downturn, simply because the economy is so much tougher today.

Among the recommendations to come out of the meeting is a need to add measurement standards that better reflect changing technology, lifestyles, and demographic trends in the U.S., because up-and-coming minority and millennial consumers don't use credit in the same way that households did in the past.  Meeting attendees, which included representatives of Fannie Mae, the Urban Institute, the Asian Real Estate Association, National Association of Hispanic Real Estate Professionals, the Homeownership Preservation Foundation and George Washington University, expressed support for credit scoring companies building in payments like monthly rent and utility bills into their models.

Representatives from two of the major credit scorers, Fair Isaac Corporation and VantageScore also attended the meeting.  They said their companies were already experimenting with such non-traditional charges as rent and utility payments although they are not yet incorporated into their scoring models.  Fair Isaac Corp, which produces FICO scores, said it has also changed the way it handles medical collections, among other things, so people aren't unfairly penalized for non-recurring problems.

"It's such a critical topic," NAR President Chris Polychron said in closing the meeting. "We'd like to see these scoring models that rely on non-traditional histories. We just have a lot to do."