A pair of articles in the Wall Street Journal this week signaled that credit scoring models and strict lending standards and are beginning to loosen. Signs of the Great Credit Hangover seem to be fading as the pendulum swings back the other way ever so slightly.
Credit Score Revamp
This year’s introduction of FICO 9, the latest iteration of the widely used credit scoring model from Fair Isaac Corp., is expected to help widen credit access. The goal of this latest version, of course, is to increase lending without increasing risk. Lenders want to expand the pool of eligible borrowers while avoiding likely deadbeats. The eternally open ended question, of course, is how?
The new model will not penalize those who do not have an outstanding balance, omit bills that have been settled with collections, and give less weight to unpaid medical debt.
That first point especially makes a lot of sense. Absent the influence of government
handouts that distort the free market regulations, I would say borrowers without debt are more likely to pay back loans than those who have already demonstrated an inability to do so.
The WSJ cites Federal Reserve findings that “More than half of all debt-collections activity on consumers’ credit reports comes from medical bills…”. This encompasses an astounding 41 percent of the U.S. adult population. That’s apparently 75 million people.
However, since banks have been relatively late adopters of new FICO methods, it’s probable that consumer lending for cars and credit cards will see these changes before mortgage lending follows suit.
The other interesting piece of news reported by the WSJ is that, according to data from the Federal Reserve, almost one in four U.S. banks reduced their lending restrictions in the second quarter of this year, especially when it comes to commercial real estate loans.
I’m fortunate to have been in good health thus far, and I’m vigilant with my credit. However, borrowing is still a giant pain. Then again, one could look at the above paragraph and conclude that more than 75 percent of U.S. banks still have very high lending restrictions, not to mention they are often mired in bureaucratic nonsense as well.
An example of that is a request from a bank I refinanced with last year. Here’s an excerpt from my response to them regarding an inquiry on my credit report:
“The July 1st inquiry on my credit report is the first inquiry from [Incompetent Bank] and self-explanatory. It was performed with respect to the mortgage refinancing of the subject property. The underwriting process has been protracted to the extent that [Incompetent Bank] had to pull my credit again this month. The fact I’m being asked to explain this is a possible reason why said underwriting process is protracted.”
They asked me in September what the inquiry on my credit report was for. Lest we forget it was from a bank with the exact same name. Could their collective heads have been in a place where the sun doesn’t shine? The subtlety of my answer may have been lost on them, as did the fact it took four months to complete the transaction.
My point is just because some banks are relaxing their standards doesn’t mean anyone should hold their breath when applying for a mortgage. In my experience, even with pristine credit and full documentation, banks will find a way to make it as much of a hassle as possible.
They frequently seem to say, “No thanks, we already have enough defaults so lending money to anyone with great credit would be too much of a risk.”
However, as the article suggests, part of their reluctance to lend stems from the fact they are grappling with new regulations, are still dealing with defaults on existing loans and also have the uncertainty of ghosts of mortgages past coming back to haunt them, as several high profile settlements have shown. Maybe now the bartenders are showing more restraint when the partygoers belly up to the bar.
Photo courtesy Morguefile.com