Trended Credit – A “Sea Change” from “Seeing Change”

Trended Data Spy Glass_Web

If you are a mortgage lender or servicer, the ‘sea’ has suddenly changed. FNMA’s newest requirement, a ‘trended credit’ view of a consumers’ 24 past months of revolving credit payments and balances, provides Fannie Mae and all lenders an incredibly valuable new tool to better assess risk behaviors.

Trended Data Example
Trended Data Example

New risk analysis opportunities and personas abound. Just four of many examples are below:

  1. Does Trended Credit give clues as to a borrower’s true liquidity?

Revolving credit maybe the first (and only) source of fallback liquidity in the event of an expense or income shock to the household.

If the borrower is seen to commonly make only minimum payments, now clear in trended credit, it strongly implies that their emergency liquidity could be limited, stressed and worthy of further analysis or additional escrow reserves.

  1. Can Trended Credit identify ‘Credit Window Dressers?’

Some borrower are paying off revolving debt to temporarily improve their FICO score prior to application.

This is an increasingly common trend with brokers and credit advisors informing consumers on the importance of credit utilization on their FICO scores then coaxing significant–yet temporary—credit card pay-downs within a 60 days of a loan application.

With trended credit, all can now see RECENT credit changes benchmarked against previously higher or common levels.  FNMA has a particular interest in this practice, which has previously obfuscated added credit risk.

  1. Is the Borrower a ‘Transactor’ or a ‘Revolver’?

One is Five times less likely to default!

“Transactors” are defined as those who regularly pay-off their revolving debt balances.  They are by some analytics, 4-5 times LESS LIKELY to default than borrowers who regularly maintain elevated balances (above 50%) on credit cards. (AKA “Revolvers”)

  1. What about income variability?

In a 24 month time series, income quality aberrations can now be identified and assessed.

As a potential new lender, the source data is now present on the credit report to see the WHEN and HOW MUCH revolving credit use varied which should inform the necessity to ask WHY and discern the root cause.

For example, an underwriter can ask ‘What happened in March 2015 when your card balances shot up 65% – or $17,000?  Was this a health issue, a vacation, a large purchase or emergency?”

The converse is just as valuable.  If the consumer suddenly PAID down credit 65% in March 2015, could the source of the large repayment be seasonal income, a bonus or commission, or sale of an asset?  Is this a recurring trend or an aberration?

With trended credit – a 24 month historic view of the ACTUAL revolving payments made – lenders have NEW visibility to assess risk and add value to investors by enriching their analytics.

The payoff to greater scrutiny and inquiry is significant; clearer discernment of credit risk using time series data, to inform future payment risk.

Next: Risk Based Processing: Best Practices using Trended Credit