How does trended credit data affect the mortgage industry?
How does trended credit history impact the mortgage lending industry?
When Fannie Mae released Desktop Underwriter Version 10.0 on September 24, 2016, the automated underwriting system had a substantial change in risk assessment: the use of a borrower's trended credit data.
This is the first widespread use of a borrower's trended credit history in the mortgage industry. While Fannie Mae has stated that they expect the number of Approved/Eligible loans to "remain relatively stable", there will be changes to who their automated underwriting system approves and why.
Traditional versus trended credit history
Lenders know all about traditional credit scoring, it kind of comes with the territory. A report is pulled that gives a snapshot into the financial health of a prospective borrower. Everything from length of account history, balances owed, to credit inquiries in the last couple of years will be included on the borrower's credit report.
What this snapshot in time doesn't provide is any insight into how a borrower tends to their debts. A traditional credit report may show that a borrower has a balance on a credit card of 'x' dollars. This can effect debt-to-income ratio and credit utilization rates that are negatively impacting traditional credit scoring models.
When the report includes the borrower's trended credit data, the risk assessment can take into account whether or not that individual is actually paying down their debts and how. Maybe that credit card balance is paid in full every month, which would demonstrate less risk than a person who pays only the minimum monthly payment on the same amount of debt.
Account-level credit indicators
Trended credit data works by analyzing a credit line's historical data on several monthly factors. These factors include:
- Amount owed (balance).
- Minimum monthly payment due.
- Actual payment amount made.
Fannie Mae's risk assessment will take into account the most recent 24 months of trended credit history, even if more information is available from the credit bureaus.
The big takeaway here is that loan officers may have to make some adjustments to the way that they council prospective borrowers to handle their credit. These changes to the way that Desktop Underwriter analyzes risk are expected to help support creditworthy borrower's ability to access mortgage credit, while simultaneously reducing risk for Fannie Mae.
The question that will need to be answered is what borrower credit profile will not get an Approved/Eligible decision, and how quickly can credit issues be remedied. Will loan officers still be able to put together a plan that quickly fixes issues and elevates a credit profile with a rapid re-score? Or, will trended credit data make it more difficult for some of those borrowers to pass the risk assessment without more time to put issues in the rear view mirror?