Borrowers with high FICO Score at Risk of Mortgage Default

2010 March 12

Analysis by FICO Score Trends service finds that borrowers with high FICO scores now defaulting on mortgages faster than bankcards

Borrowers with a high credit score won’t necessarily insulate borrowers from the home foreclosure crisis, according to a new study from FICO, the leading provider of analytics and decision management technology.

FICO reported new and troubling findings uncovered in the latest analysis offered by its subscription service for businesses, FICO Score Trends. The report suggests that these premium borrowers might be more likely to default on their mortgages than their credit card debt should they encounter financial difficulties.

Reversing a long historic trend, mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, even though most credit cards are unsecured credit and mortgages are secured by real estate. FICO observed a parallel rise in mortgage delinquencies for higher-scoring consumers.

According to the analysis in FICO Score Trends, recent repayment behavior across the financial services industry has shifted significantly from historical trends. From May through October 2009, the mortgage default rate for borrowers with credit scores of 760 to 850 was 0.32%, versus 0.12% for credit cards.

In 2008-2009, bankcard accounts were just 1.6 times more likely to become 90 days delinquent than were mortgage loans. By comparison, in 2005 bankcard accounts were more than three times more likely to become 90 days delinquent.

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior. While the FICO 8 score continues to prove its unprecedented power in rank-ordering consumers for risk, even low-risk consumers are changing the value they give different credit lines. As the CARD Act goes into effect next week, it likely will create additional, unhelpful pressures on the banking business.”

In 2005, nearly 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to just 25% of the newly booked mortgage population.

Borrowers with FICO scores of 760 and higher generally qualify for a bank’s best mortgage rate. A score of 720 is considered prime, and is usually the lowest rate that will allow borrowers to secure the most widely advertised mortgage rates.

FICO

FICO (NYSE:FICO) transforms business by making every decision count. FICO’s Decision Management solutions combine trusted advice, world-class analytics and innovative applications to give organizations the power to automate, improve and connect decisions across their business. Clients in 80 countries work with FICO to increase customer loyalty and profitability, cut fraud losses, manage credit risk, meet regulatory and competitive demands, and rapidly build market share. FICO also helps millions of individuals manage their credit health through the myFICO.com website.

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