CrossCountry Mortgage, a leading mortgage lender, recently altered its lending practice and has adopted FICO Score 10 T for non-conforming loans and MBS issuances. This decision is a major industry shift with significant implications for both borrowers and mortgage-backed securities (MBS) investors. The new product will change the loan eligibility criteria, evaluating a potential borrower’s credit history and payment behaviours in a more comprehensive manner.
The FICO Score 10 T, also known as 10 Suite, is a newer measure of legitimacy in the field of credit scoring. It’s not only a more sophisticated tool but also provides a more up-to-date measure of an individual’s likelihood to fulfill financial obligations. Unlike its predecessors, the FICO Score 10 T incorporates trended data. It uniquely scrutinizes the last 24 months of a consumer’s credit history to better assess their creditworthiness.
The debut of the FICO 10 Suite in the mortgage industry, spearheaded by CrossCountry Mortgage, signals a paradigm shift. Prior to this, most lenders relied on traditional FICO scores to determine loan eligibility. The movement toward using FICO Score 10 T showcases the industry’s commitment to evolve and adapt to contemporary credit scoring methods.
CrossCountry Mortgage’s bold step gravitates toward the rising demand for a tool that precisely evaluates a potential borrower’s creditworthiness. It scrutinizes credit habits over time rather than a simple snapshot. Consequently, this introduces a better gauge for loan eligibility, providing a more holistic view of a client’s credit history. The application of FICO Score 10 T by CrossCountry Mortgage has been seen as an attempt to not only maximize profitability but to also minimize the risks associated with lending activities.
A detailed and comprehensive evaluation of credit history is crucial in making sound credit decisions. Traditional scoring models often fail to deliver an in-depth assessment thereby leading to the issuance of loans to borrowers who ultimately default on their payments. Adoption of the more robust FICO Score 10 T can lead to a dramatic reduction in defaults as it provides a detailed look into a borrower’s credit behaviour over an extended period.
For the borrowers, this could represent both an opportunity and a challenge. The FICO Score 10 T is likely of benefit to those applicants with good credit score management practices i.e. those who consistently manage their credit well over a two-year period may stand to benefit from better interest rates. On the other hand, borrowers who have incurred late payments or have inconsistent credit behaviours are likely to find themselves at a disadvantage.
As for Mortgage-Backed Securities (MBS) owing to this new method of FICO scoring, changes can be expected in the composition and behaviour of loan pools. The implementation of FICO Score 10 T is expected to have a clear impact on the quality of loans since in-depth analysis of loan applicants’ credit behaviour will effectively filter out those with high-risk tendencies. This is, in turn, expected to reduce pool defaults, thus making MBS a safer investment instrument with enhanced credit enhancements.
In addition, MBS investors can stand to benefit from securitizations that include non-conforming loans evaluated with FICO Score 10 T. These new scoring trends could result in healthier, more stable securities. Investors may see a modification in the performance of future pools, contemplation of stratified deals based on borrowers’ trending information, and a potential reduction in credit enhancement levels for higher-rated transactions.
However, such a move isn’t without its limitations. One must not forget that according to the Consumer Financial Protection Bureau, “the use of trended data and various other changes incorporated in the FICO 10 T Suite raises complex issues and poses certain risks.” Predominantly, there is a learning curve associated with the adoption of this new method.
There may potentially be an increase in the effort involved in the underwriting and assessment process, and the reliance on extensive historical data could lead to new challenges. Furthermore, market participants, especially on the MBS investor side, will need to gain a clear understanding of the new system and its impact on the performance of their investment.
In conclusion, CrossCountry Mortgage’s move to use FICO Score 10 T in assessing loan applicants represents a major shift in how lenders may gauge creditworthiness. It points to a future where loan issuers scrutinize a trended credit history rather than a point-in-time snapshot. While presenting few challenges in terms of adoption and understanding, it is clear that the benefits — improved loan performance, reduced defaults, and more secure investments for MBS investors — stand to outweigh these concerns. It is an optimization of credit score assessment promising rewards for both mortgage lenders and MBS investors in advancing the industry’s standards.
