No matter how you view it, the traditional credit box is changing.
The need for responsible risk management will not change, but the traditional process of evaluating whether borrowers are creditworthy – or not – is transforming.
At Verus Mortgage Capital, we often hear from lenders who don’t think that traditional lending standards are keeping up with the needs of today’s borrowers – millennials, foreign nationals, self-employed, and those with imperfect credit. In any event, a major shift in lending standards has already begun.
And though the residential mortgage industry has sometimes been faulted for being slow to change and adapt, signs of rapid change are in progress. For example:
- With more than 16 million self-employed in the U.S., more lenders are interested in offering alt doc programs that don’t require W2s or pay stubs. As the gig-economy gains momentum, the number of borrowers that rely on bank statements and other documentation will grow quickly – along with borrower demand for more flexibility.
- Fair Isaac Corp, which introduced the FICO credit score in 1989, has announced plans to launch a new system in 2019 called the UltraFICO Score. The Wall Street journal said FICO’s move “is among the biggest shifts ever for credit reporting and the FICO scoring system, the bedrock of most consumer-lending decisions in the U.S. since the 1990s.”
- FICO also said seven million borrowers with low scores resulting from short credit histories should see higher scores with UltraFICO. In addition, about 26 million borrowers now considered subprime will see higher credit scores.
Ten years after the mortgage market collapse, residential lenders remain leery of borrowers with lower credit scores. But during that time, a growing number of lenders have been chasing a shrinking pool of borrowers that fit within the traditional credit box. This causes originators to expend more resources to obtain fewer loans going forward.
The good news is that the pendulum seems to be swinging in a direction that allows responsible borrowers to obtain the financing they deserve. If successful, FICO’s plan could help boost credit access for borrowers, without requiring lenders to take on excessive risk. Regulators are also exploring ways to increase affordable lending for consumers with lower credit scores and shorter credit histories.
But for now, borrowers who fit the traditional credit box remain in short supply, as shown by the decline in traditional year-over-year origination volumes.
That’s just one reason Verus Mortgage Capital remains 100% committed to building the non-QM lending space with responsible programs that help a wide range of borrowers – including millennials, foreign nationals, investors and self-employed – obtain the homes they deserve. Check out our programs to learn more.