Average FICO Scores Dropping - the Affect on Mortgage Rates?

A recent Fair Isaac Company news release shows that U.S. credit scores have dropped since 2008 in synch with the economy.

High unemployment, a sinking economy and a Housing Crisis, take your pick as to why credit scores are dropping.

Consumers have defaulted on mortgages in record numbers and mortgage late payments carry a lot of weight on credit scores.  They've done the same on credit cards, although recent statistics indicate that problem is slowing.

So, is anyone really surprised by the Fair Isaac news release that credit scores are dropping?

The chart below is right from Fair Isaac:

Notice that the percentage of consumers in almost every FICO score range in the above chart has worsened since 2008.  Not by a lot, but they are worsening.

Keep in mind, that most mortgage lenders won't accept middle FICO scores below 620.  So, the increase in FICO scores below 600 is not good news.

There are a two interesting trends on the chart:

- the percentage of FICO scores between 750-799 have actually increased in 2010 after dropping in 2009.  While this may seem like good news at first, that increase probably came from those dropping from the higher tier, which is a negative.

- the other interesting development is the percentage of FICO scores in the tier from 300-499.  It increased in 2009, but saw a pretty substantial decrease in 2010.  So, the number of people with the worst credit is dropping, which is good news.  You would think it actually be getting worse in our economic recession.  But look closer and you'll see that the tier has always had the smallest percentage of consumers.  It actually takes a lot of negative reporting to get a FICO score under 500.  This is probably more a sign that the number of consumers now using cash instead of credit is increasing.  I'd also like to see Fair Isaac's numbers/percentages on those that don't have enough credit to generate a FICO score.  I'd bet they're going up.

Again, keep in mind when looking at this chart that consumers are shifting from one tier to the next.  So, the 650-699 tier staying relatively stable, probably doesn't mean much.  There are probably as many consumers dropping into it as there are dropping out of it.

The good news to take away from all this is best represented with the bar graph below:

If you add up the percentages you'll find that in 2010, even after all the recent economic hardships, over 53% of American consumers have a FICO score above 700.

FICO Scores & Mortgage Rates

Fair Isaac didn't cover this in their news release, but since this is a mortgage blog, we'll cover it.

In 2008 FNMA/FHLMC started charging more to mortgage borrowers with FICO scores under 720.  They use what's called, Loan Level Price Adjustments (or LLPA) to determine how much more to charge.

You can reference the previous link for all the detailed charges, but here's the basic matrix:

*NOTE - the above price adjustments are in discount points, not interest rate points.

As you can see from the chart, if your middle FICO score is under 720 you're going to pay more to get the going mortgage rate (unless you borrow less than 60% of a property's value).

I'd like to see Fair Isaac break their tiers down to correspond with FNMA's matrix above.  That would give us better data to see how the trend in FICO scores is affecting borrower costs.

What we can glean from their existing data is that in 2008 45.7% of consumers had a FICO score below 700.  In 2010 that number increased to 46.9%.

That means that an additional 1.2% of consumers paid either a higher interest rate or had higher closing costs in 2010 because of their FICO scores.

Do you think that's going to get worse of better in 2011?

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

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Drew Sygit: CMPS, CMC, CRMS, CMLO, CALO, MBA, NAMB/MAMP Instructor & Speaker
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