Updated March 27 at 9:27am

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ADVICE

Looking for an alternative to credit scores?

Posted:

Do you ever get the feeling that your credit score doesn’t adequately portray your true risk as an applicant for a home mortgage?

If your FICO score is a subpar 690 but you know that you are a solid candidate for a loan, do you think that lenders’ heavy dependence on credit scores is unfair to you as an individual?

You’ve got some company. Digital Risk, a mortgage analytics firm, is mounting an unusual frontal assault on one of the lending industry’s sacred cows. It argues that credit scores such as FICO failed to predict large numbers of defaults during the mortgage bust years – most notably thousands of “strategic” walkaways by borrowers with high scores – because they could not anticipate homeowners’ reactions to economic stress. Unless lenders use more sophisticated assessment tools that incorporate far more than credit histories, Digital Risk says, they may be misjudging not only many of today’s high-risk borrowers but other applicants who are safer bets than their credit scores suggest.

“The mortgage industry is relying on outdated methods to determine risk,” said Peter Kassabov, chairman and chief executive of Digital Risk, which is based in Maitland, Fla. “During the mortgage crisis, high-FICO borrowers encountering distress defaulted in huge numbers, yet we still depend heavily on that one score along with [down payments] to make lending and loan-modification decisions.”

According to one study conducted in 2009, 588,000 homeowners walked away from their homes strategically during 2008 alone. This amounted to 18 percent of all serious defaults that year and shocked the mortgage industry. Fair Isaac, creator of the FICO score, acknowledged the problem, and last year released an “analytic tool” that lenders can use to detect potential strategic defaulters – high-scoring, credit-savvy borrowers primarily – before they stop paying.

Digital Risk, however, says strategic default is not the only weakness of traditional credit scores. The company describes itself as the “nation’s largest provider of mortgage risk, compliance and transaction-management solutions,” and claims to have seven of the top 10 mortgage lenders as active clients. In early August, it introduced a multidimensional risk-evaluation system it calls “Veritas,” which it claims integrates borrower credit characteristics with property and local real estate market data along with proprietary behavioral-prediction models. The behavioral component includes what the firm calls statistical “clusters” of borrower, property and market situations – 123 in all – that give lenders a better idea of how an applicant will react to financial problems, such as the next recession or housing downturn.

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