onseco Finance’s move into the “riskier” consumer lending business — as evidenced by the sub-prime loan program it launched in mid-2001 — may not be a bad move, according to results of a study by MGIC Investment Corp., the nation’s largest mortgage insurer.
The study, based on thousands of home loans Milwaukee-based MGIC insured during the last recession from 1989 to 1991, concludes that some borrowers with the highest credit scores are more likely to experience delinquencies or default on loans than less credit-pristine borrowers.
The key factor is location, according to MGIC. For example, if a high-credit score borrower owns a home in a volatile market that is hard-hit by local economic problems, that person is “far more likely to lose his or her home to foreclosure than a low-score, credit-impaired borrower in a more stable, local economy,” MGIC reports.
“The research is an eye-opener,”says Joseph Birbaum, MGIC senior vice president of credit policy. “It suggests that credit scores predict only part of a person’s default risk in a recessionary economy.”
MGIC and other lenders acknowledge the accuracy of credit scores. During the last recession, homeowners with scores of less than 620 were 6.5 times more likely to get into serious repayment problems than those with scores above that total, according to investor giant Freddie Mac. But as the MGIC study notes, “No matter how high your credit score, you’re more likely to fall behind on your payments and lose your house if you happen to live in an area with a weak local economy and declining property values.”
Homeowners with high credit scores in volatile real estate markets also are 10 times more likely to end up seriously delinquent than high-score homeowners in more stable markets, the report notes.
That said, lenders such as Conseco aren’t closing the books on borrowers with higher credit scores. Nor are they giving carte blanche approval to those with shakier credit histories. In the case of its sub-prime loan, Conseco Finance will take on someone with a score as low as 525. which is usually no-man’s land even for secured loans, as long as there’s equity in their property, says Jeff Surratt, senior vice president of the Conseco Home Improvement Division.
“With that kind of score, a customer could have one 90-day late mortgage payment or three 30-day lates in the past 12 months, but now they’re current,” he says. “It would be a case where there was some event that caused payment problems, but now the person is ready to re-establish his or her credit history.”
