With interest rates now at 14-year highs, the cost of homeownership is becoming an issue for most prospective home buyers. HousingWire recently spoke with Mike Darne, vice president of marketing at CreditXpert, about how mortgage lenders can leverage credit to help make homeownership more affordable.
HousingWire: With interest rates at 14-year highs, what kind of pressure does that put-on housing affordability?
Mike Darne: This may be the most peculiar time in history for the mortgage and housing sectors, especially when it comes to affordability.
Affordability is at an all-time low, driven by the rise in interest rates, pandemic demand for homes, a tight labor market and supply chain issues. Yet two of these four factors are diminishing in importance. Pandemic demand has all but dried up, though the damage it has done will keep the price of homes high for years. That said, there was just a 3-month supply of homes during the buying frenzy. The market is now sitting on more than a 9-month’s supply. Homes are not selling as quickly, and sellers are no longer basking a seller’s market. This should mean home prices will decrease.
Supply chain issues, too, are easing. The cost of building materials is down off its peak. In time, this will help decrease the price of housing, too.
Having two of the four factors improving is certainly helpful. However, the tight labor market and interest rates will continue to negatively impact affordability for the foreseeable future. The point is that these four factors are macroeconomic in nature. There is nothing lenders or applicants can do about it. At the end of the day, this is the hand the housing market has dealt. It is up to all of us to figure out how to play it.
HW: How can mortgage lenders leverage credit to make homeownership more affordable?
MD: I always find a “back-to-basics” approach useful in times of rapidly changing market dynamics, or when starting something new. It is clear that we are in an unsettled market, and I also believe that lenders, and their applicants, have an opportunity to try something new.
The most basic of mortgage lending principles starts with the 3 Cs – Capacity, Collateral and Credit. I feel it is important to focus on these because each of the factors are in the applicant’s control. Capacity, of course, is the borrower’s ability to pay. It considers their income and their assets. Collateral concerns what the borrower is buying. Again, up to them, though significantly impacted by the current median home price of almost $430,000. The thing to remember about capacity and collateral is they are very static in the sense the applicant can do little about either within the time it takes to process their mortgage.
Credit, on the other hand, is dynamic. In most cases, applicants can, using data-driven tools like those offered by CreditXpert, improve their credit scores enough to expand their financing options, improve the rate they will pay on their mortgage and/or increase their purchasing power. By focusing on credit first in the mortgage process and by taking literally minutes to review score improvement options, borrowers and lenders can have an impact on affordability at the applicant level. This is precisely how we play the hand the market has dealt.
And there’s real benefit in playing the credit score improvement card. Consider someone searching for a home in the median home price range of around $430,000 may have an initial credit score of just under 700. Today that means this borrower can expect to pay 6.00% for their mortgage. Let’s say that same prospective homebuyer can improve their credit score by 60 points. Doing so could reduce the rate they will pay to 5.75%. This could end up saving them $115 a month and more than $20,000 over the life of the loan.
A question we often get asked is, “How do lenders know whether an applicant has the potential to improve their credit score?” This is where it is important for lenders to employ a data-driven approach as they work with applicants. CreditXpert provides lenders with a predictive credit insight platform that can show them precisely what it will take to reach a desired mid-score and the likelihood of reaching that target.
HW: What are the challenges lenders face when trying to leverage credit to make homeownership more affordable?
MD: Lenders face three broad challenges when trying to leverage credit to make homeownership more affordable.
Guessing is first. Many experienced mortgage professionals feel they “know” what it will take to improve an applicant’s score. This is a dangerous tactic. Impacting credit scores is extremely complex. An inaccurate guess when recommending a set of actions could hurt an applicant’s score and ruin their chances of purchasing a home in the near-term.
Time is the second. To be clear, using a data-driven credit strategy does not add time to the mortgage process as it can happen concurrently with all the routine processing activities required for every loan. But many lenders we work with get a jump on things by putting credit right at the top of the mortgage process. Being proactive about credit accomplishes two things. First, it gives both the lender and the applicant a little more breathing room to address things that may have contributed to a lower credit score. Second, moving credit to the start of the process, perhaps even in the pre-qual stage, sends a message to applicants that the lender is committed to presenting the best offer and winning their business. This is an important tactic for lenders as our 2021 consumer study revealed that 61% of mortgage applicants applied with two or more lenders.
The third challenge lenders face when trying to leverage credit to make homeownership more affordable is finding the right tool. Often times lenders focus only on applicants with less-than-ideal credit scores and do one of two things. First, they just move on, sending a denial letter. This is time-consuming, expensive and, in a fair number of cases, an unfortunate waste of a lead. The lender may also refer the borrower to credit repair or credit counseling, both of which are far removed from credit improvement.
But where many lenders miss the boat on credit is in not looking for opportunities to improve the credit score for ALL their applicants. This is where credit improvement and tools like CreditXpert can be an important strategy for lenders. Think of credit improvement as a “tune-up.” Tune-ups don’t cost much, don’t take much time and they’re highly effective. In the credit score example, there’s nothing “wrong” with the borrower’s credit score, though, with a few actions, it could be better by enough to reduce the rate they will pay on their mortgage. Of the millions of credit pulls we analyze each year, we have found that 73% of those with initial scores below 760 could improve by at least 20 points within 30 days. This means that there is a significant amount of near-term unrealized potential in those applying for a mortgage.
If what we do at CreditXpert can be thought of as a “tune-up,” credit repair and credit counseling is like a “major overhaul.” Overhauls are time-consuming and expensive. There is no time for either within the time it takes to process and close a mortgage. Both have their place, of course, but both apply to a much smaller subset of potential home buyers. Recommending either isn’t playing the hand, it’s folding.
HW: How does CreditXpert help lenders find potential opportunities for applicants?
MD: CreditXpert can help lenders find opportunities for their applicants at both the strategic and tactical levels. At the strategic level, lenders need to understand the demand side of the equation. This means having a strong grasp on where the volume of credit inquiries is coming in from across the credit spectrum. For example, during the pandemic, we saw a significant spike in inquires at the top end of the spectrum and a sizable dip in inquires in the 580 – 680 range. This was a signal that a very different type of applicant was entering the market and that lenders would have done well to adjust their strategy accordingly.
In addition to understanding where the volume of inquiries is coming from, lenders need to focus on applicant credit potential. CreditXpert publishes a monthly report called the Mortgage Credit Potential Index (MCPI). In this report we not only show where demand is coming from, but we also highlight the potential in each 20-point credit band. The MCPI shows the both percentage of applicants in each band that could improve by at least 20 points within a 30-day timeframe, but also focuses on the percentage of applicants that could achieve a better outcome by improving their credit. For example, we break out the percentage of applicants that could qualify for a conventional loan, lower their interest rate, etc. By looking at the potential side of the equation, lenders will start to think of their applicant pool in new ways. Those that may have been discarded become closable loans. Those that were initially well qualified can become opportunities for lenders to put a highly compelling offer on the table and box out competitors.
At the tactical level, CreditXpert helps lenders easily see the credit potential of EVERY applicant at the time credit is pulled. Our new platform released earlier this month puts every applicant’s credit potential right in front of mortgage loan officers and allows them to see precisely what it will take to reach a desired target score along with the likelihood of making it happen. The key here is that this is a quick, data-driven process that can give lenders the edge they need to win an applicant’s business in one of the most competitive markets we have seen in years.
For more information on how CreditXpert help lenders find potential opportunities for applicants, visit creditxpert.com.