The so-called VantageScore credit scoring system released last week by the three major consumer credit bureaus - Experian, Equifax, and TransUnion - is not expected to affect securitizations in the short-term, market participants said. Since neither Standard and Poor's, Moody's Investors Service, Fitch Ratings, nor the GSEs, can yet use the VantageScore product, its impact on the securitization industry is anticipated to be minimal at this point. The VantageScore is being marketed as an alternative to the widely used Fair Isaac Corp. FICO score.
Some wondered how soon or if the product would take off at all, since lenders often need to base lending decisions on whether the loans they make will be purchased in the secondary market - and because scores produced from the VantageScore can not, at this point, be run through models used to calculate risk for secondary market investors. "I think its prospects are pretty bleak, because they didn't get a buy-in from the rating agencies or the GSEs yet, so I don't see how anyone could actually use it - unless a lender is just in the market to originate loans and keep them," said Mark Adelson, head of structured finance securities research at Nomura Securities International.
But David Rubinger, vice president of communications at Equifax, said the consumer credit agencies intentionally kept the development of the new product - which has been one-year in the running - contained to a small group of people for competitive purposes. He said customers, namely the credit card industry, had been in search of another form of credit scoring that could be used to find new borrowers. Banking regulators were briefed on the new scoring system a day before its March 14 unveiling, when product marketing began. "There is plenty of time for the education process to take place for a lot of these different constituencies," Rubinger said.
Experian, Equifax, and TransUnion jointly developed and own the product, but will each market it separately. The scoring system is supposed to alleviate differences between scoring models used within each of the three credit unions; consequently, variances in credit score from one credit agency to the next should be a product of underlying data alone. The analytics behind the score were developed by creating one streamlined algorithm from each of the three reporting agencies' proprietary models. A sample size of five million consumer credit files was pulled at the same point in time from each of the three companies in the process, Rubinger said.
The consumer credit agencies modeled the score after an academic grading scale, with "F" being the poorest credit score and "A" representing the highest. Also, as with the academic system, the letter "E" is excluded. The three-digit numbers corresponding with the grades range from 501 to 990. FICO scores range from somewhere in the neighborhood of 300 to 900 - with 900 being a perfect score.
The lending community is by-and-large waiting for more information before making any decisions on the product. San Diego-based subprime lender Accredited Home Lenders, for one, wants to learn more about it. "We are not going to be using it as this point in time," said Rick Howe, director of corporate communications at Accredited. "That may change over time, depending on acceptance and the (test of time) that the other scores have been through." Rubinger of Equifax said the consumer credit agencies are anticipating a six-to-12 month timeframe until the initial adoption of the product.
Craig Watts, public affairs manager at Fair Isaac, could not comment specifically on the VantageScore's application to the secondary market because of a lack of complete information about the analytics behind its scoring method, but did say, "the FICO score continues to be used by 80% of the 50 largest banks in the United States."
Similar to the FICO score, the VantageScore judges the likelihood that a consumer will miss a loan payment within 90 days or more, and the product is optimized for a two-year time horizon, according to Nomura. Whether the analytics behind the VantageScore are better than those used to calculate the widely used FICO score is up for debate. "We doubt that Fair Isaac actually has left much room for improvement in wringing better predictions from the available data," Nomura wrote last week, "We expect data differences account for the vast majority of variation in any given consumer's scores at the three bureaus."
While the VantageScore was designed to promote a seemingly simpler way for consumers and lenders to quickly interpret credit data across each of the national consumer credit agencies, the product would have been more popular among secondary market participants had their opinion been solicited, according to Nomura's Adelson. For example, the two-year time horizon used with the FICO and VantageScore, along with the delinquency orientation, could be improved for securitization purposes. A score that was calculated based on anticipated losses and charge-offs using a four-to-five year performance window may have been more useful, he said.
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