The Federal Reserve warns that credit scores – the almighty number that can determine whether a consumer is able to qualify for a loan, rent a home or even buy car insurance – may have become less reliable during the coronavirus pandemic.
According to new Fed analysis, the scores of homeowners who took advantage of payment relief on their mortgages actually rose an average of 14 points during the pandemic. That was a bigger jump than the seven-point increase seen among borrowers who didn’t forbear on their loans.
“In effect, although they have not made any payments, their credit reports are treated as if they were making ongoing payments for credit scoring and account history purposes,” researchers said Wednesday. from the central bank in a blog post. “The concept of credit scoring, a device for distinguishing good borrowers from bad borrowers, may lose some of its power to signal creditworthiness to lenders, at least for a while.”
Banks and finance companies use credit scores to determine a consumer’s willingness and ability to repay them. But the companies providing the numbers have long been criticized by consumers and advocates who say it’s unclear what data they’re using to calculate the scores or what can be done to raise them.
In the depths of the coronavirus pandemic, as unemployment soared and government officials urged consumers to shelter in place, the nation’s largest mortgage lenders launched a series of forbearance options to borrowers who made it possible to delay payments for up to 18 months.
The Fed found that about 13% of mortgage borrowers were forbearance for at least a month over the past year, and more than a third of those homeowners were still seeking relief in March.
“confused” tool
“One thing to keep in mind is that credit scores can be less informative,” Joelle Scally, financial and economic analyst for the Federal Reserve Bank of New York, said during a press briefing. “They are a very important tool for lenders to identify creditworthy borrowers, but with the protection of forbearance programs, some of these things can get confusing.”
It’s not just credit scores that are losing some of their power: the central bank said about 8% of borrowers were already behind on their mortgages when they entered forbearance. After taking relief, the vast majority were reported as being outstanding on their loans.
“As a result, the credit bureaus‘ actions on mortgage defaults should be viewed with caution,” the Fed said in a separate blog post. “Current data on foreclosures and delinquency statistics taken from credit bureau data do not accurately give a clear indication of the stresses in the housing market.”
History of Jenny Surane.
