More nuanced approaches to managing credit risk could support stronger housing recovery

The availability of credit is key for the housing market to continue its recovery. Unfortunately, many Americans are still facing difficulties qualifying for the loans that would allow them to purchase a home.

As a result of the recent recession, many Americans have seen their credit scores suffer, with black and Latino families affected in disproportionate numbers. 

According to American Banker, more than half of all black and Latino wealth has been lost as a result of the housing crisis. For the majority of cases, this has little to do with making payments on time, but rather is a result of foreclosures that were outside the home owners' influence. When major declines in home values struck, the neighborhoods of minorities were often among the worst hit, an unfortunate effect that residents had no control over.

As evidenced by this, credit scores do not always accurately reflect a borrowers' ability to make payments on time. According to recent research by TransUnion, one of the major credit bureaus, 80 percent of renters with a subpar credit score would see their scores improve with just one month of timely rental payment information included in their reports.

The American Banker piece exploring this issue pointed to when World War II veterans were not subject to credit scores when returning and purchasing a home. Very few veterans faced default, and the economy boomed as the housing market growth spread to other industries. 

While this may not be as feasible today, there certainly needs to be a review on the current use of credit scores during the approval process. Even Federal Reserve Chair Janet Yellen had to voice her opinion about the struggles of Americans looking for mortgage credit during a quarterly press conference. "It is difficult for any homeowner who doesn't have pristine credit these days to get a mortgage," she told the media present at the event. 

Without promoting loans that could be unsafe to either the lender or borrower, a solution needs to explored in order to provide the needed kickstart to the housing market. Having credit risk assessment software that is capable of drawing from alternative data sources can help to provide a better understanding of a borrower's creditworthiness.

Homeownership has always been a critical element in the American Dream, and penalizing borrowers for aspects of their credit score that fall outside of their control is hindering the growth of the overall economy. Blacks, Latinos and Millennials who are faced with credit score issues stemming from foreclosures or burdensome student loans deserve a fair opportunity to qualify for a mortgage, but this cannot take place until lenders find new ways to evaluate borrowers that account for other factors besides credit scores, or the credit bureaus themselves are able to provide a more nuanced view of individuals' creditworthiness.

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