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Stability in consumer credit scores: Level and direction of FICO score drift as a precursor to mortgage default and prepayment

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  • Smith, Brent C
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    Abstract

    This article represents an extension of the expansive credit risk and credit migration literature, prominent in the corporate bond and securities risk pricing literature, to an analysis of the drift of consumer credit scores. A rich data set of residential mortgages is used to observe credit score migration post loan origination and in a test of the ability of credit score transition to serve as a precursor to potential default and prepayment. The results indicate credit scores provide signals and information to investors and servicing agents in a fashion similar to credit ratings on commercial paper as to default potential.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Housing Economics.

    Volume (Year): 20 (2011)
    Issue (Month): 4 ()
    Pages: 285-298

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    Handle: RePEc:eee:jhouse:v:20:y:2011:i:4:p:285-298

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    Web page: http://www.elsevier.com/locate/inca/622881

    Related research

    Keywords: Residential mortgage default; Risk; Lending; Housing economics; Mortgage underwriting; Consumer credit;

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    References

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    2. Jose A. Lopez & Marc R. Saidenberg, 1999. "Evaluating credit risk models," Working Papers in Applied Economic Theory 99-06, Federal Reserve Bank of San Francisco.
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    16. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
    17. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
    18. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
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