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104 104 GOVERNMENT INVESTMENT PROPERTY PRESERVATION SERVICING TECH UPDATE ON DELINQUENCY AND PREPAYMENTS Credit scores alone are not enough to determine the likelihood of default, Fitch Ratings notes, as a variety of factors can complicate the default risk process. In a report, Fitch discusses how consistency is needed in this process. "Assessing downside risk of U.S. consumer credit can be more difficult if different versions of credit scores are used when lending, underwriting standards are relaxed amid a supportive economy, or when lenders are reaching for growth," Fitch Ratings says. "As these dynamics can be exacerbated during an economic downturn, it is essential to view credit scores in combination with other key risk variables to most accurately assess default risk." According to Fitch, higher FICO scores are indicative of a more solid repayment history of debt obligations, with a lower probability of default. However, different versions of credit scores have been introduced post-crisis that are not used consistently across asset classes and providers, which complicates comparing these scores and has prevented their widespread use in credit analysis. Current higher FICO score trends in mortgages are partly attributable to a higher percentage of originations from the prime segment following the financial crisis amid the benign economic environment. Borrowers are paying their bills, as is to be expected given strong labor markets, rising wages, and low unemployment and interest rates. FICO scores are also improving as a result of the extended duration of the favorable economic environment, as past payment history with higher delinquency levels falls off. Much of the market is reliant on older FICO versions. Fitch notes that the mortgage industry uses older versions like FICO 2, 4, and 5 when assessing creditworthiness for new mortgages and deciding interest rates, while the newer FICO versions are currently not used by the mortgage market. Newer versions, such as FICO 8, which is commonly used in other industries, factors in on-time payments, account balances, and length of credit experience when calculating scores. FICO 9 differs when it comes to collections, factoring in rental payment history while putting less weight on delinquent medical collections. Black Knight's Mortgage Monitor report began with a review of some of the high-level mortgage performance statistics stated in the company's most recent First Look report, accompanied by an update on delinquency, foreclosure, and prepayment trends. An in-depth look into the noticeable rise in prepayment activity, and the reasons for it, followed thereafter, and fast on the heels of those facts came an assessment of the refinance incentive remaining in the current market. e nation's equity landscape was then discussed before the subject of servicer retention rates was broached. e report wasted no time in getting down to the nitty-gritty, evaluating their procured stats in order to offer an overview of October's activity. ey reported an impressive and steady rise in mortgage prepayments, an occurrence that they attribute to previous low-interest rates. Although, they did also warn that a recent rise in rates, coupled with the trend of seasonal home sales slowing, may likewise retard prepayment activity as the coming holidays progress. In light of this, the report predicts that the trend for delinquencies to rise seasonally in both November and December would be no surprise. Regarding prepayment activity and the current factors driving prepayments, Black Knight Mortgage Monitor's data reveals that overall prepayment activity is now more than three times higher than in January 2019, a month which stats represented an 18-year low. e data then points to the fact that the lion's share of 2019's prepayment increase was driven by a rise in refinancing occurrences. Also, even though late October's interest rates rose to 3.78%, sending the incentives to refinance to their lowest levels since March, Freddie Mac's December 5 report on refinancing candidates in the housing market points to the promising fact that more than 8 million refinance candidates still remain at the ready to make moves. en offering insights into the current state of equities, Black Knight Mortgage Monitor shared that tappable equity has grown in 97 of the 100 largest U.S. markets during the past year, showcasing widely varying growth rates, of which, the most equity-rich markets seeing some of the lowest. It was then revealed that while refinance lending is at multi-year highs, servicers struggled to retain refinancing borrowers in the third quarter of 2019. Specifically, after seeing the highest retention rates since late 2017 earlier in the year, just 22% of borrowers stayed with their servicer post-refinance. Pointing out that, "Data shows that borrowers' motivations for refinancing are anything but uniform," Black Knight Mortgage Monitor's then suggests that in order to better navigate and understand these ever-changing trends, an advanced portfolio and market analysis can help servicers proceed in the most successful fashion, forward. According to Fitch, higher FICO scores are indicative of a more solid repayment history of debt obligations, with a lower probability of default. However, different versions of credit scores have been introduced post-crisis that are not used consistently across asset classes and providers, which complicates comparing these scores and has prevented their widespread use in credit analysis.

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