As homeownership demographics gradually begin to shift, there is now a powerful incentive for lenders to take a leadership role through inclusion initiatives that enable more people to achieve their dream of owning a home.
According to a new study from the Urban Institute, it is projected that there will be 6.9 million net new homeowner households from 2020 to 2040, a 9% increase, made up almost entirely by minority households. Hispanic homeowners will grow by 4.8 million, homeowners of other races (mostly Asian homeowners) will increase by 2.7 million and African American homeowners will grow by 1.2 million. In the same time span, the total number of white homeowners will decline by 1.8 million.
Improving financial inclusion is our collective societal obligation.
Attaining the projections is easier said than done. Inclusion efforts need to be continuous and sustainable. One of the key reasons why inclusion efforts too often fail is that a traditional credit score is used as part of the mortgage application.
Herein lies the problem. Nearly 53 million Americans lack enough of a credit history to obtain a traditional credit score. Some 28 million consumers have files with insufficient data, and more than 25 million have no credit bureau file at all or are “credit invisible”.
For far too long, this Catch-22 conundrum—consumers want to own a home but they can’t qualify for a mortgage until they showed a credit history—was left unexamined. But now the government is shining a spotlight on the necessity for inclusion. The Project REACh—standing for Roundtable for Economic Access and Change—is bringing together leaders from the banking industry, national civil rights organizations, businesses, and technology to reduce specific barriers that prevent full, equal, and fair participation in the nation’s economy. And they are supplementing this effort with first-time home buyer incentives.
Lenders can seize a unique opportunity to become inclusion leaders.
How do lenders respond to these kinds of initiatives? One way is to recognize that the absence of bank accounts and credit history or even a previously damaged credit score don’t necessarily equate to high credit risk.
But is it truly risk? By augmenting prescreen marketing models with alternative data—defined as data not available through a traditional credit report—it becomes possible to gain a more integrated view into creditworthiness. Rather than focusing narrowly on repayment history, bankcard utilization or 30-day delinquencies, alternative data models that are highly effective predicators of behavioral patterns and financial risk levels strike right to the core of how people live and whether their lifestyle indicates that they are trending upward or downward economically. This non-traditional data empowers financial entities to tap into a huge, underserved market while remaining risk adverse.
Alternative data may well be the right solution at the right time.
By using alternative data, pioneering lenders gain the ability to approve more applicants while reducing loss exposure across various consumer segments—no-file to thick-file, sub-prime to super-prime—by completing the picture of creditworthiness and identifying underserved yet creditworthy consumers. By shining a lens on factors such as asset ownership, address stability and tenure, education and more, it becomes easier to identify under-the-radar customers who present a low risk and may even be on a positive economic trajectory.
Of course, one of the key factors in supplementing traditional data with alternative data to come up with a truer predictive score comes down to the underlying quality of the data. To execute risk-based pricing strategies across a broader base, there are several factors to consider: whether the data is industry-specific, culled from multiple sources, and vetted through a sophisticated linking and analytics process.
By incorporating alternative data, lenders can see opportunity where others only see risk. Not only will strategic inclusion goals be met, but also the lender can expand market share while cultivating a long and profitable relationship with new customers.
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