# Modernising Credit Assessment For Mortgages – Finding Real Insights To Create Real Opportunity
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2019-04-01
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Rethinking Mortgage Credit Assessment: Unlocking True
Meta Description: Discover how outdated credit assessment methods can hinder home ownership and revenue opportunities, and learn about the flaws in the system that impact
URL: https://financedigest.com/modernising-credit-assessment-for-mortgages-finding-real-insights-to-create-real-opportunityhtml

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By **Mahesh Raghavan**, Senior Principle – Financial Services Digital Consulting, Infosys

**Modernising credit assessment for mortgages– Finding real insights to create opportunity**

Between the dream of home ownership and reality, too often comes frustration. After customers find the [house of their dreams](https://www.financedigest.com/so-you-have-the-dream-job-nice-car-and-big-house-but-is-your-lifestyle-sustainable-do-you-have-the-products-in-place-if-the-worst-were-to-happen.html "So you have the dream job, nice car and big house, but is your lifestyle sustainable? Do you have the products in place if the worst were to happen?"), the reality of the mortgage process becomes evident. That [process is rigorous and often painful](https://www.financedigest.com/anti-money-laundering-doesnt-have-to-be-a-painfully-inefficient-process.html "Anti-money laundering doesn’t have to be a painfully inefficient process"). While the level of scrutiny is understandable – lenders must know borrowers can repay – the [data banks](https://www.financedigest.com/asia-shares-edge-higher-wary-of-us-bank-data.html "Asia shares edge higher, wary of US bank data") turn to can be significantly flawed. These flaws are more glaring than one may realise, and significantly undercut home ownership and [revenue opportunities](https://www.financedigest.com/the-potential-impact-of-coronavirus-covid-19-for-riveting-tools-market-revenue-opportunity-forecast-and-value-chain-2021-2028.html "The Potential Impact Of Coronavirus (Covid-19) For Riveting Tools Market Revenue, Opportunity, Forecast And Value Chain 2021-2028").

**Flaws in the system: A limited perspective**

Credit agencies rely on backward-looking assessment methods developed decades ago that don’t truly represent creditworthiness. A [credit score](https://www.financedigest.com/how-to-raise-my-credit-score-40-points-fast.html "How to raise my credit score 40 points fast") predicated on someone’s past behaviour gives some indication of the ability to repay loans, but it is an incomplete view.

Also, more than 1 in 5 consumers have a material [data error](https://www.financedigest.com/amazons-twitch-hit-by-data-breach-due-to-configuration-error.html "Amazon’s Twitch hit by data breach due to configuration error") in their files that makes them look riskier than they are.

If incorrect data is [reported to credit](https://www.financedigest.com/credit-agricole-is-weighing-foray-into-german-car-sharing-media-report.html "Credit Agricole is weighing foray into German car-sharing: media report") agencies or an agency makes a mistake, the responsibility to correct it falls largely on the consumer. They must undergo a difficult process to get their record corrected, during which they may be wrongly flagged as credit unworthy. From both the bank and consumer’s perspective, credit agencies [fail to do their primary job and the lending institution loses out on the profitability](https://www.financedigest.com/how-to-fail-profitably.html "How to Fail Profitably") of a creditworthy customer they wrongly rejected.

Banks, on their part, have credit assessment and underwriting rules that do not take into [account consumers’](https://www.financedigest.com/what-successful-accounting-looks-like-in-the-age-of-the-consumer.html "What successful accounting looks like in the age of the consumer") reality and changing lifestyles. [Banks have a lot of data about customers](https://www.financedigest.com/uk-banks-told-to-reimburse-customers-tricked-by-scams.html "UK banks told to reimburse customers tricked by scams"), yet they don’t know their customers!

A fitting example of the [banks’ shortcoming is the case of Ben Bernanke](https://www.financedigest.com/banking-crisis-breakthroughs-win-nobel-economics-prize-for-bernanke-diamond-dybvig.html "Banking crisis breakthroughs win Nobel economics prize for Bernanke, Diamond, Dybvig"). Bernanke served as Chairman of the Federal Reserve until 2014, after which he took a position with a leading [think tank](https://www.financedigest.com/new-uk-pm-must-be-radical-to-stop-power-bill-catastrophe-think-tank.html "New UK PM must be radical to stop power bill catastrophe – think tank") in Capitol Hill.

He applied for a home refinance only to be shockingly rejected – a downright absurd outcome considering Bernanke made $250,000 per speech and had recently [signed a multimillion-dollar book deal](https://www.financedigest.com/germany-signs-deal-to-give-ownership-of-benin-bronzes-to-nigeria.html "Germany signs deal to give ownership of Benin Bronzes to Nigeria"). Did the [banks know their customer or did their underwriting rules](https://www.financedigest.com/bank-of-england-publishes-rules-for-energy-firms-liquidity-tool.html "Bank of England publishes rules for energy firms’ liquidity tool") reflect the reality of Bernanke’s creditworthiness?

Credit agencies not only have data quality issues, but they have antiquated [rules like the banks](https://www.financedigest.com/bank-of-england-consults-on-remaining-basel-bank-capital-rules.html "Bank of England consults on remaining Basel bank capital rules"). For example, when a person switches their mobile phone provider, the new provider performs a credit check. The credit agencies [record](https://www.financedigest.com/credit-suisse-shares-hit-record-low-after-report-bank-is-looking-to-raise-cash.html "Credit Suisse shares hit record low after report bank is looking to raise cash") this as a hard credit check and, in response, reduce that individual’s FICO score. From a practical standpoint, a customer switching to a service provider that saves them $25 a month is better off from a disposable income and creditworthiness perspective, yet their [credit score](https://www.financedigest.com/12-things-that-dont-hurt-your-credit-score.html "12 Things That Don’t Hurt Your Credit Score") indicates the opposite.

Finally, the process of building a [credit score](https://www.financedigest.com/benefits-of-a-good-credit-score.html "credit score") is fundamentally flawed. A [person must borrow to build a credit](https://www.financedigest.com/questions-to-ask-when-applying-for-a-bad-credit-personal-loan.html "Questions to Ask When Applying for a Bad Credit Personal Loan") score, whether they need the money or not. Encouraging people to become debtors has the unintended consequence of incentivising the kind of poor financial behaviour that can lead to a debt-ridden society.

**At the cutting edge**

Currently, few lenders have taken steps to address these problems, but there are [solutions for those who look towards the future](https://www.financedigest.com/the-future-of-fintech-and-open-source-cloud-solutions-in-the-united-kingdom.html "The future of fintech and open source cloud solutions in the United Kingdom").

Certain lenders in the [mortgage and student loan](https://www.financedigest.com/metro-bank-posts-second-quarter-of-profitability-on-mortgage-loans-demand.html "Metro Bank posts second quarter of profitability on mortgage loans demand") space have embraced a more well-rounded methodology. Rather than relying solely on the backward-looking FICO score from credit agencies, they take into account a borrower’s future potential. They consider the [person’s](https://www.financedigest.com/personal-finance-strategies-for-saving-and-investing.html "Personal finance: strategies for saving and investing") educational background, including what and where they studied, their profession, their current employer and more, to form a holistic picture of that person’s financial health and their earning potential.

Another company that is proactively addressing the problem of creditworthiness uses lifestyle data, in addition to financial, professional and educational information, to predict a borrower’s ability to [repay loans](https://www.financedigest.com/bounce-back-loans-what-to-do-if-you-cant-repay-2.html "Bounce Back Loans: what to do if you can’t repay?").

Other institutions use [analytics to perform better credit](https://www.financedigest.com/enhancing-credit-exposure-management-through-graph-analytics.html "Enhancing Credit Exposure Management Through Graph Analytics") assessments and to debunk long-held myths, such as the belief that if a subprime borrower owns a house and pays a mortgage, they are more stable than a subprime borrower who rents. Through empirical [data analysis](https://www.financedigest.com/shock-data-logger-market-2021-outlook-current-and-future-industry-landscape-analysis-2029.html "Shock Data Logger Market 2021 Outlook, Current and Future Industry Landscape Analysis 2029"), lenders have shown that myth to be false. With new [insights gained](https://www.financedigest.com/organic-fertilizer-market-where-should-participant-focus-to-gain-maximum-roi-exclusive-report-by-future-market-insights.html "Organic Fertilizer Market | Where Should Participant Focus To Gain Maximum ROI | Exclusive Report By Future Market Insights") from analytics and machine learning, they can make more informed decisions when evaluating loan applicants.

**Regaining social metrics –** [Putting community into community banking](https://www.financedigest.com/analysis-war-in-ukraine-puts-pressure-on-east-european-banks-to-prop-up-sinking-currencies.html "Analysis-War in Ukraine puts pressure on East European banks to prop up sinking currencies")

[Banking has existed far longer than credit](https://www.financedigest.com/audit-finds-holes-in-ecbs-management-of-bank-credit-risk.html "Audit finds holes in ECB’s management of bank credit risk") agencies. How, then, did they gauge a borrower’s worthiness?

[Back in the days when a bank](https://www.financedigest.com/canadian-banks-fighting-brokers-back-for-customers.html "Canadian Banks Fighting Brokers Back For Customers") served only its local community, lenders examined a borrower’s financial situation and also considered that person’s social reputation. For a long time, after towns grew and [banks went national](https://www.financedigest.com/swiss-national-bank-raises-rates-says-bank-crisis-stopped.html "Swiss National Bank raises rates, says bank crisis stopped"), we lost that social-reputation metric, but with innovative uses of new technology, lenders can regain a community-based approach.

Certain [FinTech companies](https://www.financedigest.com/7-cyber-threats-fintech-companies-should-watch-out-for.html "7 Cyber Threats FinTech Companies Should Watch Out For") apply similar principles to their lending decisions through the use of non-traditional data to create social contracts. By developing a social footprint of the borrower based on their connections, social media,browsing history, geo-location and other smartphone data, they’re able to bring a social element into a borrower’s profile to create a more complete assessment.

**Exploring innovative new solutions**

One thing is clear: banks can do better. It is possible to significantly improve credit assessment and rid the old system of its flaws. The solution calls for an experimentation-and-fail-fastapproach. At the cutting edge, one Infosys client has set up an initiative using non-traditional [data in its credit assessment to analyse each data point’s](https://www.financedigest.com/interoperability-of-data-to-accelerate-the-point-care-infectious-disease-diagnostics-market.html "Interoperability of data to accelerate the Point Care Infectious Disease Diagnostics Market") impact in predicting creditworthiness.

Incredible [progress is being made](https://www.financedigest.com/sweden-finland-and-turkey-have-made-progress-on-nato-membership-sweden-says.html "Sweden, Finland and Turkey have made progress on NATO membership, Sweden says") in this space, but when it comes to change, most banks remain bogged down by inertia. [Banks can break this by adopting design thinking and lean on start-up](https://www.financedigest.com/how-partnerships-between-fintech-start-ups-and-traditional-banks-herald-a-brave-new-world-of-opportunity.html "How partnerships between FinTech start-ups and traditional banks herald a brave new world of opportunity") led approaches to experiment quickly, fail fast and learn faster, as they explore how to improve their credit assessment.

It is never easy to change. However, new technologies present possibilities for any lender to do things better. To overcome the inertia of how things have been done and look to how they should be done – for the customer, and for the business.


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