The report found that there is a significant segment of the population that is not able to access traditional credit due to a variety of factors such as lack of credit score history, low incomes, or high debt-to-income (DTI) ratios. The report also identified ways in which lenders could expand access to credit to this population, including loosening DTI requirements and adopting alternative credit scoring models.
The report found that non-traditional credit scores could open up an estimated $257 billion in originations to otherwise creditworthy borrowers. It also found that Relaxing DTI limitations could add another $43 billion.
Furthermore, the report concluded that increasing access to credit for this population would be beneficial for lenders. It stated that lenders could increase their customer base, increase profits, and benefit from more diversified portfolios.
Analysis:
The Urban Institute's new report estimates that expanding access to credit among low-to-moderate income borrowers could lead to an additional $300 billion in mortgage originations. This finding was based on an analysis of credit access among this population.
The report identified two main barriers that prevent this population from accessing traditional mortgages. The first is a lack of credit score history, which can prevent lenders from accurately assessing borrowers' creditworthiness. The second barrier is DTI ratio limitations. DTI is a measure of how much of a borrower's income is taken up by debt payments, and many lenders have strict limits on the allowable DTI ratio for mortgage applications.
The report proposed two strategies to improve credit access for low-to-moderate income borrowers. The first is to use alternative credit scoring models that do not rely on traditional credit score histories. The second is to relax DTI ratio limitations. The report found that utilizing these strategies could result in an additional $257 billion in originations from alternative credit scoring models, and an additional $43 billion from relaxed DTI ratios.
The report concluded that expanding access to credit could be beneficial to lenders. Not only could it increase their customer base and profits, but it could also provide them with a more diversified portfolio of mortgage products. This could better position them to weather a market downturn or recession.
The Urban Institute's report suggests that expanding access to credit among low-to-moderate income borrowers could lead to an additional $300 billion in mortgage originations. It proposed two strategies to improve credit access for this population: employing alternative credit scoring models and relaxing DTI ratio limits. These measures could result in an additional $257 billion in originations due to alternative credit scoring and $43 billion from relaxing DTI requirements. Expanding access to credit could prove beneficial to lenders, providing them with a larger customer base and more diversified portfolio of mortgage products that could help them better withstand market conditions.
This article was contributed on Nov 16, 2023
