As published in Scotsman Guide's Residential Edition, July 2005.
As interest rates inch up and re-fis dwindle, originators continue to seek new opportunities within horizontal markets, such as the underserved real-estate market.
Recent studies estimate that this market accounts for approximately 20 percent to 25 percent of the U.S. population. That could equate to millions of potential untapped consumers for the real-estate industry. Segments of the underserved real-estate market include recent immigrants, young adults, widowed or divorced adults and others with little or no credit history when measured by current credit-reporting standards.
Identifying the underserved
The reasons for limited credit history vary. For recent immigrants, it could be a matter of having too little time to establish credit in this country or cultural differences that make cash transactions their preferred means of purchase. For young adults, age restrictions limit their time to have established credit. Widows, widowers or divorcees who may have relied on their spouses’ credit in the past can find themselves now having to establish their own credit histories.
Whatever the reason for their limited credit histories, many in the underserved market are capable of successfully fulfilling a mortgage obligation. Originators’ challenge in this shifting market is to identify the true risks associated with these potential borrowers in order to extend the most-appropriate credit offers. Standard credit reports and FICO scores are not designed to provide for these borrowers’ circumstances. In turn, tapping this market’s potential requires an alternative means of assessing creditworthiness.
In the past, extending credit to nontraditional borrowers required lengthy processes to assess credit risks. At that time, a manual process was more feasible because of the limited number of nontraditional borrowers being served. Today, with increased origination volume expected as the focus shifts toward the underserved market, successful originators must use other tools to expedite the approval process efficiently and effectively. This need for an accurate credit-risk-analysis tool plays a significant role in redirecting originator focus to a previously underutilized tool in the industry: nontraditional credit reports.
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