By Clark Abrahams, Marketing Director, SAS
Is a new credit assessment the intervention needed for the subprime crisis? As I follow the unfolding mortgage crisis, one thing is abundantly clear-there is significant room for improvement in current credit assessment approaches. Credit scoring has not done an adequate job of assessing risk in the subprime mortgage market. That fact is beyond dispute. Simple re-calibration of the existing models will not fix the problem of the blind spot in today's underwriting practices.Technology has a vital role to play to boost efficiency and help measure and monitor credit risk. However, in order to create a more effective means of identifying risk in the first place, a comprehensive new credit risk framework is needed. Simply throwing technology at the problem will not fix it.
Loans need first to be properly classified, and then risk rated. The process today has that backwards.
A better solution may be a hybrid approach that combines the best that technology can offer coupled with expert human judgment. Such an approach can help deal with the current crisis and may lessen the extent of, or even prevent, the next one. A better credit assessment needs to:
• Expand the boundaries of information associated with mortgage loans; • Appropriately segment borrowers based upon primary factors; • Layer in secondary risk mitigation factors, where needed; • Assign actions for each identified segment; • Allow for system updating, unlike scorecards, so that polices can adapt in response to the evolving economic climate, and so that risk estimates can be improved over time instead of becoming more unreliable over time, again as is the case with credit scoring.
As the accuracy and power of the FICO score continues to get debated, new and improved ways that address limitations of credit scoring systems and better evaluate credit risk will be in demand.
Clark Abrahams is the marketing director for Cary, N.C.-based business intelligence and analytical software and services provider SAS.