Patterns In Risk Factors
This blog was co-authored by John Wang.
Mortgage lenders have known for a long time that debt-to-income (DTI) and credit history (based on credit bureau data), among other factors, are critical for sound underwriting and managing credit risk on a mortgage portfolio. Similar analysis can be used to evaluate a prospective tenant’s likelihood of making the rent payments agreed to in the lease or the share of a building’s rent roll that may go delinquent. This has become increasingly important for rental management companies as the renter share of households has risen to its highest in 50 years (Figure 1).
Rental property owners and managers use the CoreLogic® Rental Property Solutions platform to evaluate the credit risk of rental applicants. Information from this platform can be used to examine trends in renter credit quality over time.
Figure 2 shows the average rent-to-income ratio for rental applicants. A higher rent-to-income ratio is generally associated with increased credit risk, as renters devote a higher percentage of their income to paying rent. The rent-to-income ratio has trended upward between 2009 and 2017, as the increase in rents has outpaced income growth. At the national level, it has increased from 25.4 percent in the second quarter of 2009 to 28.1 percent in the second quarter of 2017, a 10.6 percent increase over an eight-year period.
Rent to income is one factor affecting renter payment risk. Additional sources of information, such as credit bureau data, public records, and other information in the renter application, can also provide insight into renter performance risk. The CoreLogic ScorePLUS® model is a statistical model that brings together multiple sources of information to predict renter applicant’s risk of lease default. Information related to credit bureau history, subprime loan history, eviction and rental collection history, as well as the renter’s application information all factor in to the SafeRent® Score risk score.
Figure 3 shows the average SafeRent Score over time for rent applicants contained in the Rental Property Solutions platform. Similar to a FICO score, a higher SafeRent Score is associated with lower risk. Two trends stand out in the average renter risk scores. First, the scores exhibit a seasonal trend. The seasonal trend is supported by seasonal trends in credit bureau characteristics of rent applicants. Second, the average score has been improving (renter applicant risk has been declining) since 2010. This is consistent with the general improvement of credit performance as borrowers continue to recover from the 2008-2009 recession. The improvement in applicants’ credit characteristics has more than offset the upward trend in rent to income shown in Figure 2, resulting in an improving rental risk score over time.
This blog provides an introductory overview of renter credit risk. A follow-up blog will examine trends in renter payment risk as well as other renter characteristics in greater detail.
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