Credit Risk, Credit Scoring, and the Performance of Home Mortgages

Abstract

This article examines the ways institutions involved in mortgage lending assess credit risk and how credit risk relates to loan performance. An increasingly prominent tool used to facilitate the assessment of credit risk in mortgage lending is credit scoring based on credit history and other pertinent data, and the article presents new information about the distribution of credit scores across population groups and how credit scores relate to the performance of loans. In addition, this article takes a special look at the performance of loans made through nontraditional underwriting practices and "affordable" home lending programs.