Stability in Consumer Credit Scores: Level and Direction of FICO Score Drift as a Precursor to Mortgage Default and Prepayment

Abstract

This article represents an extension of the expansive credit risk and credit migration literature, prominent in pricing risk of corporate bond and securities investment, to an analysis of the drift of consumer credit scores. A rich data set of residential mortgages is used in the development of models to predict credit score migration and then to illustrate the ability of credit score transition to serve as a precursor to potential default and prepayment. The results indicate credit scores provide signals and information to investors and servicing agents in a fashion similar to credit ratings on commercial paper.