MHN Interview with TransUnion: As Delinquencies Rise, More Companies Are Using Expert Scoring Models to Mitigate Risk

Since the recession began in December 2007, national rental vacancy rates have increased 11.46 percent from 9.6 percent to 10.7 percent (at the end of 2009). In that same time, TransUnion’s Credit Risk Index (a statistic developed to measure changes in average consumer credit risk within various geographies) increased 9.54 percent, reaching an all-time high level of 129.67. This dynamic puts property managers in a unique position – there are more properties available to rent, but prospective
tenants are bringing more risk to the table than ever before.

Mike Mauseth and Steve Roe, both vice presidents in TransUnion’s rental screening business unit talk to MHN about changing risk strategies during the recession and areas that have experienced heightened credit risk.

What are some areas in the nation that have experienced heightened credit risk?

Mauseth: Though some parts of the country are beginning to experience an economic recovery, TransUnion data identified increases in consumer credit risk in several states between the first quarters of 2009 and 2010. Areas hit hardest by foreclosures such as Florida and Arizona have seen the greatest increase in credit risk, though other states such as Idaho, New Hampshire and Oregon have also experienced three to four percent increases in consumer credit risk in the last year. Some areas that have experienced decreased consumer risk in the last year include Kentucky, North Carolina and Tennessee.

Can you provide an example of changing risk strategies during the latest recession?
Roe: With delinquencies rising across the board during the latest recession, more companies are using expert scoring models to mitigate risk. In fact, we worked with one national company to adjust their decision points when evaluating prospective tenants. After implementing our policy recommendations, the company has added 600 more tenants per month without increasing their bad debt.”

Are there any trends you see?

Roe: In general even though you’re looking at credit risk across the country, we’ve seen it change a lot regionally. In certain areas, unemployment and credit risk have gone through the roof and in others, both have been stable. We have larger customers that have portfolios across the country in those different regions. We really look at things in those portfolios and say we might need to adjust the risk in Phoenix, but in Dallas it’s probably okay. In some areas, people are looking at concessions as a way of doing business, and in others they are looking at raising rent. It really depends even in the same states.

Another trend is that across the board, there really is a focus on making sure you attract and retain quality tenants.

MHN: Does credit data change for different regions?

Roe: The credit data remains the same but the question is what does that credit mean relative to other people in that population, town or zip code. You might have someone on the lower medium score in a city, but relative to other people in that zip code, the lower medium score could be a good tenant score for that area.

MHN: What can a property manager do to reduce risk?

Roe: Apart from the credit score of the tenant, we are trying to help them get access to alternative data sources. Eviction and criminal records, high-risk collections information and whether a tenant has paid their rent on time are all factors that, if known, can help in avoiding risk.

MHN: Are there any other ways in which credit risk analysis can help a property manager?

Mauseth: Once an apartment is occupied, the manager needs to know if they are about to suffer a mass exodus, and that helps them manage their properties. When they plan to acquire a building, they should know if the project is just filled up with lower quality tenants to make it look like a good acquisition. It’s called portfolio management.