Written By: Joel Palmer, Op-Ed Writer
Mortgage processors, mortgage underwriters and other industry stakeholders have another month to submit input to the Federal Housing Finance Agency (FHFA) regarding potential changes to Fannie Mae and Freddie Mac’s credit score requirements.
Specifically, FHFA is asking interested parties whether Fannie and Freddie should expand the credit scoring models used in assessing mortgage borrowers. Currently, the GSEs use only Classic FICO, or FICO 4, but may soon be considering FICO 9 and VantageScore 3.0.
FICO 9 scores were made available to consumers in 2016. FICO said this version disregards any collection accounts that have been paid in full, and it differentiates unpaid medical accounts in collections from non-medical debts.
The VantageScore model was introduced in 2006 and developed by the three nationally recognized credit reporting companies (CRCs), which are Equifax, Experian, and TransUnion. The intellectual property rights for the model were then transferred to VantageScore Solutions, an independently managed firm, according to the VantageScore website.
VantageScore said its scoring system is more inclusive and provides credit scores to millions of people who otherwise don’t have a score. For example, it can score consumers who are new to the credit market.
Its scoring criteria includes including payment history, age/credit type, percent of credit limit used, total balances/debt, recent credit, and available credit.
The Credit Score RFI includes questions on credit score usage, operational impacts of the options under consideration, issues related to competition in the credit score market, and possible changes to the tri-merge credit report, which requires lenders to obtain credit reports from all three credit reporting companies.
At the direction of FHFA, Fannie and Freddie has assessed, over the past two years, the potential impact of updating credit score requirements. The tests used the three credit score models — Classic FICO, FICO 9 and VantageScore 3.0 — on actual mortgage loan applications received from lenders and acquired by the GSEs.
Based on these assessments, FHFA has concluded that any change in credit score requirements will have little impact on mortgage processor and underwriters, as well as mortgage borrowers.
Credit scores, after all, are just one aspect of mortgage underwriting. Think of it like cooking. If you swap out one ingredient for a similar substitute in a food recipe, the people eating the dish will hardly notice.
“FHFA concluded that the Enterprises’ empirical findings revealed only marginal benefits to requiring a different credit score than Classic FICO,” read a summary in the agency’s official Request for Input.
“These findings suggest that, regardless of the credit score used in the underwriting process, each Enterprise’s automated underwriting systems more precisely predicted mortgage defaults than third-party credit scores alone. The Enterprises’ automated underwriting systems incorporate additional information provided by the borrower and/or third parties during the mortgage application process (e.g. borrower income and assets) that is not reflected in the information used to generate a standalone third-party credit score.”
Part of the reason the credit score change could be negligible is that the GSEs have recently implemented changes that allow their automated underwriting systems to evaluate borrowers who do not have a Classic FICO credit score, which is one of the key arguments for updating credit scoring models.
There is widespread support, however, for using alternative credit scores. Several bills have been introduced in Congress over the last several years to require Fannie and Freddie to do that. The Consumer Finance Protection Bureau has pushed for alternative scores, as has The Urban Institute. The National Association of Realtors recently issued a statement to Fox Business supporting “newer, more predictive and inclusive credit scoring models.”
The hesitation to switch is due in large part to the lingering effects of the 2008 financial crisis, which required a $188 billion bailout of the GSEs from the federal government, which took over ownership.Another cited reason is the cost of updating mortgage underwriting systems.
Melvin Watt, director of FHFA, was quoted as sayingthat using "competing credit scores" could lead to "a race to the bottom with competitors competing for more and more customers.”
Input to the RFI should be submitted electronically (select “credit score” in pull down) or via mail by February 20, 2018, to the Federal Housing Finance Agency, Office of Housing and Regulatory Policy, 400 7th Street, S.W., 9th floor, Washington, D.C., 20219
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.