You probably know that your credit score is a crucial factor in your ability to qualify for a mortgage. You might also know that your score can vary depending on the type of scoring model your lender uses. If it’s an old, outdated version you might get a lower score. If it’s a newer, more advanced model, you’ve got a better shot at being scored more fairly.
Which brings up an end-of-the-year controversy: The two behemoths of the mortgage business – Fannie Mae and Freddie Mac – continue to use a credit scoring model that even its developer, FICO, says is not as “predictive” as its much newer models. Worse yet, Fannie and Freddie require that all lenders who want to submit loan applications to them must also use the same, outdated technology.
The net result, say critics from the lending industry, consumer groups, civil rights organizations and a bipartisan coalition of legislators in Congress, is that many applicants don’t get the credit scores they deserve. Many other consumers – the estimates range above 30 million – aren’t even scoreable using the models currently employed at Fannie and Freddie. Disproportionately, critics say, these are people who don’t make heavy use of the credit system or who are young and don’t have much information on file with the national credit bureaus. Large numbers of them might qualify for a mortgage, say scoring experts, if they were simply given a fair shot.
Acknowledging the problem, Fannie’s and Freddie’s government regulator, the Federal Housing Finance Agency, directed the companies two years ago to begin examining how to improve their scoring systems. For 2016, the FHFA told them to “conclude their assessment,” and “as appropriate, plan for implementation” of a better approach.
Since it’s now December and there have been no announcements about possible reforms, I thought it appropriate to ask this question: When are Fannie and Freddie rolling out their new and improved scoring models and what will they look like? The question is especially timely given the release in late November of a new study from the Urban Institute documenting how recent credit standards in the mortgage arena have impacted millions of would-be borrowers.
Researchers found that roughly 1.1 million home loan applicants were turned down last year because the standards used to evaluate them have been much more stringent than they were in the pre-housing boom era, when defaults were relatively low. Between 2009 and 2015, “lenders would have issued 6.3 million additional mortgages,” researchers calculated, “if lending standards had been more reasonable,” as they were back in 2001.
A major culprit: a big shift toward the credit score elite when it comes to mortgage approvals. From 2001 through 2015, the share of borrowers approved for mortgages with FICO scores above 700 rose to 66 percent from 51 percent, while those approved with scores below 660 declined to just 14 percent from 31 percent. Credit scores of approved applicants at Fannie and Freddie this year alone have averaged between 752 and 754, according to loan technology firm Ellie Mae. Meanwhile, the average score among all Americans is just 699, according to score developer FICO. (FICO scores range from 300 to 850, with low scores indicating higher risks of default.)
In response to my question, a spokesperson for the FHFA told me that Fannie and Freddie continue to discuss their plans for scoring reforms with “a broad range of stakeholders” about the “cost, operational implications, and potential impacts on access to credit.”
Who are some of these “stakeholders” and how do they see this issue? Among the most directly affected are the banks and mortgage companies who deal with the two companies daily. They strongly favor a move to more advanced scoring models as a way to broaden the base of potential home buyers and borrowers without exposing themselves or Fannie and Freddie to higher risks of default.
Michael Fratantoni, chief economist for the Mortgage Bankers Association, told me in an interview that “by sticking to old models we are disadvantaging” sizable numbers of consumers. Groups such as Fratantoni’s also want to see the introduction of advanced scoring models from companies other than FICO – VantageScore Solutions, LLC offers a rival system now in use in most other segments of lending – as an option permitted by Fannie and Freddie.
“We are on the record for more competition in this space,” Fratantoni said. “We shouldn’t be locked into just one set of scores.”
Nor should potentially millions of credit-worthy consumers.