The use of credit scores in the mortgage market is a source of great confusion, but it also can be a catalyst for many consumers. It’s also one of the key themes of our official response to the Federal Housing Finance Agency’s (FHFA) request for input (RFI) on updating the credit scoring models required by the GSEs.
A consumer’s credit score, contrary to what even some industry experts believe, is not a substantive input into either Fannie Mae or Freddie Mac’s automated underwriting engines. For Fannie Mae’s Desktop Underwriter, the borrower’s credit score is not an independent variable at all.
Rather, the now decades-old mandated FICO models are used to screen borrowers and in the pricing grids that impact interest rates. If the FHFA were to permit the acceptance of newer, more inclusive models, like VantageScore 3.0 or 4.0, these scores would be used in those same two ways. In other words, neither the underwriting process nor the amount of risk taken by Fannie or Freddie would effectively change, if at all.
There are 30 to 35 million consumers who have a VantageScore credit score but are nonetheless unscoreable using FICO*. Of these 30 to 35 million, approximately 7.6 million have a score of 620 or greater and approximately 2.4 million of those consumers are minorities. The vast majority of these consumers are likely unable to obtain a FICO Score because they have not had an update to their credit files in the last 6 months. While many of these consumers may not seek a mortgage, every one of them would come one step closer if VantageScore were a part of the process.
We estimate that 2.3 to 2.5 million additional consumers may have the desire, credit profile, and income to support a mortgage. This would represent a significant improvement in the mortgage sector given the rapidly changing demographics driving the composition of first-time homeowners in America.
Our estimate has been questioned by FICO (which has its monopoly to protect) and, to a lesser
extent, by the FHFA: in the GSEs’ own analyses, they reported only “marginal” improvements in access to credit as a result of using newer models. I’d like to take issue with that conclusion for three reasons.
First, I dare anyone to call a family who fails FICO’s restrictive minimum scoring requirements and tell them that their inability to qualify for a mortgage is a “marginal” matter. They do matter and deserve a
shot at the American Dream of achieving sustainable homeownership, as long as they pass the underwriting process.
Second, the “marginal” improvements reported only tells half the story. Today, prospective borrowers with limited credit histories are often discouraged from applying for loans altogether. When such consumers do apply, they face limited lender options, limited product options, and significantly higher prices.
Third, the GSEs’ evaluation of VantageScore 3.0 only considered (and was only able to consider) those
consumers whose applications had been submitted to the GSEs. They entirely ignored the millions of consumers who are served by other channels, like FHA or VA, and those who got discouraged before they ever applied for a mortgage.
In this letter, I’ve addressed the consumer-centric issues at stake in the effort to end the FICO monopoly
in the mortgage arena. The mortgage industry is complex with many different stakeholders. For example, without funding coming from large institutional investors willing to take on the risk associated with a
30-year loan, we would not have a housing finance industry to begin with. We’ve addressed challenges associated with this important function in our RFI response as well. We have also set forth these thoughts thoroughly in a whitepaper we published a few months ago.
March 30th marked the deadline for responses to FHFA’s request. I would like to thank FHFA staffers, Director Watt and the many RFI respondents for their time and interest in this worthy effort.
Regards,
Barrett Burns
* Reduction in public records and collection trade lines in consumers files will cause the number of consumers who would be newly scoreable using the VantageScore credit scoring model to decline.
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