Mortgage experts generally expect government-related investors’ plan to replace FICO’s “classic” score with newer ones — and more flexible credit reporting — could open up lending, but some are worried about unintended consequences and costs.
As the Federal Housing Finance Agency noted in announcing the plan, incorporating alternative data in scores and providing more flexible reporting could help more consumers qualify, but some fear it won’t help everyone.
Some of the advances in the past decade not incorporated in the nearly 20-year-old classic FICO score or traditional reporting, like trended data, “could be advantageous to people who are working to reestablish credit,” said Shmuel Shayowitz, president and chief lending officer of Approved Funding. However, he questioned whether they’ll be as much help to younger people who lack payment track records.
Experts also think the multiyear initiative could require the mortgage industry to pay for the change.
Mortgages have long largely relied on a system in which one score and a tri-merge credit report have been used by the government-sponsored enterprises who buy many mortgages in the U.S., so the switch could require investment in the operational change needed to accommodate it.
The development is “a slight negative for the lenders, mortgage insurers, and other stakeholders/investors in the mortgage ecosystem that will have to cover the cost of this new policy,” Ivan Boltansky and Eric Hagen, analysts at BTIG, said in a report.
“I think this move will make it more costly for mortgage applicants and mortgage originators to process loans,” Shayowitz said, noting that his take is only a surface impression of the announcement’s implications based on the information available to date.
“Time will tell whether this is truly of benefit to the consumer,” he said. (Mortgage companies often pass along increased costs to borrowers.)
However, others are more optimistic that those lacking payment histories and thin-credit borrowers will see lower costs due to what FHFA has acknowledged will be long-term score and reporting changes.
“This is a positive win, especially for low- and middle-income communities,” said Daniel Smith, CEO and founder of Keepingly, a technology company that provides a home budgeting platform.
A reduction in consumer costs related to the credit reporting and scoring changes will materialize, but not right away, said Jonathan Lawless, director of homeownership at Bilt, and a former vice president for product development and affordable housing at one of the two government-sponsored enterprises the FHFA oversees.
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This article was originally published on National Mortgage News on October 26, 2022.
