More inclusive credit scoring models offer huge upside for GSEs
A few months ago, I shared news that Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA), are evaluating the possibility of accepting more inclusive credit scoring models such as VantageScore 3.0.
Fannie and Freddie, known jointly as government-sponsored enterprises (GSEs), process the great majority of single-family home loans in this country. Their current seller-service guidelines “lock in” credit scoring models that ultimately exclude millions of creditworthy borrowers, and that are based on consumer data compiled from 1995 to 2000.
As the GSEs and the FHFA consider accepting more inclusive, up-to-date scoring models, discussion has largely branched in two directions: Proponents have focused on the benefits of scoring models that could extend mortgage access to millions of creditworthy American consumers. And skeptics have pointed to the potentially high cost to the GSEs of testing and implementing new scoring models.
We are pleased to offer an analysis that considers not just the costs, but also the potential upsides for the GSEs and U.S. taxpayers, of adopting updated and more inclusive credit scoring models such as VantageScore 3.0.
The findings, based on conservative assumptions, are summarized in an infographic on our website. They indicate that GSE adoption of more inclusive credit scoring models would:
- Generate $272 million in new net revenues annually for the GSEs, which would easily offset implementation costs and provide a substantial return to taxpayers.
- Extend purchase-mortgage lending to 16 percent more Hispanic and African-American households, as compared with 2013 levels.
- Provide sustainable homeownership to 72,285 additional creditworthy households otherwise invisible to the GSEs every year.
There is now clear evidence that such a move by the GSEs would not only expand homeownership for tens of thousands of creditworthy Americans annually, but also lead to significant and sustainable revenue generation and, importantly, more than cover implementation costs.
GSE acceptance of the VantageScore model as an option in lenders’ underwriting processes would not only be fair and prudent for the competitive marketplace, but this study also shows it would have significant benefits for consumers and the GSEs themselves.
We will continue to press the GSEs to adopt more modern and advanced credit scoring models. If you’d like to support these efforts, or just follow this issue more closely, please subscribe to our GSE Lockout Newsletter.
All the best,
Barrett Burns is president and CEO of VantageScore Solutions, LLC.