The Federal Housing Finance Agency has released milestone dates for a process that would update consumer credit measures used in mortgage underwriting, make the use of various sources more competitive and potentially extend lending to more borrowers.
The process, which is set to start next year, will be inclusive of mortgage companies and others affected by the updates so that some of their concerns about higher costs and other unintended consequences can be considered and addressed, according to the agency.
"Today's announcement highlights FHFA's commitment to stakeholder engagement as the enterprises implement the new credit score models and transition to a bi-merge reporting requirement," said Director Sandra Thompson. "Obtaining public input in a transparent manner and considering the feedback is critical to a successful transition."
In the first quarter of 2024, the FHFA will change the process used by lenders selling loans to government-sponsored enterprises Fannie Mae and Freddie Mac from one based on three merged credit reports (from Equifax, Experian and TransUnion) to two.
Next, it will transition Fannie and Freddie's underwriting away from reliance solely on FICO's classic credit score.
Starting around the third quarter of next year, they will start delivering updated scores and associated disclosures, including an one from FICO known as 10T. The other one that was validated last October is VantageScore 4.0. VantageScore is a collaboration between the three credit bureaus.
The second phase will then ideally follow in the fourth quarter of 2025. At that point, Fannie and Freddie will put the new scores into use not only for pricing mortgages they buy, but also for setting capital requirements and other processes.
In addition to buying loans within certain parameters with the aim of furthering their affordable housing missions, the two GSEs are currently positioned as a backstop for the market and have been working to retain a certain amount of capital relative to the credit risks they take on in order to protect their financial stability.
Fannie and Freddie were brought into government conservatorship when the Great Recession's housing crash threatened their finances and have maintained ties to the U.S. Treasury.
Updated scores could change the way they size up risks but aren't designed to add any. Rather, they incorporate things like trended data, for example, such that they examine more how a borrower manages debt over time rather than at a particular point.
The GSEs have done some ad-hoc experiments with underwriting based on more advanced borrower assessments like this but scores that incorporate them would have even more influence in the underwriting process as they're more of a primary influence on whether a borrower qualifies for a loan and what fees lenders are charged in selling it. Those fees influence what the borrower pays for mortgage credit.
At one point under earlier leadership the FHFA was concerned about VantageScore's ties to the credit reporting agencies. A different director later reversed that decision.
Former Fannie Mae President and CEO Timothy Mayopoulos, who recently was named to lead the Silicon Valley bridge bank, was an advocate of updated underwriting and fell in love with a credit reporting executive, who he later married. A watchdog agency flagged this as a conflict of interest at one point early in their relationship. He left the GSE long before the current decision to accept VantageScore.
The current leadership of the GSEs and their regulator seem to be taking an even-handed approach to the different credit reporting companies and score providers involved by accepting both types of advanced models.
However, Rep. John Rose, R.-Tenn., has expressed some concerns about the bi-merge process.
"Lenders may not be able to accurately price risks and manage their mortgage-related exposures if they are relying on a limited picture of borrowers' credit files," he said in a letter sent to Thompson last month.
Brad Finkelstein contributed reporting to this article.
Bonnie Sinnock
Capital Markets Editor, National Mortgage News
