Fannie, Freddie delay new credit scoring systems

Have you been looking ahead to the long-anticipated news that the two dominant players in the home mortgage arena – Fannie Mae and Freddie Mac – finally made the decision to overhaul their outdated credit scoring systems to increase home-ownership opportunities for a broader array of consumers, sorry. Your wait is now considerably longer.

Fannie, Freddie delay new credit scoring systems

There won’t be any modernization of the mortgage giants’ controversial scoring systems before mid-2019 at the earliest, as outlined by Fannie’s and Freddie’s top government regulator.

Melvin Watt, director of the Federal Housing Finance Agency (FHFA), disclosed a week ago that despite intense pressure from Congress and home-ownership advocacy groups, he plans no adjustments to the following two years. Therefore , retention of the existing system that uses FICO scoring models that are widely considered outdated, as well as a continued requirement that mortgage lenders underwrite home-buyer applicants exclusively using scoring versions that even their developer, FICO, would like to replace.

Some quick background: FICO scores, between 300 to 850, predict the relative likelihood of default on loan applications, based upon information from consumers’ credit files. Low scores indicate higher risk; high scores less risk.

Since the adoption of credit scoring by Freddie Mac and Fannie Mae in the mid-1990s, FICO (formerly referred to as Fair Isaac Co.) provides a series of newer versions developed to enhance the predictive accuracy of its scores.

Fannie’s and Freddie’s models date to the early years of the past decade and have for ages been superseded by more consumer-friendly versions. As an example, the most recent FICO model ignores score-depressing items associated with many consumers’ credit files including paid-off collections, and it’s also more lenient on medical bill collection accounts.

In the past, members of Congress along with a coalition of housing advocacy groups began complaining that Fannie’s and Freddie’s dependence on outdated scoring models is harmful, and urged the two companies to upgrade their systems.

In addition they noted that a minimum of one major competitor to FICO, VantageScore Solutions, features a model that says it will score 30 million-plus consumers with minimal data on file at the credit bureaus who currently are “unscoreable” or invisible to older FICO models. VantageScore says if included with Fannie’s and Freddie’s menus, its model could “expand mortgage lending to Hispanics and African-Americans to purchase homes by 16%.”

Under the direction of Watt, Fannie and Freddie have studied the potential for updating and expanding their scoring technologies for the past two years, but have continued to insist that each and every lender just use the older FICO models they prescribe. They also have declined to upgrade to any of FICO’s more sophisticated versions – a move that FICO itself supports. One of the reasons for the reluctance to change, as outlined by industry experts, would be the substantial cost of retooling underwriting systems and potential complications for bond investors.

Watt said that while he endorses the objective of expanding having access to mortgage credit for additional people, any abrupt departure from Fannie’s and Freddie’s current technologies will be “a serious mistake.” Watt said the earliest practical time for any change could possibly be in two years, once the two companies plan jointly to introduce a new platform for mortgage bond market offerings. Watt also expressed concern that using “competing credit scores” may lead to “a race to the bottom with competitors competing for more and more customers.”

Reaction to Watt’s disclosure was swift and generally critical. Lisa Rice, executive vice president of the National Fair Housing Alliance, said “this delay will further deny the opportunity of middle and moderate-income families, and in particular families of color, to get access to credit in the financial mainstream.”

FICO has a different perspective. Even though the company would rather that clients use its most sophisticated scoring models, “we applaud the fact that they are doing this due diligence” before radically changing their systems, said Joanne Gaskin, FICO’s senior director of scores and analytics, since the process “really is more complex than most people realize.” In addition to the costs are daunting. “We’ve heard price tags of hundreds of millions” of dollars for some large players in the mortgage market. “It’s not a small undertaking.”

In a nutshell: For an additional two years at a minimum, with regards to credit scoring, Fannie and Freddie are staying with what they’ve got. Outmoded or not.

If you are ready to find your new home? Nick & Cindy Davis with RE/MAX Premier Group are here to assist you. We are always a just a click here away or call to 813-300-7116.

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