By AnnaMaria Andriotis and Christina Rexrode
Banks and rival lenders are butting heads over the credit scores
used to decide millions of mortgage requests by U.S. home
buyers.
Now, a federal agency is weighing whether to step into the
fight, which revolves around a longtime requirement for lenders who
sell mortgages to Fannie Mae and Freddie Mac to gauge most
borrowers using FICO scores. The Federal Housing Finance Agency's
ultimate decision could have wide-reaching ramifications for the
mortgage market and home buyers across the U.S.
Many nonbank lenders, which in some recent quarters have
accounted for more than half of the mortgage dollars issued in the
U.S., want the ability to use a credit score provided by a company
owned by credit-reporting firms Equifax Inc., Experian PLC and
TransUnion. These lenders argue the alternative score would open
the mortgage market to a greater number of people and lead to more
mortgage approvals, helping to boost home sales and the
economy.
Banks generally want to stick with the current system that uses
FICO scores, which have been around for decades and are created by
Fair Isaac Corp. Ditching the status quo, they say, could lead to
an increase in consumers with riskier credit profiles getting
mortgages and a subsequent rise in defaults.
The FHFA, which oversees Fannie and Freddie, is weighing whether
to change the requirement to allow for the use of another
credit-scoring system. In late December, the agency asked lenders
and others for formal input on the issue.
In doing so, the FHFA acknowledged concerns about a "race to the
bottom" where credit-scoring systems would compete to offer metrics
that make the most loans rather than aspire to be the most
reliable.
Credit scores help determine who gets a mortgage and on what
terms. They played a role in the last housing boom and bust as
lenders lowered credit-score requirements, extending hundreds of
billions of dollars of mortgages to subprime borrowers.
After the financial crisis, lenders tightened requirements for
potential home buyers. As part of this, they required higher credit
scores, making it more difficult for borrowers with spotty credit
histories to qualify for a mortgage.
That is why some lenders, mostly nonbank firms, want a change in
the kind of scores that can be used. They would like to increase
mortgage volume by expanding the pool of borrowers.
These lenders view FICO scores as an impediment since they tend
to be more conservative than alternatives.
Nearly half of mortgage dollars made in the U.S. go through
Fannie and Freddie, according to Inside Mortgage Finance, so their
requirements have huge sway over the mortgage market.
Nonbank lenders argue the current system shuts out borrowers who
don't use credit either out of personal choice or because they went
through a bankruptcy or foreclosure. That is where VantageScore
Solutions LLC, the scoring firm that Experian, Equifax and
TransUnion launched in 2006, says it can step in.
The company says it can assign a credit score to about 30
million more consumers than FICO. Roughly 7.6 million of those
consumers would potentially be eligible for a Fannie or Freddie
mortgage, VantageScore says.
VantageScore, for instance, says it will assign credit scores to
consumers if they have a credit card or a loan for as little as one
month. FICO requires six months. Separately, FICO creates scores
for consumers as long as lenders or other entities update
information on their credit reports within the last six months.
VantageScore says it will go further back than that.
Banks aren't convinced, even if some big ones have begun to
experiment with VantageScore for small pools of applicants whose
FICO scores aren't high enough for a mortgage approval. "We've got
so much experience using the system we're using now," said Gerard
Cuddy, CEO of Beneficial Bancorp Inc., a Philadelphia community
bank.
The banks' trade group, the American Bankers Association, says
the current system allows for strong underwriting standards.
Introducing a new scoring model could put that at risk, said Joe
Pigg, senior vice president of mortgage finance at the ABA.
It also could open up mortgage lenders to legal liability, the
group says. One feared scenario: If one scoring model is found to
approve some borrowers, banks could be accused by regulators of
discriminating if they use the other model, Mr. Pigg added.
Nonbank lenders counter that the current system is too rigid and
unfairly excludes deserving borrowers. Sanjiv Das, CEO of a major
nonbank lender, Caliber Home Loans Inc., said VantageScore could
open up homeownership to customers including millennials who don't
have a credit history because of their age.
"I strongly believe that a large number of customers are being
excluded because of the slavish reliance on FICO," Mr. Das
said.
Mat Ishbia, CEO of another major nonbank lender, United
Wholesale Mortgage, said he was enthusiastic about a possible
change. "Doing something just because you've always done it that
way isn't a good enough reason," Mr. Ishbia said.
Both sides agree that Fannie and Freddie's credit-score
requirements need an update, partly because lenders using credit
scores must employ an old version of the FICO score.
But the FHFA appears to have doubts about adding a new credit
score into the mix. When asked during a congressional hearing in
October about new credit-scoring models that can assign scores to
people with limited credit histories, FHFA's Director Mel Watt
said, "The notion that there would be substantially more people
credit scored and that would increase access if we had competition
is probably exaggerated."
The FHFA has several options as it weighs the debate, including:
requiring lenders to check credit scores either from FICO or
VantageScore; requiring lenders to check both; or allowing lenders
to choose between the two scores.
Not all nonbank lenders are urging change. Stanley Middleman,
CEO of the large nonbank lender Freedom Mortgage Corp., supports
the continued use of FICO, partly because he doesn't see the point
of adapting a whole new system.
"I don't think people are getting boxed out of homeownership,"
Mr. Middleman said. "And I don't feel like we're guilty of
something by asking people to have a credit history."
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and
Christina Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
January 03, 2018 08:14 ET (13:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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