Certain parts of the mortgage market are increasingly adopting more modernized credit scores, but whether a more central effort to that end will reach the finish line on schedule next year is unclear.
Two big government-related mortgage investors plan to retire their “classic” score and move to more advanced metrics in 2025, but some question whether a Trump administration that could release the entities from conservatorship will keep the current plan for doing this in place or not.
Experts familiar with the score updates in the larger consumer finance market say they don’t think Fannie Mae and Freddie Mac would want to retreat from replacing their outdated metric given the bipartisan legislative mandate behind it, which congress would be unlikely to change.
“It would make no sense to stop the presses at this point, regardless of the structure of Fannie and Freddie,” said John Ulzheimer, an expert witness and former credit reporting and scoring professional. “Unlike most of what happens in D.C., this isn’t a political lightning rod issue.”
Anthony Hutchinson, senior vice president of industry and government relations at VantageScore, also foresees follow-through on score modernization as directed under 2018’s Economic Growth, Regulatory Relief and Consumer Protection Act.
“We don’t expect derailing and actually expect acceleration,” Hutchinson said.
Others take a different view, suggesting there’s a division between those who see the effort as politically polarized and those who don’t.
“With a Trump administration, I assume the whole tortured mess goes away,” said Chris Whalen, an analyst and NMN columnist who foresees an interest in doing this in order to differentiate policies from President Biden’s. He also said the industry could challenge the initiative in court.
If the new administration wants to depart from the current plan but still support the original legislation, it could distinguish itself by taking a new tack, said Terry Clemans, executive director the National Consumer Reporting Association.
The NCRA favors a shift to a plan that encourages competition by having Fannie, Freddie and their regulator “pick a winner” in regular reviews of credit metrics over time, rather than mandating the delivery of two newer scores, according to Clemans.
The lack of score competition has played a role in cost increases, Clemans said.
Credit reporting agencies created VantageScore as an alternative to the traditional FICO measure.
Right now, modernized scores from both VantageScore and FICO are on track for use at the enterprises and the industry also has been increasingly using them voluntarily in other parts of the market, or signaling they plan to when the Federal Housing Finance Agency that regulates Fannie and Freddie does.
Adrianne Todman, acting secretary of the Department of Housing and Urban Development, said at the Mortgage Bankers Association’s annual meeting in October, “We will be prepared to act when FHFA puts into practice what they are planning to do.”
Also, FICO announced Tuesday that the 10T score on track for adoption by the enterprises has now been used to underwrite loans in a Ginnie Mae guaranteed securitization for the first time.
Ginnie didn’t need to approve the use because lender Cardinal Financial used 10T to underwrite loans that the Department of Veterans Affairs guarantees, which don’t have a credit score requirement.
The lender, however, does use a score overlay to underwrite such loans and in this case did so solely on the basis of 10T. The move allowed borrowers to obtain better loan terms than were possible using classic score.
Investors had access to traditional FICO scores as a courtesy but they weren’t used in underwriting.
Todman’s comment suggests that the Federal Housing Administration, another agency that backs mortgages in Ginnie securitizations at the loan level, will also eventually underwrite based on advanced scores, assuming the department maintains its current plan under Trump.
Meanwhile, VantageScore also has reported increased voluntary use of the 4.0 model the enterprises are on track to use. Andrada Pacheco, its senior vice president and chief data scientist, called 4.0 “the fastest-growing credit score model” that VantageScore has.
The 4.0 score could get an additional boost because the company is “providing transparency into the components of the model for lenders to use in their custom risk assessments,” she added.
Mortgage companies working with Fannie and Freddie have long sought more access to data that will allow them to obtain comfort with the advanced scores they’ve been asked to start using in that market.
Some VantageScore 4.0 data is available for credit score analysis in conjunction with the initiatives at the enterprises and their regulator. Fannie, Freddie and the Federal Housing Finance Agency have been working with FICO to provide some information as well.
A second Trump administration is likely to support the idea of allowing mortgage companies to decide which score to use in the GSE market, according to Whalen. The credit reporting industry would have to have to exert a lot of influence to get their way, he added.
Another somewhat separate part of the current plan that might change is the pending option to use two credit reports rather than three for mortgages. It’s a move aimed at encouraging competition and providing industry savings, but it isn’t legislatively mandated.
“We’re likely to remain with a trimerge,” Curtis Knuth, CEO of S1/Service First Information Solutions LLC, said in an email.
The bimerge option has fueled debates and dueling studies about whether it actually is less costly or could lead to “cherry picking” that undermines the objectivity of reports.
Naa Awaa Tagoe, deputy director for the FHFA’s Division of Housing Mission and Goals, said at the MBA convention that such concerns needed to be vetted before a bimerge can move forward.
“We … have to think about the delivery guidelines for trimerge loans versus bimerge loans, as well as thinking about policies that may deter gaming because this is an optional shift,” she said.
However, there may be a limit to how long the mortgage industry can hold onto idiosyncratic credit reporting and scoring practices like the trimerge or the use of a single antiquated score due to the policies of GSEs who control much of the market.
“The agencies have largely escaped the criticism they rightly deserve for it taking this long,” Ulzheimer said. “They’ve been left far behind by every other lending industry.”
— Spencer Lee contributed to this report
