Fannie Mae and Freddie Mac will look at FICO alternatives
When it comes to home loans, Washington’s mortgage giants will change their ways, considering alternatives to their traditional protocol using only FICO Scores for mortgage approvals.
Between them, Fannie and Freddie are the two largest mortgage financing entities in the entire U.S., responsible for backing almost fifty percent of all home loans. Until now, they’ve used the credit scoring number set forth by the Fair Isaac Corp – FICO – when gauging an applicant’s risk or good standing as a credit prospect.
However, the Federal Housing Finance Agency, which regulates Fannie and Freddie, recently ruled to include an alternative to that one-trick (FICO) pony, opening up new paths to lending and homeownership for buyers who don’t perfectly fit into the FICO “box.”
The move comes as a push to encourage more people to buy homes instead of renting, as homeownership rates are still below historical averages. While they have picked up considerably since the low point after the Great Recession, it’s increasingly hard for many demographics – including Millennials, who are burdened with student loan payments – to qualify for a home loan and buy their own property.
The move to open the door to other credit scoring models aside from FICO is always a victory for VantageScore, which is the largest scoring system not named Fair Isaac. Vantage, with their VantageScore, will be a viable alternative on the path to qualifying for a mortgage-backed by Fannie and Freddie going forward. Vantage is also owned by Equifax, Experian, and TransUnion, the three chief credit reporting firms, easing the flow of credit data, accuracy, and accountability.
This movement was predated by legislation signed into law last year mandating that FHFA updated their regulations when it comes to approved credit scoring models for Fannie Mae and Freddie Mac-backed mortgage loans.
According to Mark Calabria, Director of the FHFA, the priority is “to ensure that the American people have a safe and sound path to sustainable homeownership.” Calabria explains that tools to accurately measure risk are fundamental to that process; “an important step toward achieving that goal.”
Rather than being contentious, even FICO embraces the rule change and welcomes the FHFA’s push to include VantageScores – at least publicly (despite the fact that the news dropped Fair Isaac shares by 5.8%).
“The FICO Score has been the industry standard for credit scores for decades because it is trusted by lenders to be independent, predictive and reliable,” said Joanne Gaskin, FICO vice president of scores. “We are confident that it will remain the superior choice by any measure established by [Fannie and Freddie].”
“Competition is critical for markets to operate efficiently,” counters Barrett Burns, president of VantageScore Solutions. “We are confident this decision will benefit consumers, lenders and the economy at-large.”
It’s also a change that was initiated not only from the top-down, but when many non-bank lenders called for the inclusion of VantageScore for mortgage lending. That group of non-bank lenders holds considerable sway since they now account for the majority of home loans issued in the United States. According to their argument and analysis, alternatives to just FICO would open up lending to considerably more Americans who are now shut out from the American Dream, broadening the home loan market and boosting homeownership rates.
They also claim that FICO often errs on the side of caution when making lending risk decisions and doesn’t accurately represent the creditworthiness of some people so that the update will be generally helpful and useful.
However, it wasn’t always smooth sailing for this regulation, as the language in earlier drafts expressly prohibited including credit scoring models from any firm that also managed credit reporting (an indirect reference to Vantage). But amid a backlash from lawmakers and credit reporting lobbyists alike, the latest version eliminates that blockade, opening the door for VantageScore.
Since Fannie Mae and Freddie Mac back nearly half of all mortgages in the U.S., their guidelines and standards cast huge ripples over the housing market at large. However, just like a battleship that’s too big to turn course quickly, some would argue that they haven’t adequately adjusted to the present economy and housing market reality. For instance, after the last mortgage meltdown and financial collapse, Fannie and Freddie tightened their credit standards to stem the tide of bad and risky mortgages that were being originated. They required higher credit scores and more prohibitive rules to mitigate their risk.
But now with the housing market stable, economy fully recovered, record equity in homes and low interest rates, the same risk factors aren’t present.
Therefore, including VantageScore as a tool for Fannie and Freddie-backed mortgages should augment – not replace – the pool of applicants getting approved using FICO. For instance, VantageScore issues a score for consumers who haven’t actively used their credit within six months, something that FICO doesn’t account for.
With this new law, VantageScore may be able to help hundreds of thousands of new borrowers with “thin” credit files or alternative scenarios to qualify for a Fannie or Freddie-backed mortgage – and turn the keys on their own home.
If you would like to increase your credit score quickly to get a mortgage for your home, contact Blue Water Credit for a free consultation.