FHFA, stakeholders struggle to pin down costs in credit score update

Lenders and vendors are seeking guidance from the Federal Housing Finance Agency on what the expense involved in its congressionally-mandated credit score update will be and how to manage it, but an FHFA adviser recently said that's a question the industry itself must answer.

"Are there ways to mitigate costs? Frankly, you're all going to know better than me or any of my colleagues at FHFA how to go about doing that," Dan Fichtler, senior adviser, capital markets, when asked about this at the Mortgage Bankers Association's annual convention.

He encouraged stakeholders to offer feedback that the FHFA could design policy around, which was in line with the agency's tendency to respond to concerns about policies that affect the two mortgage investors it oversees by asking for direction on how critics think the matter should be handled.

But providing input on the issue is tough for lenders and vendors given that the move from one older score to two newer ones is still somewhat open-ended.

The version of the subject-to-change timeline for the transition — currently set for completion by the fourth quarter of 2025 — confirms its end goal is a move to two updated scores from a single older one with optional flexibility to pull two reports rather than three.

That fact that lenders have recently been through a score price hike, and may have to juggle potentially three credit metrics of that type during the transition has made the industry wary of the future costs, even with the potential savings from dropping one of the three reports.

While dropping a report could be efficient on its face and the FHFA and Standard & Poor's have said they find the difference between two and three negligible, one credit bureau recently pushed back with research questioning whether that's true for individual borrowers.

There are still a lot of uncertainties on implementation that may play into costs, like how to manage the two-step process involved in vetting the new score data before using it, said Shawn Jobe, head of business development, Informative Research.

"The enterprises need to start seeing this data. So they're really looking to develop a milestone that will be just around the capturing of the information itself, versus actual utilization of it," said Jobe, who moderated the panel.

Adding further complication to figuring out the costs is the fact that credit scores and reports expenses are embedded throughout the full span of the mortgage process from origination to servicing, said Piper Beveridge, vice president, strategic relations, ICE Mortgage Technology.

"There's at least 30 integrations with our partners that need to be updated," she said.

Counterparties that work with lenders, such as mortgage insurers, also will need to vet the new score changes and data, Beveridge said.

"That's not to say this can't be done … this is more of an exercise of saying this isn't as simple as just adding a score and dropping a bureau," Beveridge said.

Why fewer credit reports could mean more complexity for mortgages

FICO, the provider of the "classic" score Fannie Mae and Freddie Mac have used and one of the advanced credit metrics they're moving to, 10T, can provide data that users can vet for governance purposes, said Joanne Gaskin, a vice president at the company.

VantageScore, the provider of the 4.0 credit metric that Fannie and Freddie also will be using in the future, was not represented on the panel and was not immediately available for comment. VantageScore has ties to the credit bureaus but says it operates separately from them. 

Concern that the switch to the two advanced scores or reduction in the number of credit reports allowed could create a separation between what Fannie and Freddie require and the rest of the market does was another theme in discussions during the panel. 

"Fannie and Freddie only are going to buy scores that are part of their underwriting guidelines, and which make up about 60% of the volume that has generally been in the mortgage origination space. So that means that there's 40% of the market still out there," Gaskin said.

Lenders don't always know who the end-investor for the mortgages they originate will be when they pull credit, so the bifurcation could create challenges in terms of choosing which measure to use, one questioner noted in asking whether other government programs will update scores.

No representatives from agencies like the Federal Housing Administration or Department of Veterans Affairs were present on the panel, but Jobe said he was aware they'd had discussions about the number of credit reports they'd require.

"They're still going through an analysis of looking at whether or not they will use a tri-merge or bi-merge. The initial thought right now is that they're going to continue to use a tri-merge, but they would accept a bi-merge in this scenario where one bureau may be unavailable," he said.

While adoption is easier with a common standard for all loans, a lender in the private market can implement advanced credit scores without waiting for a broader change in policy if they choose. This may be particularly accessible to a portfolio lender.

"Sometimes people in the mortgage market think that they can't do anything outside of Fannie-Freddie guidelines, but if you can do portfolio you can use whatever you like," Gaskin said in an interview with this publication.

So long as their costs aren't prohibitive, advanced scores designed to make it possible to size up more borrowers than traditional measures can be attractive to lenders contending with market conditions that have reduced their leads for new loans.

Lack of credit history has been a significant barrier to obtaining a home loan, second only to the inability to achieve a low enough debt-to-income ratio, according to an iEmergent analysis of 2022 Home Mortgage Disclosure Act data presented during a separate panel.

Making more modern scores available could help loan officers avoid conversations with borrowers about needing to make their credit history look more in line with traditional measures, communication about which can hurt chances to make loans if not done correctly.

A term like  "credit repair" can be a turnoff because it suggests a borrower is damaged in some way, Mosi Gatling, sales manager at LoanDepot, said during the panel on ways to reach more first-time homebuyers.