Now that Fannie Mae requires trended data credit reports for its automated underwriting system, will other secondary market players follow suit? If so, how soon?
Trended data or "time series data" that shows borrowers' debt loads over time rather than as a snapshot has been used outside the mortgage industry for at least the last three to five years. But the mortgage world is unique in how it uses credit reporting and scoring and tends to be slow to
While there are no current requirements for lenders to deliver or use trended data for non-Fannie loans or mortgages that are manually underwritten, there are a number of reasons why the data will start to slowly make its way throughout the industry.
"It would almost be corporate delinquency to not be considering it," said John Ulzheimer, a former credit bureau employee and president of The Ulzheimer Group, a consulting firm in Atlanta.
For starters, two of the three credit bureaus recently began
Credit reports are part of the data input for credit scores, but scores don't provide borrower-specific details the way credit reports do, so the industry uses both. Trended data isn't currently part of the FICO Classic scores the mortgage industry uses, but FICO is considering broader inclusion of trended data in its scores. Competitor VantageScore, a joint venture of the credit bureaus, also is.
"None of the credit bureau-based risk scoring systems [used by the mortgage industry] consider at this time series/trended data, but if you and I have this conversation next year at the same time, I could almost guarantee you that we would have heard about one of them starting to use it," said Ulzheimer, whose previous experience includes work at FICO and credit bureau Equifax.
While the GSEs' regulator and conservator, the Federal Housing Finance Agency, hasn't weighed in on trended data specifically; it has been considering whether the two government-sponsored enterprises' use of scores needs to evolve.
Fannie Mae and Freddie Mac often follow each other's lead for competitive reasons. Last year, for example, Fannie decided to make
Another development that could broaden the need for trended data in the mortgage industry is whether Freddie Mac follows Fannie Mae's lead in requiring lenders to submit trended data through its automated underwriting system.
But so far, Freddie has no plans to do this, said spokesperson Lisa Tibbitts.
The mortgage industry has a lot of good reasons to move slowly and carefully in deciding when and whether to add trended data or update scores. For one, there are Equal Credit Opportunity Act and Office of Comptroller of the Currency compliance requirements, although Ulzheimer said these are fairly straightforward.
"As long as the scoring system you are using is ECOA compliant then you are good to go, and if the OCC doesn't think that there are some safety and soundness issues in the way you are using scores, then you're good to go," he said.
Updating credit reporting and scoring also gives the Consumer Financial Protection Bureau more to scrutinize in terms of whether the data is accurate and fair.
"But the credit reporting agencies do a pretty good job with data accuracy considering the ridiculous volume of information that they manage, so I wouldn't not consider it [updating credit reporting and scoring] because of that," said Ulzheimer, who is a Fair Credit Reporting Act consultant.
Credit reporting and scoring tends to evolve after a new set of data or model has a statistical track record demonstrating its effectiveness.
"The Equal Credit Opportunity Act says if you are going to use a score for underwriting you have to use one that is empirically derived and statistically and demonstrably sound," Ulzheimer said. "Generally, what happens is that you'll have people just collecting it for a while: for six months, a year, or two years."
Fannie gathered
The GSE has said trended data is expected to on a net basis not change the overall number of single-family loans it approves and buys, likely because some home loans previously approved won't be, but a roughly equal number of mortgages previously rejected won't be. Borrowers who pay off their credit card balance are 60% less likely to become delinquent than those who make minimum payments,
The extent to which trended data now available to lenders and servicers proves statistically valuable could determine whether they take steps to start using updated scores and/or credit information to better manage risk or market loans.
"Does the cost of converting to it outweigh the potential cost of not converting to it?" That will be the question, Ulzheimer said.
