Will two newer credit scores beat a single older one for mortgages?

The Federal Housing Finance Agency's plan to replace the FICO Classic credit score used by government-sponsored enterprises with two new ones by 2025 has some compelling aspects to it, but lenders would like more data on what overhauling their systems to this end will net them.

"They did a great job with the phased approach but the concern that we're seeing in advocacy groups is [that] they asked for industry feedback too soon," said Matt Vanfossen, CEO, Absolute Home Mortgage Corp. and vice president, Community Home Lenders Association of America.

"We're not sure of the effects of the FICO 10T and VantageScore [4.0] models. We haven't seen the scoring modeling in actual usage [with mortgages]. So what we believe is that the feedback should come after we actually get to see more," Vanfossen said.

Credit reporting

Why fewer credit reports could mean more complexity for mortgages

This first step in updating borrower assessments was seen as the easiest and could reduce costs, but stakeholders fear change that reduces data inputs.

By Bonnie Sinnock

August 14

The FHFA has said it has vetted the scores and that it will be flexible in considering the timeline for the credit scoring update. It also promised to share data and consider all feedback.

So far, that feedback is mixed. While the mortgage industry would still like more deliberation and to see the numbers sooner, other stakeholders are calling for the agency to stick to its current plan.

The two models aim to give a broader range of borrowers a more equitable chance to qualify for homeownership by incorporating payment track records outside of those traditionally used. That's something the industry shouldn't wait much longer for, particularly given that it's a legislative mandate, said Rikard Bandebo, chief product officer at VantageScore.

"If this takes longer, the millions of Americans that under these new models would qualify for mortgages don't get access," he said.

Four members of Congress have urged the FHFA to not go beyond its 2025 timeline, noting that it's been several years since the Credit Scoring and Competition Act of 2018 passed.

The timeline for modernizing scores is already "a full seven and a half years after Congress and the President implemented the law, which is more than enough time for the mortgage market to comply with the regulation," they said. 

"Our constituents that are awaiting an opportunity to purchase a home can accept no further delay in the implementation of new credit scores in the mortgage market," Reps. Brittany Peterson, D.-Colo.; Zach Nunn, R.-Iowa; Vincente Gonzalez Jr., D.-Texas; and Young Kim, R-Calif., said in the July 31 letter to FHFA Director Sandra Thompson.

While mortgage companies certainly could use more borrowers, they are concerned about the operational change, vendor management and associated costs involved in the move to two scores.

As a result, a coalition of 17 trade associations led by the Housing Policy Council, and including groups like the CHLA and Mortgage Bankers Association, has called for more time to implement the operations needed to accommodate the changes the FHFA is planning.

"You're virtually ripping out the backbone of mortgage credit underwriting. Is there any good way to do it? Probably not," Vanfossen said, noting that it's something that the industry needs to be careful to get right in order for it to accomplish its aim.

Mortgage companies and some analysts have questioned how many new borrowers more advanced scores will bring in, while also raising concerns about how the new loans will perform, and what it all costs.

There are demonstrable net gains in business, according to score providers.

"With the rental and trended data we are able to help lenders underwrite about 5% more consumers without taking on any additional risk," said Joanne Gaskin, vice president of scores and data analytics at FICO.

Trended data, which involves a longer-term look at consumer spending habits over time as opposed to a snapshot of their current debt levels, can increase the credit performance for consumers with strong payment histories by 20% at VantageScore, which has a different model.

VantageScore also estimates that it can assess over 30 million consumers more than other commercially available models, more than 10 million of these having scores of 620 or more that could make them potentially eligible for mortgages. Around 4.1 million of the latter are minority borrowers who tend to be underserved by the traditional mortgage market.

FICO is a little less comfortable scoring people with very short credit histories. It requires six months of history with at least one account. VantageScore's minimum is one month of history and a single account in the past two years.

How the GSEs will use both indicators remains to be seen. John Ulzheimer, a professional witness who previously worked in the credit reporting industry, said they're unlikely to average them because while their ranges are similar, the numbers mean different things.

"It's like averaging Celsius and Fahrenheit and saying that's the temperature," he said.

However the GSEs handle it, lenders could be happy if the new scores qualify more borrowers with the ability to repay. But some of them say for the advanced scoring to work it also has to be an affordable way to provide more broad-based access to low-to-moderate income homeownership.

"What you don't want to see is a high barrier of entry, where multiple lenders have to charge upfront credit cost fees, which then discourages LMI borrowers," said Vanfossen, noting that mortgage companies have struggled to profit and recently saw a large jump in FICO prices.

Citing concerns about the price hike and needing more time to implement in a cost effective way, the Community Home Lenders of America in a July 27 letter to the FHFA asked that new scores be added one at a time and VantageScore be the first to implement.

VantageScore has said this could be done depending on how its credit measure is positioned amid other rule changes the GSEs may be planning, said Tony Hutchinson, senior vice president of industry and government relations.

"That would be the only hindrance to pulling our score right now in the system, but it is as easy as just requesting our score, as long as the GSEs are prepared to accept it. Or if people are going to hold a loan in their portfolio, they can do it right now," he said.

FICO declined to comment on the order of score implementation but offered some more general comments on recent price hikes, noting they were in response to inflation that has occurred over time without any adjustments, and involved increases on the part of credit reporting agencies as well.

"This was a kind of a catch-up and more in line with the relative value that FICO scores bring to the overall credit bundle," Gaskin said. 

Mortgage firms can sell to buyers other than the GSEs or portfolio home loans and some institutions are experimenting with minimizing the impact of credit scores to make lending more equitable, but given Fannie and Freddie's market share, they can't be ignored. 

Even if a lender relies instead on holding loans in portfolio or selling elsewhere, the broader market tends to follow the lead of the GSEs.

Lenders and the GSEs have to strike a balance in using scoring models with nontraditional data as while not using that information could exclude some borrowers, improper use also could have negative consequences, according to a 2022 National Consumer Law Center report.

"I would like to say that this is going to help broaden the box, so to speak, but some people could complain," said Jim Milano, attorney at McGlinchey Stafford. He said litigation in this area is not something he comes across in his practice but urges caution about fair lending impacts.

When asked about general litigation risk, Ulzheimer said,"I think you're probably better off with the advanced models — way, way better off."