FHFA Approves New Credit Scoring Models for Fannie, Freddie

from Jan/Feb 2023 MHInsider

The 30-Year Journey To Community Unity, Advanced Advocacy

by Raymond Leech

As we know, manufactured housing is a key source of affordable housing for many Americans. And, as noted in a previous article, Fannie Mae and Freddie Mac are reviewing ways to better support the industry’s lending programs in the coming years. And just recently, there is good news from FHFA that should positively impact a lot of people looking to purchase new homes.

On Oct. 24, FHFA approved two new credit scoring models for use by Fannie Mae and Freddie Mac, the FICO 10T credit score model and the VantageScore 4.0 credit score model.

Why is this change important?

Because these two new models improve the accuracy of a borrower’s credit profile by looking at new payment information such as the borrower’s performance in paying their rent, utilities, and telecom bills. The current FICO score models have been in use for nearly 20 years but do not consider these factors.

The implementation of both of these systems will take several years, but once in place, lenders will have to deliver both credit score models for any loan sold to Fannie Mae or Freddie Mac.

Benefits of the New Models

In releasing the news about this change in credit scoring models, FHFA highlighted some of the benefits: · More Accurate Credit Scores: Both FICO 10T and VantageScore 4.0 models met accuracy standards set by FHFA to evaluate borrowers more fairly and accurately. · More Inclusive Credit Scores: Both new models incorporate different and new payment history information such as rental payments, utilities, and telecom payments. »

· Enhanced Safety and Soundness in the Housing Market: This change will promote more accuracy in the housing finance system, which will ultimately lead to better outcomes for borrowers, lenders, and Fannie Mae and Freddie Mac. Because both of the new models are more accurate than the curCongress passed a law requiring FHFA to establish a process for validating and approving credit score models for use by Fannie Mae and Freddie Mac. FHFA then issued a proposed rule describing that process.

In 2019, FHFA issued its Validation and Approval of Credit Score Models final rule. A year

“NAR has advocated for the use of newer credit scores for years as a means of fostering competition, innovation and access, and we are pleased that FHFA has taken the first step to making this change,”

Rouda Smith

National Association of Realtors

rent FICO models, the mortgage market and stakeholders will have an improved view of risk to help them better manage it.

The Road to the Announcement

The Timeline as noted in the FHFA announcement took several years and started in 2014 when FHFA, along with Fannie Mae and Freddie Mac, began considering changes to credit score model requirements.

In 2017, FHFA issued a request to gather more information about how to better update the credit score models and a year later later, Fannie Mae and Freddie Mac published a Joint Credit Score Solicitation rule, allowing all the credit score model developers to apply for consideration for their models.

In 2022, FHA hosted a public listening session on this new credit score approach that was attended by nearly 350 industry participants and featured 28 speakers sharing their ideas and viewpoints.

And, again, on Oct. 24, FHFA issued the announcement requiring the use of these models by Fannie Mae and Freddie Mac. Implementation and Impact of the New Models

The implementation and rollout of this effort will take several years, and over that time, FHFA, Fannie Mae and Freddie Mac plan to work with lenders and other industry stakeholders to ensure a smooth transition.

So, what will be the impact of this change?

VantageScore in their research stated that this change could provide credit scores for 37 million people that FICO does not currently capture as part of their models. Of those 37 million people, the company estimates 10.7 million will have a score of 620 or above, including approximately four million minority borrowers.

“This action today will enable millions more Americans to have access to mortgages because of VantageScore’s more predictive credit score…and it will correct some historical imbalances we’ve had for conforming mortgages,” VantageScore CEO Silvio Tavares told the Wall Street Journal.

The Urban Institute agrees and notes that this effort should positively impact minority homeowners because of the use of rent payments. It estimates that 16 percent more Hispanic and African-American households would have expanded access to mortgage financing.

“Today's decision will benefit borrowers and the Enterprises, along with maintaining safety and soundness,” FHFA Director Sandra L. Thompson said. “While implementing the newer credit score models is a significant change that

will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers.”

Industry Reaction to the Changes

Reactions from industry professionals to the new measures have been very positive.

“NAR has advocated for the use of newer credit scores for years as a means of fostering competition, innovation and access, and we are pleased that FHFA has taken the first step to making this change,” Rouda Smith, of the National Association of Realtors, said. “There is a long road ahead to implement this change, but it will ultimately create a more accurate gauge on a buyer’s ability to purchase a home by including alternative credit data.”

Chi Chi Wu is the staff attorney at the National Consumer Law Center.

She told MarketWatch that NCLC has been working on the change since 2014, urging FHFA to update the credit scoring models.

“We have to give kudos to Sandra Thompson for actually pulling the trigger on this, because her predecessors kind of kicked the can down the road.” Wu said, “So this particular decision is good… the credit scoring models should have been updated a long time ago.”

As noted, these changes will take several years to implement, but once completed, many more Americans should qualify for the financing to purchase a home. MHV

Berkshire Bank Product Manager Raymond Leech has worked in the mortgage industry for more than 30 years, having developed and managed construction and renovation mortgage products, as well as working on FHFA Duty To Serve efforts involving manufactured housing, rural housing, and affordable housing.

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