Lending

GSEs still looking into 'feasibility' of alternate credit score models

FHFA 2015 Scorecard Progress Report

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The Federal Housing Finance Agency’s latest 2015 Scorecard Progress Report released further insight on where the government-sponsored enterprises’ currently stand on alternate credit score models.

The progress report is released each year to summarize major activities of Fannie Mae and Freddie Mac in 2015 that contributed to achieving FHFA’s objectives as conservator of the enterprises.

At the beginning of last year, the FHFA released the year’s scorecard guidelines for Fannie and Freddie, which focused on three main points, maintaining, reducing and building. (Here is a link to this year’s guidelines)

Here’s a quick over:

  1. Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets.
  2. Reduce taxpayer risk through increasing the role of private capital in the mortgage market.
  3. Build a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future.

The FHFA noted that since 2013, it has issued an annual conservatorship scorecard.

Alternate credit scoring falls underneath the GSEs’ objective to maintain credit availability in the housing finance market in a safe and sound manner.

In the progress report, the FHFA said that the enterprises started a process to assess the feasibility of using updated or alternate credit score models in their business operations.

From the report:

As part of their work in 2015, the enterprises assessed relevant factors, including the operational and technological implications of any changes for the enterprises and the broader housing finance industry. This involved data and business process analysis to assess the impact not only to the enterprises, but also to consumers, sellers, investors, and vendors.

This issue remains an ongoing priority for FHFA and is included again in the enterprises’ 2016 Scorecard. FHFA will continue to work with the enterprises towards concluding this assessment during 2016.

In December, a bill was introduced in the House of Representatives that would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use when determining what loans to purchase.

The bill, which is entitled the “Credit Score Competition Act of 2015,” was introduced by Rep. Ed Royce, R-CA., and Rep. Terri Sewell, D-AL.

In Royce and Sewell’s view, lower-to-middle income Americans who are qualified to buy a home but are unable to do so because of their FICO score or lack thereof will “specifically benefit from the GSEs using other credit scoring models.”

This is in addition to Freddie Mac’s CEO Donald Layton telling HousingWire last year that Freddie was already considering “one or two alternatives to FICO,” and Secretary Julian Castro saying that HUD is open to alternatives in a speech earlier in 2015.

Royce commented on the new FHFA scorecard progress report saying, “The current practice of using a single credit scoring model hampers the ability of Fannie and Freddie to mitigate their risk, and places the GSEs on a weaker foundation. The FHFA should be commended for seeking a solution to this problem. Breaking up the credit score monopoly at Fannie and Freddie introduces competition into the credit scoring industry and ultimately decreases the potential for another taxpayer bailout.”

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