Mortgage

FHFA Director: Changing credit score models before 2019 would be serious mistake

More information needed on alternative models

In a speech Tuesday night at the National Association of Real Estate Brokers’ 70th annual convention in New Orleans, Federal Housing Finance Agency Director Mel Watt explained a change in the credit scoring system before mid-2019 would be a serious mistake.

Watt explained the FHFA continues to research options for an alternative credit scoring model, however several new factors came up about competition in the credit score market.

“For example, how would we ensure that competing credit scores lead to improvements in accuracy and not to a race to the bottom with competitors competing for more and more customers?” Watt said. “Also, could the organizational and ownership structure of companies in the credit score market impact competition?”

Watt said more work also needs to be done on the operational impacts of the industry, and stressed that this task has been one of the most difficult evaluations undertaken during his tenure as director of the FHFA.

Now, Watt laid out two factors that are preventing the FHFA to move forward more quickly.

“First, based on the overwhelming feedback we have received from the industry, it is clear that it would be a serious mistake to change credit scoring models before mid-2019 when the Common Securitization Platform is fully operational and the Enterprises implement the Single Security,” Watt said. “For this reason, any credit score model change would not go into effect before 2019 even if I announced a decision today.”

“Second, we believe that, regardless of the decision we make on credit score models, the short term impact on access to credit will not be nearly as significant as was first imagined or as the public discourse on this issue has suggested,” he said. “Credit scores are only one factor the Enterprises use to evaluate loan applications and the Enterprises currently use the same or even greater levels of credit data in their underwriting systems as the credit scoring companies use.”

He said the FHFA will issue a request for industry input this Fall in order to get more information about the impact of alternative credit scoring models.

“We have an obligation to get this right and we need more information to be able to do so,” Watt said.

So far this year, Watt explained Fannie Mae and Freddie Mac have put forth several changes which help ease access to credit such as the changes to student loan debt in April. The GSEs will continue to bring forth further change throughout this year to continue easing access to credit.

Currently, the Senate is considering a bill that would direct the FHFA to create a process that would allow alternative credit scoring models to be validated and approved by the GSEs when they purchase mortgage.

In his speech, Watt also talked about the importance of fair housing, read more about that here.

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