Although Federal Housing Finance Agency Director Mel Watt recently threw cold water on the idea, at some point in the future, the mortgage industry will move to using a credit scoring model other than one built by FICO prior to the recession.
A push towards embracing alternative credit scoring models has gained steam in recent years, and as the discussion starts to grow, VantageScore Solutions, the company behind the VantageScore credit scoring models, plans to be right at the forefront of it.
The topic recently hit a roadblock after when Watt said that making any changes to the government-sponsored enterprises’ credit scoring models before 2019 would be a “serious mistake.”
Up until that comment from Watt, the industry was under the impression that changes would be happening to Fannie Mae and Freddie Mac’s credit scoring models much sooner than 2019, and hopefully sooner rather than later.
In preparation of the FHFA’s expected request for information on this matter, VantageScore published a new white paper, “New credit scoring models: a smooth transition to more transparent mortgage capital markets.”
Seller guides currently require the government-sponsored enterprises to use three legacy FICO models—one from each of Equifax, Experian, and TransUnion— each built using different sample dates.
“Much as ‘Kleenex’ has become the namesake of its product category, ‘FICO’ has become a familiar and encompassing term in mortgage finance. There are, however, many different scoring models available,” VantageScore's white paper stated. “Since VantageScore entered the market in 2006, FICO and VantageScore have launched several generations of newer models that are both more predictive and more consumer- friendly. At the same time, there have been improvements in the datasets that these models are built upon.”
“The mortgage industry remains frozen in time,” the paper stated.
To help facilitate in the change and ease the transition for investors, VantageScore offered four recommendations:
- Give lenders a choice between the latest validated scoring models, but require them to stick with the initial choice they make for a period of time in order to prevent “gaming” or “score-shopping.”
- Well before implementation, provide capital markets participants with a historical database, which includes credit scores from the latest validated models and loan attributes, so that lenders can recalibrate prepayment models.
- Regardless of what choice lenders make at the time of origination, ensure that investors receive the VantageScore credit score and, if possible, the current legacy credit score for every loan in every pool.
- Improve transparency by disclosing monthly credit score updates to all MBS investors.
VantageScore isn’t the only one pushing the FHFA to open the discussion up on alternative credit scoring models.
Most recently, housing industry’s largest trade groups sent a letter to Watt, urging him to look beyond FICO and begin using alternative credit scoring models.
The groups expressed disappointment that Watt wouldn’t begin using alternative credit scoring models at any point in the next two years. The groups included the Mortgage Bankers Association, National Association of Realtors, and the National Association of Home Builders, along with other groups.