Just as he did back in August in a speech before the National Association of Real Estate Brokers’ 70th annual convention in New Orleans, Federal Housing Finance Agency Director Mel Watt told the crowd at the Mortgage Bankers Association Annual meeting in Denver not to hold their breath waiting for Fannie Mae and Freddie Mac to begin using alternative credit scoring models.
But Watt said that the FHFA is seriously considering allowing the government-sponsored enterprises to move beyond only using FICO credit scores, although the decision is much more complicated than first thought.
“As I said previously, none of the decisions we make at FHFA are easy decisions and taking into account multiple perspectives, as we always try to do, often makes decisions even more complicated and difficult to reach,” Watt said Monday.
“One example of this is the challenge we have encountered in reaching a decision about whether to require the Enterprises to use alternative credit scores,” Watt continued.
“I initially thought this decision would be relatively easy to make,” Watt added. “After all, we all believe that competition is good, don’t we? However, the more we looked into this issue, the more complicated it became and it is turning out to be among the most complicated decisions I have faced during my tenure at FHFA.”
Watt then went on to explain why the decision to move to alternative credit scoring models is so complex, using a series of questions to illustrate his point, including:
Do alternative credit scoring models actually increase access to credit by providing credit scores on more borrowers who are credit worthy and able to pay a mortgage?
How does this compare with the Enterprises’ current ability to evaluate borrowers without a credit score?
How do we ensure that competing credit scores lead to improvements in accuracy of credit decisions and not just to a race to the bottom with competitors competing for more and more customers?
What would be the implementation and operational costs to the Enterprises, lenders, and other industry participants of converting to an alternative credit score or a multiple-score system?
Does the credit repositories ownership of one of the credit score providers present implications for long-term competition in the credit scoring market?
Watt said that given the nature of the decision, FHFA plans to ask the mortgage industry for input on the matter.
“In light of the complicated questions we found we needed to answer, FHFA decided to develop a request for input to be released this fall,” Watt said Monday. “Through the RFI, we hope to get honest and reliable information and stakeholder feedback on these and other matters relevant to this critically important decision.”
But despite the increased conversation around the adoption of alternative credit scoring models, Watt again said that nothing will happen definitively until 2019, at least – although a decision could come next year.
“Notwithstanding the complexity of these issues and the multiple competing considerations involved in resolving them, FHFA is committed to making a decision about the Enterprises’ future credit score model requirements in 2018 as soon as we complete our review of responses to our RFI,” Watt said.
“At the time of this announcement, FHFA will also set an implementation date, which we have already said will be no earlier than the second half of 2019, in order to provide the Enterprises and other industry stakeholders sufficient time to implement any changes our decision may require them to make,” Watt added.
“It is our responsibility to consider all the input and to make the tough decisions and we will do so,” Watt concluded. “I am confident we will make the right decision.”