FICO’s scoring tweaks won’t impact most mortgages

Like a “Classic Coke” throwback, most lenders use an older FICO scoring model

Fair Isaac is updating the secret formula for FICO scores in a way that will make it tougher for some consumers to get credit.

Before breaking glass and pulling the fire alarm, it’s worth noting: It won’t have much of an impact on the $2 trillion of mortgage originations expected for this year.

Lenders using the Fair Isaac score follow a “classic FICO” model required by Fannie Mae and Freddie Mac. That can’t change without approval from the Federal Housing Finance Agency, which can take years.

Think of it like a “Classic Coke” holdout.

“It’s not going to have a huge impact for mortgages, other than some people who are looking for private-label,” said Christopher Low, chief economist at FHN Financial. That’s only about 10% of originations, he said.

“It’s a lot more likely to affect people who are trying to get car loans and credit cards,” Low said.

We don’t know the specifics of FICO’s latest formula, because that’s a closely guarded secret – like the recipe for Coca-Cola. When Fair Isaac updates its matrix, as it does every few years, it only releases a broad-brush summation.

The last time there was an update, in 2014, it had the effect of boosting the credit scores of many consumers dinged during the global financial crisis.

Back then, the Fair Isaac said it was tuning into the “nuances in recent consumer data” – in other words, missing a payment or two when the unemployment rate was soaring to historic highs wasn’t necessarily predictive of how a person would act when the economy wasn’t in crisis.

Now, FICO is tightening things up. The new model will score consumers more strictly for things like late payments and rising debt levels.

Using the new formula, called FICO Score 10 Suite, “a lender could reduce the number of defaults in their portfolio by as much as ten percent among newly originated bankcards and nine percent among newly originated auto loans,” FICO said in a statement on Thursday.

In the statement, Fair Isaac also touted the benefit to the mortgage industry, without mentioning for now it can only be used for private-label mortgages, not for loans expected to be packed into securities sold by Fannie Mae and Freddie Mac.

“The reduction in defaults is even higher for newly originated mortgage loans, at 17 percent compared to the version of the FICO Score used in that industry,” the FICO statement said.

Mortgage originations probably will total $2.1 trillion in 2020, according to a forecast on Tuesday by Fannie Mae, the largest mortgage financier. That would be the second-highest level, following 2019’s $2.2 trillion, since the 2008 financial crisis.

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