Says alternative models could make expand credit box
The National Association of Realtors sent a letter to two members of Congress this week, declaring the organization’s support of alternative credit-scoring models that could be used to open the credit box to previously underserved borrowers.
In a letter sent this week to Rep. Ed Royce, R-CA., and Rep. Terri Sewell, D-AL., NAR President Tom Salomone writes that NAR supports the “Credit Score Competition Act of 2015,” which Royce and Sewell introduced last year.
The bill, which is yet to be considered by the House Financial Services Committee, would enable Fannie Mae and Freddie Mac to consider other credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use when determining what loans to purchase.
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.”
Royce and Sewell’s bill becomes the latest in a growing movement to push beyond FICO.
In 2014, Freddie Mac’s CEO Donald Layton told HousingWire that Freddie was already considering “one or two alternatives to FICO.”
And earlier this year, the Federal Housing Finance Agency noted in its 2015 Scorecard Progress Report that Fannie and Freddie are both still considering alternative credit-scoring options.
Proponents for FICO alternatives note that GSEs currently use the FICO 4 model, which has been in use by Fannie and Freddie since before the housing crisis.
FICO itself released FICO 9 in 2014, which is supposedly more accurate and beneficial for first-time homebuyers, but the GSEs have not adopted it yet.
In NAR’s letter of support for the Royce and Sewell’s bill, Salomone notes the bill could help “many households” achieve the “American Dream” of homeownership.
“A borrower’s credit score is a critical access factor when trying to enter the housing market; with a poor score, or none at all, a borrower stands little to no chance of obtaining a loan,” Salomone writes.
“Yet millions of Americans, particularly minorities, immigrants, and people with modest incomes, come from backgrounds that avoid debt, leading many to have little to no credit history,” Salomone continues. “With new credit scoring models that incorporate additional predictive metrics and payment history, many of these ‘thin file’ individuals would be able to obtain credit and enter the housing market. Furthermore, borrowers with medical debt and paid off debt may see relief.”
The benefits of alternative credit-scoring methods extend beyond borrowers, as Royce and Sewell noted when they announced their bill.
According to Royce and Sewell, allowing Fannie and Freddie to make mortgage purchasing decisions with access to “multiple empirically derived, statistically sound credit scoring models” alleviates some of the risk in their portfolios and lowers the chance of systemic risk to the housing market.
As Salomone notes, given the market share of Fannie and Freddie, the use of alternative credit-scoring methods by the government-sponsored enterprises could have a significant impact on borrowers previously unable to get a mortgage.
“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation, but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent or utility bills on time,” Salomone writes.
“Homeownership is an integral part of the American Dream that shouldn’t be out of the reach for low-income, rural and minority borrowers who lack access to traditional forms of credit,” Salomone concludes. “This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across the country.”