Much has been written and said about using a credit scoring model other than FICO in the mortgage industry. We all have our opinions, views and skepticisms.
Ultimately, this is going to boil down to one man’s decision, and that is FHFA Director Mel Watt. I’ve met Director Watt on a number of occasions and find him to be thoughtful, measured and eager to improve the housing finance system.
Given his role and his willingness to listen, I penned an open letter to him that was published on HousingWire.com. The letter addresses a number of hurdles, opposing views and misconceptions. Included below are a few excerpts and the full article is available here.
Editorial note: the version posted on HousingWire differs slightly to the version included in these excerpts.
Director Watt: Don’t Waste this Opportunity
By Barrett Burns, president & CEO, VantageScore Solutions
THE LONG AND SHORT TERM BENEFITS FOR CONSUMERS
Homeownership is currently at a 50-year low. Director Watt’s decision could improve access to responsible and mainstream credit both in the near and long-term. We can argue about how much or how little, but tell that to anyone on the wrong side of FICO’s arbitrarily restrictive policies or to the advocates who represent them.
By our estimate, 2.5 to 3 million additional consumers (many of whom are minority borrowers) could become mortgage-eligible. In addition, consumers with no score or low scores resulting from legacy scoring models, who today self-select out of the process, would be incentivized to explore whether homeownership could be right for them. These consumers would still be subject to reliable underwriting requirements that analyze a consumer’s capacity to repay a mortgage loan.
Looking longer term, the Mortgage Bankers Association estimates that household growth will be led by 5.7 million additional Hispanic households, 5.0 million additional non-Hispanic White households, 2.4 million additional Black households, 1.9 million additional Asian households and 730,000 additional other households.
Clearly, Director Watt needs to make a prescient decision because restrictive credit scoring models will not adequately support this anticipated demographic shift. The market should be opened to include models that are able to score more of these consumers without compromising predictiveness.
COMPETITION, COMPETITION, COMPETITION
Competition strengthens markets, makes them more efficient and always benefits stakeholders. Competition between VantageScore and FICO has already led to many model innovations. Indeed, since 2006, competition has led to multiple new versions of VantageScore and FICO. These new versions continue to improve in terms of consistency, predictive power, and consumer-friendliness.
It is inarguable that no one company should have a monopoly in determining consumers’ creditworthiness. The market has already weighed in: Last year, some 2,700 organizations used over 8.5 billion VantageScore credit scores. Over 2,200 of those users were financial institutions including some of the largest lenders in the world. They tested VantageScore and over 6 billion of those scores were used to make credit decisions under the watchful eye of regulators.
…Despite changes in credit file data and consumer behaviors, FICO has maintained the same arbitrary minimum scoring criteria since its first generic model. FICO often characterizes these criteria as representing decades of research, but we believe it is more aptly characterized as decades of inertia.
Indeed, FICO’s requirement that a consumer be “credit active” in the previous six months in order to be scored is likely an effort to ensure that lenders never have to “look under the hood” of their loan origination systems. Doing so would mean benchmarking against competitive models and a potential further erosion of its market dominance.
And finally, adhering to its minimum scoring criteria also conveniently allows FICO to sell “add-on” scores, such as FICO XD, which use data sources outside of the three national credit bureaus, to accomplish similar results as does VantageScore 3.0.
Read on for a series of four reality checks that also address important issues including the “race to the bottom,” FICO’s minimum scoring criteria, credit scores versus underwriting criteria, and whether multiple scores creates confusion for consumers.
We are, indeed, at a pivotal moment for the housing industry and for credit score competition. Director Watt…the choice is yours.