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THE SCORE
 

A breakthrough for credit scoring in the mortgage market

“Diversity is having a seat at the table, inclusion is having a voice, and belonging is having that voice heard.”1

I’ve thought a lot about diversity, inclusion and belonging over the past 13 years. VantageScore, along with millions of potential homeowners, has been locked out of the mortgage market.

Significantly, when using the automated underwriting systems of the government-sponsored enterprises (i.e., GSEs – Fannie Mae and Freddie Mac), both GSEs require2 mortgage lenders to use three credit scoring models (one for each of the national credit bureaus) developed prior to the housing crisis and Great Recession and built on data that is more than 20 years old – despite the fact that there are demonstrably more predictive and more inclusive models offered by other credit scoring models, including VantageScore and even FICO.  

That will likely change in the near future thanks to a new rule finalized by the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, both of which account for more than 70 percent of mortgage origination in this country3 and whose policies influence much more.

The FHFA’s new rule finally authorizes the GSEs to test different models and use the best one. And we think that will bode well for VantageScore.

First and most importantly, what does this mean for consumers?

Consumers will benefit from a more level playing field:

  • No longer will consumers be assessed using outdated technology.
  • Mortgage eligibility will expand.
  • Pricing and interest rates will be more accurate and fair through more predictive scores.
  • There will be more opportunities for sustainable homeownership for consumers who have been underserved by the current system.

And what does this mean for mortgage lenders?

In the short term, the pool of potential customers will expand alongside more precise risk assessments.

Longer term, lenders will have the ability to prepare for the borrowing trends of tomorrow as scoring models keep pace with shifting credit behaviors.

This is both a potential growth opportunity and an investment in the future because the homebuyers of today will not look and behave like they did in the past.

In fact, the Harvard Joint Center for Housing Policy estimates that minorities, who traditionally have used credit differently than the historical borrower, are expected to account for more than 75 percent of new household growth over the next 10 years. And new scoring methods and tools need to recognize this difference with more accuracy and predictiveness.

Moreover, student debt loads are changing the borrowing patterns for millennials and Gen Zers. They are not necessarily less creditworthy so much as credit averse, a behavior that is unfairly punished by conventional models.

There has been considerable media attention on this issue, and yours truly even was a guest on CNBC. In this edition of THE SCORE, we’ve rounded up some of the media coverage and included the views of credit score guru John Ulzheimer on this topic.

I’d also like to formally welcome a new addition to VantageScore Solutions. Ben Tagoe has joined our team as senior vice president, Strategic Planning and Alliances. We’ve included an article about Ben and his impressive qualifications.

Lastly, I’m delighted that Jason Madiedo, CEO of Alterra Home Loans (the largest 100 percent Hispanic-owned mortgage company in the U.S.), has answered our “5 Questions with…” feature this month.

There are many who supported credit score competition and worked very hard to make it happen. I cannot possibly list them all but will most certainly be reaching out to everyone with our profound appreciation. To be sure, this isn’t a VantageScore win. This is a win for the consumer and the future of the mortgage industry.

Regards,

Barrett Burns

 


 

1“No Hard Feelings: The Secret Power of Embracing Emotions at Work,” by Liz Fosslien and Mollie West Duffy

2Requirement is found in Fannie Mae’s and Freddie Mac’s “seller-servicer guidelines,” which either of the mortgage GSEs (prior to conservatorship) or the FHFA could have changed at will.

3https://www.urban.org/sites/default/files/publication/98669/housing_finance_at_a_glance_a_monthly_chartbook_june_2018_0.pdf

Ben Tagoe:
New Strategic Planning SVP

VantageScore Solutions Hires Strategy Executive Ben Tagoe to Lead Strategic Planning and Alliances Group

VantageScore® Solutions, LLC, the company behind the VantageScore credit scoring models, welcomes Ben Tagoe, the company’s new senior vice president of Strategic Planning and Alliances.

Ben’s official start date was August 15, 2019. He reports directly to Barrett Burns, president and CEO of VantageScore Solutions.

In his new position, Ben will be responsible for refining and executing the ongoing strategic plan, focusing on the growth and traction of the VantageScore model among consumer lending institutions and incubating new growth initiatives. Ben also will partner with VantageScore’s industry and advocacy partners to further develop the company’s strategic relationships.

“Usage of VantageScore has been growing at a triple-digit rate, and the market continues to demand more predictive and inclusive models,” said Barrett Burns, president and CEO of VantageScore Solutions. “We are very pleased that Ben has joined the team, and with his strategic insights, we will be well positioned for new trends in consumer credit and the credit scoring industry.”

Ben most recently served as vice president for Consumer and Community Banking Strategy for JPMorgan Chase. In this role, he led teams responsible for numerous strategic initiatives, including partnerships, sales and corporate strategy.

Prior to that, Ben served as senior product manager at OnDeck Capital (NYSE: ONDK), a leading online small business lender, where he led product strategy for OnDeck’s line of credit. He also served as chief of staff, reporting to the CEO.

Ben began his career in the Securities Division of Goldman, Sachs & Co.

Ben holds a Master of Business Administration with high distinction from Harvard Business School, where he was a Baker Scholar, awarded to the top 5 percent of the graduating class. He received a Bachelor of Arts from Princeton University’s Woodrow Wilson School of Public and International Affairs. Ben also co-chairs the Associates Council of Let’s Get Ready, an organization that provides free SAT prep, admission counseling, and post-enrollment mentoring to students from low-income backgrounds and first-generation college students.

 

FHFA ruling launches media firestorm

Consumers win with newer scoring models

How Could Homebuyers Benefit from the Use of Newer Credit Scoring Systems?

Credit scoring systems have long been a staple of consumer lending in the United States. For several decades, loans, credit cards and other consumer services have been influenced, to some extent, by the quality of an applicant’s credit scores. A credit score, which is a three-digit number, distills the information from your credit report and helps lenders to predict the likelihood that you’ll pay your bills on time.

Mortgages, like all extensions of credit, are based in part on an applicant’s credit scores. But unlike other types of credit, the choices of credit score brand, type and generation are largely dictated by a third party, the Federal Housing Finance Agency (FHFA). Among other things, the FHFA supervises both Fannie Mae and Freddie Mac, the so-called Government Sponsored Enterprises or “GSEs.” Fannie Mae and Freddie Mac help to fund mortgage loans, thus providing greater access to mortgage funds with competitive terms.

Older Scoring Systems

Credit scoring has been used in mortgage lending since the late 1990s, which sounds like a long time. But the use of credit scores has been ubiquitous in non-mortgage lending for much longer. And unlike credit cards, auto loans, personal loans and other forms of credit, if your mortgage broker or lender wants to run your application through a Fannie Mae or Freddie Mac underwriting system, then the credit scores he or she will have to use will be between 15 and almost 20 years old. If you look through your most recent mortgage loan’s closing paperwork, you will find a Score Disclosure Notice, which will include those older scores.

For historical reference, the scoring models used in mortgage lending were built before the 2008-2009 economic meltdown and subsequent recovery, before at least 14 amendments of the Fair Credit Reporting Act and before at least six newer credit score developments and redevelopments. This certainly isn’t a criticism of any particular credit score or credit score developer as they do not have control over which scores are used in the mortgage market. Nonetheless, there are newer credit scoring tools commercially available that should be used to underwrite your mortgage loan applications.

Newer Scoring Systems

In August 2019 the FHFA released details of a new set of rules that could result in a change in the credit scores used for mortgage underwriting. These rules required the testing of alternative scoring model options for accuracy and reliability with possible approval of their use. The result could be implementation of a newer credit score or a choice of credit score options.

While this is certainly welcome news, the potential use of newer scoring systems won’t happen tomorrow and could actually take years before becoming a reality. Unlike other lending environments, the mortgage industry is full of intermediary players between the application and closing steps. Each of these players would need time to program and adjust for a new credit scoring system.

When you apply for a mortgage loan, the lender or broker will pull what’s called a Residential Mortgage Credit Report or “RMCR” for each applicant. This report is not pulled from any one of the credit reporting companies, such as Equifax, Experian and TransUnion, but is instead pulled from one of a variety of credit report brokers known as Mortgage Credit Reporting Companies (MCRC).

MCRCs have the ability to pull all three of your credit reports and three of your credit scores from the three national credit reporting companies, and then they deliver that aggregate information to the broker/lender and into the Fannie Mae and/or Freddie Mac underwriting systems. Each of these MCRCs would need to update its systems to procure and support the newer scores. And, Fannie Mae and Freddie Mac’s underwriting systems would need to be re-engineered to account for a newer credit scoring model, new Score Factors/Reason Codes and new performance probabilities. Then those newer underwriting systems would have to be redeployed to their respective army of mortgage brokers and lender users, which will take time.

The Upside

This one is easy. The upside of using newer scoring systems is considerable. Newer scoring models are more predictive than older scoring models. That’s an indisputable fact. Low-risk applicants will score higher, and high-risk applicants will score lower with newer models. As such, a move to newer models is a win for the lender because they do a better job delineating based on applicant risk.

Applicants will also win big with newer scoring models. For example, according to VantageScore Solutions, its newest scoring model, VantageScore 4.0, scores some 40 million more consumers than traditional models, and a large percentage of those 40 million would score high enough to qualify for a mortgage loan under today’s guidelines. Newer scoring systems ignore zero-balance collections, discount unpaid medical collections, reward consumers for paying their credit card balances in full each month, and will consider rental and utility payments if they’re on consumers’ credit reports. Older scoring models do none of these things.

Consumer Access

One more thing that cannot be overlooked with respect to this potential upgrading and updating of scores used in mortgage lending is consumer access to these newer credit scores. There has been a considerable trend over the past five to 10 years toward more access to our credit scores. If you have a credit card with almost any large issuer, or if you’re a registered user of a variety of credit management websites, then you have free access to your credit scores.

The scores that are given away by card issuers or by the above-linked websites are either the most current versions or one generation off the most current versions. The scores used today in mortgage lending are not available for free to consumers. If you want to see those scores you have to buy them. Or you have to apply for or prequalify for a mortgage loan, which is an unreasonable option for someone who is simply curious to see what is his or her mortgage lending credit scores.

5 Questions with Jason Madiedo

Jason Madiedo is the president and CEO of Alterra Group, LLC, a minority-owned top U.S. mortgage bank and the second-largest Hispanic-owned mortgage company in the country, with loan coverage in 30 U.S. states. Alterra strives to represent the underserved in the mortgage industry, specifically serving the Hispanic community to help build wealth through homeownership. Alterra was voted by Mortgage Tech Magazine as one of the Top Tech Savvy Companies along with one of the fastest-growing by Hispanic Business Magazine.

He is very passionate about assisting underserved market consumers who have worked hard to achieve the American dream, and he has served as national president for the National Association for Hispanic Real Estate Professionals (NAHREP) – Nevada.

1) When you look through your crystal ball, what does the first-time homeowner of tomorrow look like, and how does the system need to change in order to be prepared?

If tomorrow is five to 10 years from now, then it will be even more diverse from both an ethnic and technical requirement perspective. The first-time homebuyer will be a mix of immigrants with thin credit profiles. And lenders will have the desire to sit with tech-savvy, variable-income-sourced first-time homebuyers who want optics and transparency into the entire transaction along with the ability to text and “chat” for service and consult with a professional when the process gets tough. As we look for ways to streamline processes, we will need to serve the first-time homebuyer of the future however he or she wants to be served. 

2) Much has been said and written about millennials and Gen Zers’ desire (or lack of desire) to be a homeowner. Are you seeing demand for homes among these consumers?

Yes, just as much as the past first-time homebuyer. In some markets, there even is a sense of “fear of missing out.” But we also deal with a majority of Hispanic borrowers at Alterra, so it may be different elsewhere.

3) It appears that GSE reform may actually happen based on a report from the Treasury. What factors should policymakers keep in mind as they reform the current state of the GSEs?

Access to credit, cost, affordable lending products and reasonable interest rates that would not massively disrupt home values.

4) FHFA just finalized a rule that may finally deliver competition between credit score model developers for use in GSE-purchased loans. How do you think this may impact your business, the industry, consumers, etc.?

Greatly – from scoring people who are currently not scored to increasing affordability for those people inappropriately scored.

5) Where else could innovation help improve the mortgage process for lenders and the consumers they serve?

We, as lenders, need to get better at implementing the tools that are already out there.

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