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- No longer will consumers be assessed using outdated technology.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.
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.