Why more score updates may lie ahead for the FHFA (and lenders)

The Federal Housing Finance Agency's proposed modernization of the credit scores used by two major government-sponsored enterprises in the next two years may not be where such updates end for the mortgage market.

Score providers have other offerings beyond those the FHFA has studied, said John Ulzheimer, who formerly worked in the credit industry and is now a professional witness on the topic.

"If you have a Cheesecake Factory where you live, it's kind of the same thing," he said, comparing the many options at the restaurant to the number of score types available. Only certain scores tend to achieve critical mass and become agreed-upon standards, he added.

Credit reporting

Why fewer credit reports could mean more complexity for mortgages

This first step in updating borrower assessments was seen as the easiest and could reduce costs, but stakeholders fear change that reduces data inputs.

By Bonnie Sinnock

August 14

For lenders looking to sell loans to Fannie Mae and Freddie Mac, the main change is that the FICO 10T and VantageScore 4.0 model does have rent payment or trended data, the latter reflecting long-term rather than static credit use, according to Joanne Gaskin, vice president of scores and data analytics at FICO. 

However, there are also scores like UltraFICO, which additionally incorporate bank data when permissioned by consumers. Only one credit bureau, Experian, offers consumers the bank data option through its Boost product, so that's what UltraFICO relies upon.

"With companies like Finicity being sold to MasterCard and companies like Plaid, credit repositories are accessing data in real-time, based on what's in your checking account or in your savings account, with your permission," said Jeff Taylor, founder, managing director, Mphasis Digital Risk.

Credit reporting

Will two newer credit scores beat a single older one for mortgages?

Industry executives coming off a tough year are wondering what the transition will cost and how many borrowers it'll bring in.

By Bonnie Sinnock

August 15

It's the type of score that could have some synergies with other programs Fannie and Freddie have in place where they've worked with approved vendors to help access consumer permissioned bank data outside the scoring context.

Another score FICO has for borrowers lacking sufficient credit histories tracks cell phone data that's not included in the 10T model Fannie and Freddie are moving to, Gaskin said.

"We have a model that we call FICO score XD, standing for extended data. The idea is, it's a helping hand for someone who doesn't have a traditional FICO score," she said. "We can get them into FICO score XD and six months later, they can have a traditional FICO score, because they've demonstrated their repayment performance on their cell phone bills."

Evolution in credit scoring models may also involve artificial intelligence and machine learning. As with alternative credit data, much has been said about both its potential and risks when it comes to fair lending, and all of it is worth considering.

"If you don't understand how they actually work, and you can't explain the results that they provide, that's a really big challenge and that's not something that is acceptable with providing reason codes, for instance," said Rikard Bandebo, chief product officer at VantageScore. "The good thing is that the math is advancing, and they are finding more techniques to explain."

Using AI can be dangerous without transparency, if data inputs are biased or if machine learning is applied without human intervention.But it does hold promise in its ability to ingest exponentially more types of data, allowing for more granular analysis, said Yolanda McGill, vice president of policy and government affairs at Zest.ai, a company Freddie Mac has been working with to explore the technology's potential.

"It really is, I think, an important part of the future of underwriting, and housing finance,"  McGill said.