Want unlimited access to top ideas and insights?
Federal Housing Finance Agency (FHFA) Director Bill Pulte last week announced that Fannie Mae and Freddie Mac will accept the VantageScore 4.0 credit scoring system by conventional lenders. He made a similar announcement in July.
VantageScore claims to be used by over 3,700 financial institutions, including 9 of the top 10 U.S. banks, for general consumer lending and auto loans, but actual market share data in mortgages is not available.
Pulte abruptly ended a limited 50-lender pilot and
The only problem with these statements is that they are mostly for political impact and will have little or no positive benefit for consumers. First, most conventional lenders still cannot use VantageScore in automated underwriting and were mostly using it manually to buy third-party production.
Some top national lenders have told NMN that they use VantageScore very little and mostly in third party acquisition channels like correspondent and co-issue. The major loan origination system vendors still have not integrated VantageScore into their software suites. We hear that even the GSEs are still struggling with integration issues for VantageScore.
READ MORE:
The bigger issue of course is that lenders must decide how to compare and weigh the totally different FICO and VantageScore models. Most analytics firms seem to have decided that FICO is the tougher score in terms of measuring default probability, so how much do you adjust VantageScore down?
The GSEs have not yet provided a transition table between the score methodologies, so lenders are left to their own devices to make a judgment between the two models that could ultimately cost them a lot of money.
"We find, on average, VantageScore 4.0 scores are higher than Classic FICO scores, especially for refinance loans and for investor properties and second homes,"
"Both credit scoring models effectively distinguish between high-risk and low-risk borrowers. VantageScore 4.0 is marginally more effective at identifying high-risk borrowers from among those with the lowest credit scores, though the differences are small," they wrote.
Sadly Director Pulte has been sucked into the endless political fight between Fair Issac and Vantage Score, which is jointly owned by the three major credit reporting bureaus; Equifax, Experian, and TransUnion. Yet the real issue is that most credit scores are wrong because of errors in the underlying consumer data files.
If US lenders treated consumer data with the same carelessness and lack of care that is routine in the world of consumer data aggregation, they would face severe regulatory sanctions and plaintiff litigation. But instead, the lobbyists for Experian have successfully portrayed this as an issue over scores instead of inaccurate data.
"The correct credit score for a borrower is obtained by gathering the data from all of their reported credit accounts and running all of this data through the most current credit score model," wrote David Battany of Guild Mortgage in
"There is only one correct answer to the question of a borrower's credit score, regardless of which credit model is used," he concluded. Battany and his colleagues at Guild Mortgage are some of the most respected people in the industry.
The problem is that the underlying credit data files maintained by Experian, Equifax and Transunion can be incomplete or in error. As a result, the FHA and HUD require lenders to buy all three credit reports from all three data depositories to ensure that an incomplete file doesn't result in an error.
The resulting "tri-merge" underwriting process is the true monopoly in the mortgage market, not the FICO or Vantage score models. If the Trump Administration truly wants to help consumers, then Director Pulte should end the tri-merge mandate and leave the decision up to lenders. After all, the lender takes the risk of the GSE forcing
READ MORE:
Again Guild's David Battany: "If all three bureaus had identical data, we would know this because they would all produce nearly identical credit scores. The current tri-merge rules give no incentive for any bureau to get all data from all 10 accounts and arguably provides a disincentive to do so."
Director Pulte should follow the recommendation of the Mortgage Bankers Association and end the mandate for three credit reports. Last week, Bill Pulte renewed calls for lower credit reporting costs, calling the bureaus "cartel-like" as
"Equifax, Experian, and TransUnion have been overcharging Americans for far too long," Pulte said. "This will end soon. We are seriously considering bi-merge, and stronger solutions." Bravo.
The best thing that Director Pulte can do when it comes to credit scores is to let the marketplace decide which score model is better. FICO is currently the incumbent and clearly dominant with the rating agencies and investors in whole loans. Let the secondary loan market decide who has a better mouse trap.
But Director Pulte and President Trump can strike an important blow for consumers by allowing lenders to decide how many credit reports are needed for a given customer. By allowing lenders rather than the FHA or HUD to make that call, Pulte will force Experian, Equifax and Transunion to finally spend some real money cleaning up their data files.
With a high scoring borrower, the reality is that one credit report is probably enough for underwriting a loan to the standards of the GSEs. The MBA
"Our support is not a call for wholesale elimination of the tri-merge across all borrower categories, but a targeted, evidence-based modernization that will safely introduce competition," MBA President and CEO Bob Broeksmit said in a report released this past April.
With inferior borrowers, the process may require more than one report to mitigate the risk of a repurchase demand from the GSEs. But the key reason to kill the tri-merge mandate at FHA and HUD, and allow lenders to determine the number of credit reports required, is that President Trump will force the three data monopolies to clean up their act on gathering and maintaining consumer data.
Bill Pulte and President Trump are on the verge of a significant change in the world of residential mortgages that could actually help consumers and lenders. Lenders want and need a complete data set of all of a person's reported credit history and for it to be assessed as one complete credit file through the best credit score model.
If the consumer credit data is not complete, Director Pulte, it does not matter which credit score a lender uses.
The Trump Administration, FHA, HUD and the industry have legal and moral obligations to get this right. The way to achieve the optimal result for consumers is to let FICO and VantageScore compete in the world of scores, but also make the data companies compete to provide the best, most complete data files that feed these models.
