Real Estate News

Credit scoring model changes could reshape mortgage process

Published: 20 Jan 2018

With credit scoring such a major part of the mortgage application and approval process, it's no wonder experts have a lot of opinions on how to alter those standards to improve the home loan market. Now, a federal agency - which controls the nation's two largest mortgage-backing entities - is considering a potentially seismic shift in credit scoring standards that is a point of some contention.

The Federal Housing Finance Agency is now considering whether it should start allowing Fannie Mae and Freddie Mac to back mortgages with credit scoring based on non-traditional models, according to Fox Business. The traditional scoring model - pioneered by FICO - uses only credit-related financial history to inform decisions about repayment capabilities. However, non-traditional scores such as VantageScore - which is controlled by the three largest credit reporting agencies - take into account not just borrowing history, but also repayments on standard bills like those for utilities, cable or rent.

On the pro side
A number of organizations within the real estate sector have vocally advocated for changes to current credit scoring models, including a switch to VantageScore, noting that the current market locks many otherwise financially capable Americans out of homeownership, the report said. Generally speaking, people without long borrowing histories, or little to no recent borrowing history, will have a difficult time obtaining a mortgage without paying a premium.

A big change could bring more borrowers into the mortgage market.A big change could bring more borrowers into the mortgage market.

Looking at the opposition
On the other side of the argument are financial institutions, many of which note that the financial crisis of a decade ago - some of the effects of which are still being felt today - was brought about by too-lax credit standards, according to American Banker. To that end, any efforts to broaden standards more widely in the wake of the downturn and recovery could invite another potential crisis if lenders learn en masse that many recent borrowers can't afford their mortgages for the long run.

It's worth noting, though, that with the mortgage market shifting, many lenders are already loosening standards, according to the latest data from Ellie Mae. Among all closed mortgages in November, the average credit score fell six points over the previous year, from 728 to 722. That's not a huge decline, but it is reflective of a trend that has been in effect for some time.

"With the average credit score dipping, lenders are extending credit to borrowers who may have had no previous access to the housing market," said Joe Tyrrell, executive vice president of corporate strategy at Ellie Mae. "While these scores are still significantly above the levels seen a few years ago, it is encouraging to see increased accessibility, especially as the millennial population continues to pursue home ownership."

It is, however, still far more difficult for the average borrower to obtain approval on a mortgage application today than it was at just about any point prior to the economic downturn. Put another way, by just about any historical standard, credit access is still near some of the highest levels ever, and many consumer advocates note there is a middle ground between today's standards and those that sparked the downturn.