You probably know that your credit score is a crucial factor in your ability to qualify for a mortgage. You might also know that your score can vary depending on the type of scoring model your lender uses. If it’s an old, outdated version, you might get a lower score. If it’s a newer, more advanced model, you’ve got a better shot at being scored more fairly.
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Which brings up an end-of-the-year controversy: The two behemoths of the mortgage business — Fannie Mae and Freddie Mac — continue to use a credit-scoring model that even its developer, FICO, says is not as “predictive” as its much newer models. Worse yet, Fannie and Freddie require that all lenders that want to submit loan applications to them must also use the same, outdated technology.
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The net result, say critics from the lending industry, consumer groups, civil rights organizations and a bipartisan coalition of legislators in Congress, is that many applicants don’t get the credit scores they deserve. Many other consumers — the estimates range above 30 million — aren’t even scoreable using the models currently employed at Fannie and Freddie. Disproportionately, critics say, these are people who don’t make heavy use of the credit system or who are young and don’t have much information on file with the national credit bureaus. Large numbers of them might qualify for a mortgage, say scoring experts, if they were simply given a fair shot.
Acknowledging the problem, Fannie’s and Freddie’s government regulator, the Federal Housing Finance Agency, directed the companies two years ago to begin examining how to improve their scoring systems. For 2016, the FHFA told them to “conclude [their] assessment,” and “as appropriate, plan for implementation” of a better approach.
Since it’s now December and there have been no announcements about possible changes, I thought it appropriate to ask: When are Fannie and Freddie rolling out their new and improved scoring models, and what will they look like? The issue is especially timely given the release in late November of a new study from the Urban Institute documenting how tougher credit standards in the mortgage arena have affected millions of would-be borrowers.
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Researchers found that roughly 1.1 million home-loan applicants were turned down last year because the standards used to evaluate them were much more stringent than they were in the pre-housing boom era, when defaults were relatively low. Between 2009 and 2015, “lenders would have issued 6.3 million additional mortgages,” researchers calculated, “if lending standards had been more reasonable,” as they were back in 2001.
A major culprit: a big shift toward the credit-score elite when it comes to mortgage approvals. From 2001 through 2015, the share of borrowers approved for mortgages with FICO scores above 700 rose to 66 percent from 51 percent, while those approved with scores below 660 declined to just 14 percent from 31 percent. Credit scores of approved applicants at Fannie and Freddie this year alone have averaged between 752 and 754, according to loan technology firm Ellie Mae. Meanwhile, according to FICO, the average score among all Americans is just 699. (FICO scores range from 300 to 850, with low scores indicating higher risks of default.)
In response to my question, a spokeswoman for the FHFA told me that Fannie and Freddie continue to discuss their plans for scoring changes with “a broad range of stakeholders” about the “cost, operational implications and potential impacts on access to credit.”
Who are some of these “stakeholders,” and how do they see this issue? Among the most directly affected are the banks and mortgage companies that deal with the two companies daily. They strongly favor a move to more-advanced scoring models as a way to broaden the base of potential home buyers and borrowers without exposing themselves or Fannie and Freddie to higher risks of default.
Michael Fratantoni, chief economist for the Mortgage Bankers Association, told me in an interview that “by sticking to old models we are disadvantaging” sizable numbers of consumers. Groups such as Fratantoni’s also want to see the introduction of advanced scoring models from companies other than FICO — VantageScore Solutions offers a rival system now in use in most other segments of lending — as an option permitted by Fannie and Freddie.
“We are on the record for more competition in this space,” Fratantoni said. “We shouldn’t be locked into just one set of scores.”
Nor should potentially millions of creditworthy consumers.
Ken Harney's email address is kenharney@earthlink.net.
FAQs
For nearly two decades, Fannie Mae and Freddie Mac required mortgage lenders to use the Classic FICO credit scoring model. But soon, they will start requiring FICO 10T and VantageScore 4.0 in its place.
What are the new credit score rules for mortgage? ›
Lenders who want to sell mortgages to Fannie Mae and Freddie Mac next year will have to begin using the new FICO Score 10T and VantageScore 4.0 scoring models by the fourth quarter, but they'll also be allowed to submit two credit reports instead of three when calculating credit scores.
What is the primary difference between Freddie Mac and Fannie Mae? ›
In general, Fannie Mae tends to buy loans from larger commercial banks and lenders. Freddie Mac usually buys loans from smaller banks or credit unions. This is the primary difference between the two. Fannie Mae has also been around about 30 years longer than Freddie Mac.
What version of Fico does Fannie Mae use? ›
As a reminder, our work for this initiative will include: Moving from the current Classic FICO credit score model to require lenders to use two credit scores generated by the FICO Score 10 T and the VantageScore 4.0 models.
What happened to Freddie Mac and Fannie Mae? ›
The 2008 housing crash left Fannie Mae and Freddie Mac on the verge of bankruptcy, so they were put into government conservatorship. They received huge bailouts, which they have since paid back, but they remain under conservatorship today.
Has the credit score system changed? ›
While these new credit scoring models share some similarities, they also differ in some important ways. Most notably, VantageScore 4.0 will only require one month of credit history to generate a credit score. FICO 10T, on the other hand, will still require at least six months of credit history.
What is the new credit score system? ›
The two newest VantageScore credit scores (VantageScore 3.0 and 4.0) use a 300 to 850 range—the same as the base FICO® Scores. For the latest models, VantageScore defines 661 to 780 as its good range.
Does the government still own Fannie Mae and Freddie Mac? ›
Fannie Mae was first chartered by the U.S. government in 1938 to help ensure a reliable and affordable supply of mortgage funds throughout the country. Today it is a shareholder-owned company that operates under a congressional charter.
How to tell if your loan is Fannie Mae or Freddie Mac? ›
Look it up online
Many mortgages are owned by Fannie Mae and Freddie Mac. Both offer a mortgage look up tool on their website. You can look up your mortgage servicer by searching the Mortgage Electronic Registration Systems (MERS) website.
What are Fannie Mae and Freddie Mac's guidelines? ›
Debt-to-income ratio: Fannie and Freddie usually require a minimum debt-to-income ratio of 43%, though an exception may be made for certain borrowers. Income requirements: You must be able to show that you have a stable income and are able to repay the loan.
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company.
Which FICO score do home lenders use? ›
The credit score used in mortgage applications
While the FICO® 8 model is the most widely used scoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage: FICO® Score 2 (Experian) FICO® Score 5 (Equifax) FICO® Score 4 (TransUnion)
Does Freddie Mac use FICO? ›
Types of Credit Scores
Freddie Mac requires the Seller to use a FICO® score, whenever a usable Credit Score is required. FICO scores have different names at each of the three major United States credit reporting companies. All of these scores, however, are developed using the same methods by FICO.
What caused Fannie Mae to fail? ›
JPMorgan sold securities knowing that many of the loans backing those certificates were toxic”. He continued, “Investors, including Fannie Mae and Freddie Mac, suffered enormous losses by purchasing RMBS from JPMorgan, Washington Mutual and Bear Stearns not knowing about those defects”.
What was the Freddie Mac scandal? ›
An accounting scandal erupted at Freddie Mac in June 2003 that was discovered through an SEC investigation. The company had intentionally understated $5 billion in earnings.
What percentage of mortgages do Fannie and Freddie own? ›
As of 2023, Fannie Mae and Freddie Mac support around 70 percent of the mortgage market, according to the National Association of Realtors. That means the majority of conventional loans, those offered by private lenders, end up being backed or purchased by one of the two entities.
What is the new credit law in 2024? ›
Consumer Financial Protection Bureau Releases Final Rule on Credit Card Late Fees, with Overdraft Fees on Deck. On March 5, 2024, the Consumer Financial Protection Bureau (Bureau) announced the final rule governing late fees for consumer credit card payments, likely cutting the average fee from $32 to just $8.
What is the new credit score to buy a house? ›
You'll typically need a credit score of 620 or better to qualify. A 3% minimum down payment is available to first-time home buyers. A credit score and down payment of more than the minimum can earn you easier conventional loan approval and a lower interest rate.
What credit score is needed to buy a $300K house? ›
What credit score is needed to buy a $300K house? The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
