The Federal Housing Finance Agency (FHFA), the agency that oversees mortgage investors Fannie Mae and Freddie Mac, have ordered the companies to make plans to utilize alternate and/or updated scoring models in 2016 and to move forward in implementing them.
This change would have a major impact on credit reports once they are implemented. Right now both Fannie and Freddie use the FICO 04 scoring model which was released in 2004. With improvements to the scoring models over the years and the release of FICO 09 late in 2014, it makes the version that Fannie and Freddie currently use extremely outdated and antiquated.
One of the biggest benefits to consumers, if they do agree to utilize FICO 09, would be in the area of medical collections. Unpaid medical collections will have less of an impact than they do now and paid medical collections are excluded completely from the scoring model. Some consumers could benefit as much as 25 to 100 points from this, depending on what the rest of their credit report looks like. According to Experian there are approximately 64.3 million people with a medical collection on their credit report. Out of that number about 9.4 million had a medical collection with no balance. That’s 9.4 million consumers that may be put in a better position to purchase a home. Collections that are not medical, paid or unpaid are still factored into the scoring model.
Along with this, the FHFA is also taking a hard look at having Fannie and Freddie implement the Vantage Score which would help a lot of underserved borrowers. Vantage Score LLC was started by the three credit bureaus, Experian, Trans Union and Equifax as a way to compete with FICO. The Vantage Score utilizes non traditional credit such as rent, utilities and telecommunications payment histories. While it is currently used by banks and credit card companies, Fannie and Freddie have yet to adopt it. Utilizing Vantage Score could also open the door to thousands of borrowers who may not have traditional credit but have good, long standing histories with non traditional credit.
Both Fannie and Freddie have, up until now, taken a firm stand that they believe the scoring models they currently accept are adequate and represent a good barometer to reflect a borrower’s ability to handle debt, so they have been very resistant to make a change. The new models however would open the door to so many more potential borrowers which most feel would create a much fairer playing field for a potential borrower. There are, of course, some who feel this change could possibly put some borrowers into loans that they really can’t afford and won’t be able to re-pay. But they are becoming more and more of the minority. Medical collections have been the subject of debate for several years now with most feeling that they are unfair to a borrower as most of the time they are due to an insurance issue. A borrower can have perfectly good credit otherwise and one medical collection that’s depressing the score by sometimes 100 points or more. That is not really a good prediction of a borrower’s ability to handle debt.
Switching over to a newer scoring model will probably not happen quickly. Changing systems does involve significant costs and restructuring. However with this push from Fannie and Freddie’s regulator, we will hopefully start to see these changes sometime this year.