Dec 012017
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The recent hacking of Equifax data has brought the credit bureaus into the headlines again. While the credit bureaus don’t control the FICO scoring model, the most popular model and the one the mortgage industry uses, the spotlight seems to have brought renewed attention to the fairness of credit scoring.

Yesterday, we discussed how FICO 4, the current model of choice in the mortgage industry, doesn’t seem to align with current credit risk factors. Congress is trying to force the industry to consider newer credit scoring models. So, let’s look at the potentially negative effects of the newer models. There will be winners and losers, and some of the losers may be surprised.

The current model rewards consumers who make on-time minimum payments on all their credit accounts. The account balance only seems to matter if the consumer allows it to exceed 30% of the available credit.

The newer models look at this a little differently. They reward consumers who make larger than minimum payments. They also penalize consumers who have large, unused available credit as that is credit that they suddenly could decide to use.

It may be years before any of these changes affect your ability to qualify for a mortgage. However, you are likely to start seeing them when you apply to other types of credit.

Nov 302017
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Your mortgage credit score is based on a credit model developed almost 20 years ago, and Federal Housing Finance Agency (FHFA) Director Watt says that’s not going to change anytime soon.

Many in the credit industry acknowledge that the FICO 4 model, the use of which is required by Fannie Mae and Freddie Mac, is deficient. It doesn’t differentiate between paid and unpaid collections. Nor is it able to distinguish medical collections, which seem to have little predictive value of credit risk. It also poorly models student loan debt, which has ballooned in the last 10 years, and only incorporates negative information for rent and utility payments.

Congress is trying to force a change through The Credit Score Competition Act, which would encourage Fannie and Freddie to consider other credit scoring models, including the newer FICO 9 and VantageScore models.

Watt contends that Fannie and Freddie already consider the same or greater levels of credit data in their computer models that determine whether a borrower qualifies. He also notes the change would be quite expensive. He prefers to wait until after Fannie and Freddie merge their investment security platforms, slated for 2019.

However, Watt fails to mention that Fannie and Freddie impose a minimum credit score, which prevents folks from qualifying regardless of how Fannie and Freddie tune their computer models. Fannie and Freddie also use credit score for determining interest rates and mortgage insurance coverage.