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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.