Fannie and Freddie’s old FICO standards squeeze millions of potential buyers – Orange County Register
Millions of home buyers find themselves stuck in the mortgage creation process thanks to the outdated FICO standards used by Fannie Mae and Freddie Mac.
A common scenario is the following: the applicant has achieved excellent FICO scores on the credit card application and auto finance. So why does the residential mortgage credit report offer comparatively lower FICO scores for the applicant who has a good history of paying bills on time?
FICO is FICO. Right? Not really.
The reality is that mortgage giants Fannie and Freddie continue to enforce the use of legacy FICO software from two decades ago rather than the current credit standards used in auto finance and lending.
Lower FICO scores mean Fannie and Freddie can stick it to you at the cash register. They use rating ranges and down payment percentages (or equity percentages in the case of refinancing) for their pricing mandates. F&F use the lowest average FICO score for all borrowers as part of their risk assessment. Industry jargon calls this “loan price adjustments”.
For example, a 20% drop with an average FICO score between 700 and 719 means you are charged 1.25 points for the risk. Each point corresponds to 1% of the loan balance. So on a loan of $ 400,000, it costs $ 5,000 at 1.25 points.
That same 20% drop with an average FICO between 680 and 699 means a half point increase to 1.75 points or a risk charge of $ 7,000. Lower it again to between 660 and 679 and the buyer is zapped for 2.75 points or $ 11,000 of risk. That’s a whopping $ 6,000 more than the FICO-club’s 700 borrowers.
Why don’t Fannie and Freddie flip the switch, making new versions of FICO mandatory?
“Because his government,” said credit expert John Ulzheimer of the Ulzheimer Group. “They are lazy and don’t care.”
The Federal Housing Finance Agency, regulator and curator of F&F, did not answer my question.
Updating his FICO standards doesn’t seem to matter to Fannie and Freddie. Instead, they launched a solicitation a year ago for the credit rating as agencies consider adding competitors to FICO.
“The solicitation is the result of Congress passing legislation to encourage Fannie Mae and Freddie Mac to introduce competition into credit scoring models,” said Francis Creighton, president and CEO of Consumer Data Industry.
Some clients will use credit augmentation services to achieve higher scores. One is Experian’s Boost software, which adds a client’s one-time utility payments to their credit report by allowing them to track bank accounts and payments in real time. Does this add-on feature help improve a legacy FICO score in the eyes of Fannie and Freddie? Nope.
Right now I have a borrower where the lender has asked us to remove the on-time payment history from the utility bill through Boost. The scores remained exactly the same after the removal of Boost. Ulzheimer has confirmed that the current FICO mortgage software does not take Boost accounts into account. That said, Boost may still be able to help you with a better Experian FICO score for issues like auto loans and credit card interest rates.
Fannie and Freddie cannot contemplate their navels without permission from the FHFA. But we’re getting the same old, unprecedented messages about their focus on affordable housing, expanding homeownership, helping underserved applicants, and so on.
How, in fact, do they help expand ownership when the old FICO standards hurt future homeowners?
“Millions of potential minority owners are being excluded from the system due to the use of older FICO models,” said Jeff Richardson of VantageScore Solutions.
Richardson said outdated FICO models also got around 40 million fewer consumers than newer models, including some 10 million applicants with scores of 620 or more. Of those 10 million, he said, 2.4 million are either African Americans or Hispanics.
“Using more inclusive and up-to-date models could help millions of underserved borrowers,” said Richardson.
Ulzheimer explained that the contemporary FICO rating won’t disappoint for certain items that show up on your credit reports, like low dollar collections. The most recent FICO marks “discounts” on unpaid medical collections, but doesn’t ignore them altogether.
“Paid collections are ignored,” he said.
This makes perfect sense, especially for people who are trying to become homeowners. How many times have your doctor and health insurance entered into a sputum contest for one of your medical bills? Too often, these disputes land on your credit report through a collection agency.
More importantly than profit at your expense, shouldn’t the FHFA want the most up-to-date predictive modeling information on your actual risk level – as well as your most likely continued repayment capacity?
If you are rightly less risky, then why punish yourself with potentially higher mortgage rates and costs that will make your monthly mortgage burden harder for a very long 360 months? The US taxpayer ultimately foots the bill for these failed mortgages.
Freddie Mac assesses the news
The 30-year fixed rate averaged 3.02%, 5 basis points higher than last week. The 15-year fixed rate was on average 2.34%, unchanged from last week.
The Mortgage Bankers Association reported the volume of mortgage applications unchanged from the previous week.
Bottom line: Assuming a borrower gets the 30-year average fixed rate on a compliant loan of $ 548,250, last year’s payment was $ 81 more than this week’s payment of $ 2,317.
What I see: Locally, well-qualified borrowers can get the following fixed rate mortgages with a cost of 1 point: a 30-year FHA at 2.25%, a 15-year conventional at 2.125%, a 30-year conventional at 2.75%, a 15-year conventional high balance ($ 548,251 to $ 822,375) at 2.25%, a 30-year conventional high balance at 2.875% and a 30-year jumbo set at 3.25%.
Note: The 30-year FHA Compliant Loan is limited to loans of $ 477,250 in the Inland Empire and $ 548,250 in Los Angeles and Orange counties.
Eye-catching loan program of the week: A 30-year fixed rate at 2.5% with a cost of two points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] Its website is www.mortgagegrader.com.