As the Federal Housing Finance Agency (FHFA) enters the back stretch of its assessment of the feasibility of allowing lenders to choose which credit scoring model is the best fit for their businesses, VantageScore Solutions released a new white paper that addresses key operational challenges that have been cited as potential obstacles.
The white paper “New credit scoring models: a smooth transition to more transparent mortgage capital markets,” is published ahead of FHFA’s expected “Request for Information” (RFI) on this matter. In this process, interested parties, including mortgage lenders, investors in mortgage-backed securities (MBS) and consumer advocates, will be asked to provide feedback to key questions which relate to a possible transition from the status quo, a government-sanctioned monopoly, to an environment in which credit score competition and choice will be allowed.
Currently, and for more than the last two decades, Fannie Mae and Freddie Mac have “locked-in” outdated, conventional credit scoring models through their seller servicer guidelines. These guidelines require lenders who rely on automated underwriting to use older versions of the FICO model that are based on sample data which dates from 1995 through 2000.
To assist industry participants in their response to FHFA’s request and to help address challenges recently raised in a speech by FHFA Director Mel Watt, the white paper makes four key recommendations:
- Give lenders a choice between the latest validated scoring models, but require them to stick with the initial choice they make for a period of time in order to prevent “gaming” or “score-shopping.”
- Well before implementation, provide capital markets participants with a historical database, which includes credit scores from the latest validated models and loan attributes, so that lenders can recalibrate prepayment models.
- Regardless of what choice lenders make at the time of origination, ensure that investors receive the VantageScore credit score and, if possible, the current legacy credit score for every loan in every pool.
- Improve transparency by disclosing monthly credit score updates to all MBS investors.
The white paper is available for free at www.vantagescore.com/transitionWP.
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