Are Fannie Mae and Freddie Mac preparing to accept VantageScore?

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The mortgage lender’s choice of credit scoring model alternatives would have taken a step closer to reality, as Fannie Mae and Freddie Mac would have completed the validation phase of VantageScore, according to a note from Compass Point.

“The next steps involve working with originators to implement VantageScore into underwriting systems,” Compass Point analyst Ed Groshans said in the report. If accurate, a rollout would then be expected in the first quarter of next year, based on a 2019 timeline published by VantageScore, Groshans continued.

However, VantageScore, government-sponsored firms, and their regulator, the Federal Housing Finance Agency, all declined to verify or comment on this report.

“Prior to going live, we anticipate that the FHFA will issue a press release stating that VantageScore has been validated and approved for use by Fannie Mae and Freddie Mac,” Groshans said. “We expect the Federal Housing Administration to include VantageScore in its underwriting system as well, but that will happen after GSEs complete their system rollout.”

VantageScore, a joint venture between the three largest repositories, Equifax, Experian and TransUnion, has a minimal share of the mortgage market because it is not approved for use in Freddie’s and Fannie’s automated underwriting systems.

In 2017, the FHFA started looking for comments on whether GSEs should upgrade their models to use a newer version of FICO and/or alternative products. Currently, Desktop Underwriter and Loan Product Advisor use the old FICO 5 dashboard.

The regulatory reform law of May 2018 required the FHFA to be defined the standards and criteria that Fannie Mae and Freddie Mac will use to validate credit scoring models through rulemaking.

In August 2019, the FHFA backtracked from a previous proposal that locked VantageScore and implemented a rule that allowed all credit score modelers the opportunity to compete with FICO.

A virtual FHFA hearing in March discussed four options: Option 1, Hold the single score requirement for each borrower on each loan; Option 2, requiring multiple scores; Option 3, allowing lenders to grant loans with any approved score; and Option 4, the “cascade” approach allowing for primary and secondary scoring.

“While we understand GSEs are working to implement VantageScore into the underwriting process, it is unclear which options, if any, were selected,” Groshans said, adding that after the hearing, it was apparent that many parties were pushing for the third choicealso known as Lender’s Choice.

“In our view, the choice of lender would align with the administration’s goals of increasing access to affordable housing and affordable credit, but we will have to wait for the FHFA announcement to know the outcome,” Groshans said.

VantageScore a sells its product such as allowing more consumers with little or no information on file—typically minorities—to be rated and thus obtain credit.

“CHLA has always supported FHFA’s efforts to encourage Fannie and Freddie to use alternative and appropriate credit scoring options,” Scott Olson, executive director of Community Home Lenders of America, said in a statement. “Reports that GSEs may soon be on the verge of reaching initiators to make this a reality would mean our members would be able to help more underserved but qualified buyers who were previously excluded by scoring metrics unduly rigid credit ratings.”

The Mortgage Bankers Association said any decision on credit scoring models must be data-driven and transparent and expand access to those difficult to rate in older versions, in its March 2022 letter to Sandra Thompson, now full-time director of the FHFA, on the agency. four-year plan.

“The FHFA should take a conservative approach to the timelines in which the use of a new model or new models is made mandatory,” the MBA letter said. “It is also imperative that FHFA and the companies continue to engage with industry and relevant stakeholders as this process unfolds to provide guidance and resources, as needed, to overcome any obstacles. to implementation.”

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