Washington Report

No rush to use new credit score formula

 

Fannie Mae and Freddie Mac aren’t planning to use the new FICO scores discounting medical debt collections in evaluating loan applicants any time soon.

 
KENNETH HARNEY
KENNETH HARNEY

kenharney@earthlink.net

You may have noticed the big media splash recently when Fair Isaac, developer of the iconic FICO credit score, announced the debut of a new score version that no longer would penalize consumers who have medical debt-collection issues in their credit files.

The announcement hit the front pages of publications such as The Wall Street Journal and was highlighted on national TV network news. Steve Brown, president of the National Association of Realtors, was so enthusiastic about the new score’s potential that he predicted it would “make a real difference in the lives of millions of Americans who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores.”

Wow. Break out the champagne, right? Maybe not so fast. What nobody mentioned about the score, dubbed FICO Score 9, is that most homebuyers aren’t likely to see any direct benefit from it anytime soon, very possibly not for years.

That’s because the two dominant financing sources in the mortgage market — Fannie Mae and Freddie Mac — are not planning to use the new score in evaluating loan applicants for the foreseeable future. And major banks and mortgage companies aren’t jumping to adopt it either.

None of this detracts from the merit or potential value to consumers of FICO’s new score. The company says that by separating out medical debt-collection issues — which are commonplace negatives in millions of consumers’ credit files — from other types of collection actions, the FICO 9 model will more fairly rank the actual risks posed by some applicants compared with others. For borrowers whose sole major negative credit file account is an unresolved medical debt, Fair Isaac estimates the new model will increase scores by a median 25 points.

FICO 9 also is designed to more fairly treat applicants who have limited accounts on file with the credit bureaus — often young, first-time homebuyers or consumers who have made minimal use of credit cards and other forms of personal credit.

So on the surface, the advent of the new score is a big deal. But here’s the real world: New FICO score models only matter in the mortgage market if lenders choose to use them to evaluate applicants. And, based on my discussions with leaders in the mortgage field, FICO 9 is a long way off from adoption. It’s not likely to help many buyers anytime soon, despite the hype.

Start with Fannie and Freddie, the giant mortgage investors. Both use, and have confidence in, FICO scores from model changes dating between 2004 and 2008. Both tell me they are still in the process of evaluating whether to even use FICO 8, now 6 years old and the last big, consumer-friendly model change. Neither company can provide timelines on when even that set of earlier scoring advances will become part of their underwriting systems, much less FICO 9.

Major mortgage lenders feel the same way. Asked whether and when it planned to use the new FICO score, JPMorgan Chase, one of the highest volume lenders, declined to comment. Wells Fargo, the largest originator of home mortgages, also declined to predict when it might take a look at FICO 9, but said “our view is that credit decisions are more complex than a credit score alone.” Some bankers note that they already ignore or discount negative medical debt items on applicants’ credit reports and say a scoring change won’t have much of an impact on approvals and rejections.

Pete Mills, senior vice president of the Mortgage Bankers Association, said home loan industry adoption of the new score “will hinge on whether (Fannie and Freddie)” include them in their underwriting guidelines that are provided to lenders. Until then, Mills said, “we expect industry adoption to be limited.”

So why the general lack of urgency within the mortgage industry about using FICO’s ballyhooed new model? Among other reasons, it can cost substantial sums of money to re-tool complex automated underwriting systems, especially at Fannie and Freddie. Lenders have to weigh the costs and benefits. As one industry leader put it: “Will the relatively small improvements be worth the expense” and hassles? And with all the other regulatory changes mandated by recent financial reform legislation, do we have the time and manpower to devote to analyzing the effects of FICO 9?

The sobering answers for homebuyers appear to be no.

Kenneth Harney is executive director of the National Real Estate Development Center.

Read more Home & Garden stories from the Miami Herald

  •  
 <span class="cutline_leadin">On demand: </span>Most tankless water heaters come on only when they’re in use.

    Ask a plumber

    Heating water can be a ‘tankless’ job

    The pros and cons of installing a tankless water heater.

  •  
At just 10 inches deep, the Mill console table from CB2 is perfect for decorating an empty hallway ($299).

    Furnishings

    For small spaces, console tables are ideal

    Decorating a small space can be like packing for a weekend trip. There’s room for only the essentials, so every piece should be useful, versatile and worth its weight. If space is a commodity, the console table is one of the most valuable pieces on the market.

  •  
This sleek, mid-century Telechron clock is a handsome collectible.

    Treasures

    Telechron products known for style, design

    Q: I grew up in the 1960s and ’70s with this Lucite clock on a table in my parents’ bedroom. I recently found it in a storage unit of their things and am wondering how old it is, and the approximate value. It still works and has great sentimental value and now has a place of honor on my bedside table. Any information you can provide would be appreciated.

Miami Herald

Join the
Discussion

The Miami Herald is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere on the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

The Miami Herald uses Facebook's commenting system. You need to log in with a Facebook account in order to comment. If you have questions about commenting with your Facebook account, click here.

Have a news tip? You can send it anonymously. Click here to send us your tip - or - consider joining the Public Insight Network and become a source for The Miami Herald and el Nuevo Herald.

Hide Comments

This affects comments on all stories.

Cancel OK

  • Marketplace

Today's Circulars

  • Quick Job Search

Enter Keyword(s) Enter City Select a State Select a Category