Fannie Mae & Freddie Mac: Crucial Credit Update on the Horizon!

Exciting changes are on the horizon for the mortgage market, as key players begin to embrace modernized credit scoring systems. However, the big question remains: will these changes unfold as planned by next year? The timeline is still uncertain.

In a bold move, two major government-backed mortgage investors are set to phase out their traditional credit score models and transition to more sophisticated metrics by 2025. Yet, with the possibility of a new Trump administration potentially reshaping their operations, the fate of this plan hangs in the balance.

Experts in the consumer finance sector are optimistic that Fannie Mae and Freddie Mac won’t backtrack on updating their outdated metrics, especially given the bipartisan support for this initiative. This legislative mandate is unlikely to be disrupted, regardless of who occupies the White House.

“Halting progress at this juncture would be illogical, no matter the political climate surrounding Fannie and Freddie,” says John Ulzheimer, a credit scoring veteran and expert. “This isn’t a hot-button political issue — it’s about making sound financial decisions.”

Anthony Hutchinson, Senior Vice President of Industry and Government Relations at VantageScore, echoes this sentiment. He anticipates that the momentum toward score modernization, as outlined in the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, will not only continue but may actually accelerate.

However, there are dissenting opinions. Some view this initiative through a politically charged lens, suggesting that a shift in administration could derail these efforts. “I believe a Trump administration would aim to dissolve what they might consider a convoluted process,” notes an industry analyst, hinting at potential legal challenges to the current plan.

Should the new administration wish to uphold the original legislation while also marking a departure from the current strategy, it could adopt a new approach. Terry Clemans, Executive Director of the National Consumer Reporting Association, advocates for a competitive landscape where Fannie, Freddie, and their regulators regularly evaluate credit metrics to “pick a winner” rather than adhering to a rigid plan.

The lack of competition in credit scoring has contributed to rising costs, as Clemans points out. In response to this need for change, VantageScore emerged as a viable alternative to the traditional FICO model.

Currently, both VantageScore and FICO’s modernized scores are making headway in the mortgage sector, with increasing voluntary adoption across the industry. The Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, is expected to play a crucial role in this transition.

During a recent Mortgage Bankers Association meeting, Adrianne Todman, Acting Secretary of the Department of Housing and Urban Development, expressed readiness to act in alignment with FHFA’s plans. Additionally, FICO has announced that its new 10T score is already being utilized to underwrite loans in a Ginnie Mae-backed securitization — a significant step forward.

In an encouraging turn, borrowers are now securing better loan terms thanks to the 10T score, which outperforms classic scoring models. This shift highlights the potential benefits of embracing modern credit scoring methodologies.

Meanwhile, VantageScore continues to see increased interest in its 4.0 model, touted as the fastest-growing credit score model in its history. Senior Vice President and Chief Data Scientist, Andrada Pacheco, emphasized that offering transparency in the model’s components further empowers lenders in their risk assessment processes.

As the mortgage landscape evolves, companies working with Fannie Mae and Freddie Mac have long sought better access to data to build confidence in these advanced scoring systems. Some data from VantageScore is now available for credit score analysis, paving the way for a smoother transition.

Looking ahead, if a second Trump administration takes shape, it may endorse a framework that allows mortgage companies to choose their preferred credit score for use in the government-sponsored enterprise (GSE) market. However, achieving such changes will require significant influence from the credit reporting industry.

Another potential shift on the table is the option to use two credit reports instead of three for mortgage applications. Although this plan aims to foster competition and reduce costs, it remains a non-mandatory option.

“It appears we will continue with the three-report process for now,” states Curtis Knuth, CEO of S1/Service First Information Solutions LLC, highlighting ongoing debates over the merits of reducing the number of reports.

Naa Awaa Tagoe, Deputy Director for the FHFA’s Division of Housing Mission and Goals, acknowledged the importance of thoroughly assessing any shifts to ensure they don’t introduce biases into the reporting process.

As the mortgage industry grapples with traditional credit reporting practices, there’s a growing sense that these antiquated methods may soon be challenged by the policies of GSEs that dominate the market. “The agencies have faced minimal scrutiny for the delays in modernizing their practices, leaving them trailing behind other lending sectors,” Ulzheimer asserts.

This is a pivotal moment for the mortgage industry as it stands at the crossroads of innovation and tradition. The future of credit scoring is ripe with potential — will we see a bold leap forward, or will we linger in the past?