April 15, 2022
Heading into the midterm elections, consumer confidence in the economy is at its lowest point since the financial crisis of 2008, a historic calamity those old enough to remember are content to forget. What must not be forgotten are the causes that led to that horrendous economic meltdown: America’s housing and mortgage industries collapsing upon the cracked foundation of subprime lending and the failure of government-sponsored enterprises (Fannie Mae and Freddie Mac) to maintain proper margins of liquidity.
With inflation hitting a new 40-year high five months in a row, empty store shelves, and nationwide supply chain problems, the last thing we need is any additional news to agitate our nerves concerning the economy. Unfortunately, the Federal Housing Finance Agency (FHFA) may be offering up just that, with a looming decision that would upend a currently stable mortgage industry by reconfiguring the way credit scoring models are applied to lending decisions. This is a path we should all hope they decline to follow.
Specifically, the issue is whether FHFA will stick with allowing a single credit scoring model to be used in mortgages underwritten by Fannie and Freddie, or allow an unproven credit bureau-owned scoring model to permeate lending decisions. As I wrote last month, moving away from the current and highly stable single-score model accomplishes only one thing: introducing unnecessary risk and chaos into a housing industry still laboring under the consequences of the 2008 fallout.
Fresh from a series of “listening sessions” with dozens of industry stakeholders and public policy advocates, FHFA now holds all of the empirical data required to make an open-and-shut case against adopting multiple scoring models. FHFA themselves review alternative scoring models on a semi-regular basis, thoroughly testing the data and technology contained in each score and its application to sound lending criteria. It has yet to identify any model or series of models superior to the single-score in providing financial stability and expanding loan access to qualified borrowers.
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