By Jeff Lazerson | email@example.com | MortgageGrader.com | March 07, 2021
Millions of homebuyers are getting squeezed in the mortgage-making process thanks to outdated FICO standards used by Fannie Mae and Freddie Mac.
A common scenario goes like this: Applicant got great FICO scores off the credit card application and auto financing. So, why does the residential mortgage credit report deliver comparably lower FICO scores for the applicant who has a good, on-time bill payment history?
FICO is FICO. Right? Not really.
The reality is mortgage giants Fannie and Freddie continue to mandate the use of legacy FICO software from two decades ago rather than current credit standards used in auto and credit financing.
Lower FICO scores mean Fannie and Freddie get to stick it to you at the cash register. They use score ranges and down payment percentages (or equity percentages in the case of a refinance) for their pricing mandates. F & F use the lowest-middle FICO score for all borrowers as part of their risk assessment. Industry parlance calls this “loan level pricing adjustments.”
For example, 20% down with a middle FICO score between 700 and 719 means you get charged 1.25 points for the risk. Each point is 1% of the loan balance. So on a $400,000 loan, that’s a cost of $5,000 at 1.25 points.
That same 20% down with a middle FICO between 680 and 699 means a one-half-point increase to 1.75 points or a $7,000 risk charge. Drop it further to between 660 and 679 and the buyer is zapped for 2.75 points or $11,000 in risk. That’s a whopping $6,000 more compared with the 700 FICO-club borrowers.
Why don’t Fannie and Freddie flip the switch, mandating newer FICO versions?
“Because its government,” said credit expert John Ulzheimer of the Ulzheimer Group. “They are lazy and they don’t care.”
The Federal Housing Finance Agency, F & F’s regulator and conservator, did not respond to my query.
Updating its FICO standards doesn’t appear to be of importance to Fannie and Freddie. Instead, they put out a solicitation a year ago for credit scoring as the agencies consider adding competitors to FICO.
“Solicitation is the result of Congress passing legislation to encourage Fannie Mae and Freddie Mac to introduce competition to the credit scoring models,” said Francis Creighton, president and CEO of the Consumer Data Industry.
Some clients will use credit-boosting services to get their scores higher. One is Experian’s Boost software, which adds a customer’s on-time utility payments to their credit report by allowing it to track bank accounts and payments in real-time. Does this add-on feature help boost a legacy FICO score in eyes of Fannie and Freddie? Nope.
Right now, I have a borrower for which the lender required us to remove the utility bill on-time payment history via Boost. The scores remained exactly the same after removing Boost. Ulzheimer confirmed the current FICO mortgage software doesn’t consider any Boost accounts. That said, Boost may still be able to assist you with a better Experian FICO score for matters like auto loans and credit card interest rates.
Fannie and Freddie cannot contemplate their navels without permission from FHFA. But we do get the same old broken-record messages about their affordable housing focus, expanded homeownership, helping underserved applicants and the like.
How, in fact, are they helping expand ownership when old FICO standards are hurting would-be owners?
“Millions of potential minority homeowners are locked out of the system because of old FICO models being used,” said Jeff Richardson at VantageScore Solutions.
Richardson said the outdated FICO models also score about 40 million fewer consumers than new models, including some 10 million applicants who have scores of 620 or higher. Within that 10 million, he said, 2.4 million are either African-Americans and Hispanic.
“Using more inclusive and updated models could help millions of underserved borrowers,” Richardson said.
Ulzheimer explained that contemporary FICO scoring won’t ding you for certain items that show up on your credit reports, like low-dollar collections. The newer FICO scores “discount” unpaid medical collections but don’t completely ignore them.
“Paid collections are ignored,” he said.
That makes complete sense especially for folks trying to get on the road to homeownership. How many times did your doctor and health insurance carrier get into a spitting contest over one of your medical bills? Too often these disputes land on your credit report by way of a collection agency.
More importantly than the profiteering at your expense, shouldn’t FHFA want the most up-to-date predictive modeling insights about how truly risky you are — along with your most likely continued ability-to-repay?
If you are righteously less risky, then why punish you with potentially higher mortgage rates and costs that will make your monthly mortgage burden tougher-tougher for a very long 360 months? The American taxpayer ultimately foots the bill on those failed mortgages.
Freddie Mac rate news
The 30-year, fixed-rate averaged 3.02%, 5 basis points higher from last week. The 15-year fixed-rate averaged 2.34%, unchanged from last week.
The Mortgage Bankers Association reported unchanged mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $81 more than this week’s payment of $2,317.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 2.125%, a 30-year conventional at 2.75%, a 15-year conventional high balance ($548,251 to $822,375) at 2.25%, a 30-year high balance conventional at 2.875% and a jumbo 30-year fixed at 3.25%.
Note: The 30-year FHA conforming loan is limited to loans of $477,250 in the Inland Empire and $548,250 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year fixed rate at 2.5% with two points cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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