Almost exactly eight years ago, President Donald Trump signed legislation that helped create credit scoring competition by way of the Economic Growth, Regulatory Relief and Consumer Protection Act.
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Last week, VantageScore, one result of that act, finally went live in a pilot program with 21 lenders, offering a direct competitor to the longstanding FICO credit scoring system used in mortgage applications.
What does that mean for you? Those 21 lenders are running two sets of credit reports from the three bureaus: Experian, TransUnion and Equifax. One using FICO credit scores and the other VantageScore, for a total of six different scores.
If it’s a married couple, borrowers are looking at four sets of reports. Oy vey, that’s a lot.
Both FICO and VantageScore have a credit score range from 300-850.
VantageScore is broken down into four categories: subprime (300-600), near prime (601-660), prime (661-780) and super prime (781-850).
FICO scores are broken down into five categories: poor (300-579), fair (580-669), good (670-739), very good (740-799) and super prime (781-850).
Keep in mind that we are looking for the highest middle credit score for the consumer’s advantage. Those scores may be different depending on the algorithm used by each company.
For example, say FICO’s three scores are 800, 750 and 775. VantageScore’s are 795, 785 and 775. The highest middle score is from Vantage at 785 compared with FICO’s 775.
Now, here’s where things get a little goofy.
Lenders are being directed to reduce the VantageScore by 20 points before comparing it with the FICO scores or pricing out the loan.
In the previous example I cited, the VantageScore values of 795, 785 and 775 would be lowered by lenders by 20 points EACH: 775,765, and 755 respectively. So now, FICO would have higher scores of 800, 750 and 775. Pretty confusing.
Why this odd mandate? My best guess is VantageScore likely has a statistically higher scoring system than FICO. And trying to line up these two scoring models is like trying to put square pegs in round holes.
The Federal Housing Finance Agency — the regulator and conservator for Fannie and Freddie — did not respond to my queries on whether it directed the 20-point drop instructions and why.
Another goofy point: It’s the lender, not the consumer, who decides which credit scoring model is used — VantageScore or FICO.
Naturally, you’d think the lenders are on your side. Hopefully, most would choose the scoring model with the highest middle credit score of the borrowers.
But what happens when someone has a low middle credit score — say, 679? Some unscrupulous mortgage loan originator might want to push the borrower toward FHA financing. This tactic might not be the best avenue for the consumer, but the lender earns more money on the FHA financing. This is known as adverse selection.
That’s why the borrower should be empowered, not the lender, to choose.
As an aside, FHA has also adopted the VantageScore.
Perhaps the best beneficiaries of the VantageScore addition are aspiring homebuyers with little or no credit history. In industry parlance, we call this “a thin file.”
VantageScore claims it can score roughly 33 million more consumers than FICO by incorporating alternative credit like rent, utilities and phone bill payments through its more inclusive credit scoring model. With just one month of credit, a score can be generated.
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We finally have a credit scoring platform that rewards consumers who are not addicted to credit.
Finding a lender
The FHFA has not published the list of 21 mortgage lenders, but it’s common knowledge that the likes of Rocket Mortgage and United Wholesale Mortgage, two of the nations’ largest mortgage lenders, are in the pilot project. So, if you are curious, take a gander at them. Full disclosure: my firm Mortgage Grader does business with Rocket.
Those 21 lenders sell their conventional mortgages to Fannie Mae and Freddie Mac. Remember, Fannie and Freddie don’t make loans. Rather, they purchase closed loans from mortgage lenders and sell them to investors in something called mortgage-backed securities.
I don’t know if this is goofy or not, but after all that, the credit scores have nothing to do with the decisions to approve or deny credit. Fannie and Freddie look at tradelines for their credit decisions, not credit scores. Tradelines are found within a credit report and use the numbers 30, 60 and 90 days late to indicate how a borrower is managing their debt.
The scores are focused on the consumer mortgage pricing as part of a larger pricing mechanism. Yes, we must have credit scores, but obviously, not for the reasons you might think.
Here’s something else to consider.
Credit reports with credit scores have become ridiculously expensive. Many are in the $125 to $150 range — each. So far, the highest credit report fee I’m aware of is $360 for a married couple. That’s crazy expensive if you consider that each lender pulls their own credit reports.
Similar to how the Veterans Administration caps fees on appraisals, for example, the FHFA should put a mandatory cap on the cost of the consumer-paid credit report.
Options are always good, even if it’s the lender that controls the options. Upfront, the borrower should ask the potential lender exactly how they handle the tandem credit scoring models.
Make sure the lender is looking after your interests by optimizing the results with the best available middle credit score.
Freddie Mac rate news
The 30-year fixed rate averaged 6.53%, 2 basis points higher than last week. The 15-year fixed rate averaged 5.87%, 2 basis points higher than last week.
The Mortgage Bankers Association reported an 8.5% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $199 more than this week’s payment of $5,280.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625 %, a 15-year conventional at 5.5%, a 30-year conventional at 5.99%, a 15-year conventional high balance at 6% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.375% and a jumbo 30-year-fixed at 6.375%.
Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.625% for the first five years payments, and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].
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