Heading to Another Mortgage Crisis?
By Boyd Allison, Retired Banker
This is worth paying attention to. Housing regulators are quietly overhauling the credit scoring models behind Fannie Mae and Freddie Mac, and the stakes are high. The Government-Sponsored Enterprises backstop more than half of America’s $15 trillion mortgage market, and any erosion in loan quality ultimately falls on taxpayers.
A recent article from the National Taxpayer’s Union raised the alarm:
Taxpayers have a clear stake in ensuring that financial risks are measured accurately and consistently in the lending programs they ultimately back. Credit scores are central to that effort, serving as a common benchmark for evaluating borrower creditworthiness across the system. Last week, however, housing regulators signaled a break from past practice—raising fresh questions about how these changes could affect the safety and stability of the nation’s housing finance infrastructure.
The Department of Housing and Urban Development announced it will adopt the FICO 10T and VantageScore 4.0 models for Federal Housing Administration (FHA) loans, describing the move as “an important milestone” in credit score modernization. At the same time, the Federal Housing Finance Agency (FHFA) unveiled a pilot program permitting the exclusive use of VantageScore 4.0 for loans sold to Fannie Mae and Freddie Mac, with plans to incorporate FICO 10T and adjust pricing based on the updated models.
It is important for FHFA and FHA to proceed carefully. The Government-Sponsored Enterprises (GSEs) backstop more than half of America’s $15 trillion mortgage market, and even a small degradation in mortgage quality can spell trouble for its balance sheet, and ultimately taxpayers. We’ve often warned that adding multiple scores could lead to rateshopping and a “race to the bottom” effect where firms devalue the actual risk of the score to secure revenue. Should such a course of events take place again, firms would have an incentive to make the most loans instead of striving to provide the highest reliability.
As South Dakotans, we’ve seen what happens when lending standards slip. NTU gets it right here…Congress needs to pump the brakes before this gets away from them.