Proposed Changes to Fannie Mae & Freddie Mac May Help More Americans Purchase Homes
A bi-partisan bill was re-introduced this year that would allow Government-sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, to use other credit scoring models besides FICO. For decades, the GSEs have been mandated to use FICO scores to determine credit worthiness. It does not consider consumer data such as utility and rent payments when determining a score.
The “Credit Score Competition Act” would allow GSEs to use alternative, verified scoring models such as VantageScore. This is welcome news to Barrett Burns, president and CEO of VantageScore Solutions:
“Along with a broad coalition of housing and business advocates, we support and applaud the leadership of Senators Tim Scott and Mark Warner who today introduced the bipartisan Credit Score Competition Act in the United States Senate. No single company should have a government-sanctioned monopoly, especially when there are millions of consumers that are negatively impacted. Infusing competition into this integral area will improve fairness, transparency, and inclusiveness without compromising on standards. Allowing each lender to choose the credit scoring model best for its business is in the short- and long-term best interest of the housing finance industry and the consumers they serve.”
This is also good news for first-time homebuyers because different scoring models can be used that deem the homebuyer to be “credit-worthy” where FICO may not. Some consumers do not have traditional lines of credit such as student or auto loans. Although a consumer may have a history of on-time rental payments and utility payments, they are “credit invisible” when using the FICO scoring model. In a joint statement with the bill’s co-sponsor, Senator Tim Scott said his proposal would benefit consumers while keeping good standards of creditworthiness.
“Homeownership is a huge part of the American Dream, and I want to help folks across the country accomplish that goal. The current credit scoring model at the center of our housing market overlooks a large swath of people that are paying their monthly bills on-time and deserve an opportunity to pursue homeownership. This is an opportunity to make our system more fair for everyone without lowering the bar for qualification.”
During a US Senate hearing, Granger MacDonald, the chairman of the National Association of Homebuilders, said that the GSEs need to use a system that’s “transparent” so that all consumers know how their credit score is derived:
“So you know what to do and how to improve it. How to work with it. How to work toward having good credit. Good credit shouldn’t be an accident – it should be something you work at as a goal and if you understand the rules that you’re playing by, it’s a lot easier to play the game.”
If and when the legislation passes, the homebuying market will be open to more consumers. By allowing GSEs, Fannie Mae and Freddie Mac, to use other credit scoring models other than FICO, the GSEs will be able to approve more first-time homebuyers based on their credit history. In the end, the competition between credit scoring models will offer consumers more opportunities to “live the American Dream” and own their own home.