FHFA Credit Score Changes - Illusion Vs. Reality

The announcement by FHFA makes it clear, the ability of a consumer to qualify for a loan has just improved. On the surface these changes can and will have a positive impact for some consumers.  I have no doubt that the “buzz” created by FHFA’s announcement may get some consumers off the fence and to pursue homeownership – which is exactly what the market has been asking for.  Especially on the heels of interest rates becoming unbearable in the range of 7.250%+ on a 30-year fixed. The timing of FHFA’s announcement brings a new ‘attention getter’ to the market. However, will these changes be enough to generate interest in homeownership that was originally intended?  The answer is - Time will tell.

The Key Changes FHFA Announced Include

• Mandates that both Fannie Mae and Freddie Mac will use one LLPA grid for Classic FICO and VantageScore 4.0 on conventional mortgages.

• The previous pricing haircut for loans where the VantageScore 4.0 model was used and equaled 20 basis points is no longer in place. Depending upon a lenders pricing strategy, and MBS coupon execution, that change can be up to ¼% rate improvement for the consumer.

• Fannie Mae requires the use of DU Version 12.1 when using the VantageScore 4.0 model. Are your systems ready?  

  
  

The Illusion Still Needs to Play Out

• Lender, Correspondent Aggregators and MSR Buyer’s do make their own rules:

  • The unknown is how Lender’s and Correspondent Aggregators will address and implement their own credit risk and loan pricing overlays.

  • Mortgage Servicing Right values paid by Correspondent Aggregators, Co-Issue, and Bulk MSR participants has yet to be seen.  Since borrower credit scores are a predictor of past and future payment patterns, it is inevitable MSR values can and will change.

• The investor market – those that “hold the gold” and create the market tie their pricing models upon the projected long-term performance of the MBS, and the associated delinquency and foreclosure rates has yet to-be-determined.

  • It’s likely that pricing will be adjusted for “Specified Pools”, a long-standing positive pricing execution model which lenders are dependent upon for higher income streams.  

  • Over time, a Lender’s loan origination characteristics and performance is tracked by the market. In the case of Fannie Mae, a Special Feature Code of 067 is now required when the VantageScore 4.0 model has been used. These future predictors have the potential to be used for pricing changes beyond LLPA’s, such as guarantee fee levels.  

    
    

The Reality Facing Lenders Now

Unless your firm has a savvy Capital Markets team, you may be ill-equipped to manage the inevitable arbitrage that was just created for the Loan Officer’s at point of sale.

• The use of the VantageScore 4.0 model can be driven by the Loan Officer. Will a mindset develop where the VantageScore 4.0 model is now heavily used, simply due to the press associated with its benefits? In other words, a path of least resistance now exists.

• How will Capital Markets encourage the use of all credit models?

• The yet-to-be-determined guidelines for Fico 10T and use will add another layer of complexity at POS, Capital Markets execution and Operational impacts.  

  
  

Operational Chaos Ahead!  

Your team will be counting on your leadership to help them navigate these impending challenges operationally, with both transparency and collaboration. The impact will be significant on multiple levels.

• Required changes to your POS and LOS applications and workflows.

• Development of loan tracking that goes deeper, identifying the credit score model used and WHEN IT changed from one score to another to get a loan approved.

• Training now goes deeper:

  • Consumer disclosures and communication

  • Potential pricing and loan program changes

  • Underwriter perception may impact conditions to clear

  • Quality control methodology, what to look for in loan defect rates

• Quality Control samples and reporting – have you thought about how your firm will have an appropriate Pre-funding and post-closing sampling for each credit score model?  

• Projected income streams can change based upon pricing and MSR values, based upon the credit score model utilized.

While the ability to use more than one credit score model is beneficial for the consumer, those who are experienced in this business know that the real ability to responsibly execute resides within your team. Are you ready?

Luana Slettedahl, Partner with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements.  Her understanding of how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com