Homeownership—one of the core components of the American dream—is in trouble. Akin to speeding towards a cliff without brakes, America is facing some of the lowest rates of homeownership in 50 years. Meanwhile, the federal government continues to maintain the status quo regarding the credit scoring models that are permitted to usher consumers to the “doorstep” of underwriting approval. The homeowner demographics are changing significantly, but the credit scoring models have not, resulting in the disenfranchisement of potentially millions of Americans.
The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, own or guarantee more than half of the conventional mortgages in the United States. They are currently required to use only scoring models from a single credit scoring entity—FICO—when it comes to screening applicants for eligibility and pricing. Those credit scoring models have remained largely static for nearly 20 years, failing to incorporate modern credit scoring data that works to provide a fuller and more accurate picture of a consumer’s creditworthiness. This excludes millions of consumers from accessing homeownership. New entrants, such as VantageScore, have campaigned for years to compete, arguing that more modernized credit models are critical, but the GSEs’ policy continues to uphold a government-sanctioned monopoly for FICO.
The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, has taken a step in the right direction, recently concluding an RFI event on mortgage credit scoring standards to determine whether to use an updated FICO model (FICO 9), the VantageScore 3.0 model, or a combination of the two. One thing is for certain, however: one of the most effective ways to guarantee a rebound in American homeownership is to nurture credit scoring competition, a solution that is right at our fingertips.
Providing lenders with the option of deciding which brand to use (with practical constraints to avoid “score shopping”) would give credit scoring companies a reason to continue innovating while ensuring scores accurately reflect the ever-changing needs and demographics of America’s future homebuying population. This is especially critical because the Harvard Joint Center for Housing Studies has forecast that approximately 75 percent of new household formations in the period 2015-2035 will be undertaken by minorities, who are often disadvantaged by current scoring models.
America was constructed by those who were given the opportunity to reap the bounties of their hard work, building equity in a home and wealth for their families. Just as competition works as a positive force in nearly every other element of our economy, it should also work to remove the barriers that are holding back the next generation of prospective homeowners from achieving what is core to all Americans: the opportunity for sustainable homeownership.