Economy & Budget

When it comes to credit scores, safety and soundness should be the primary goal

Both parties have long fought for policies that advance affordable homeownership. In 1983, President Reagan said, “Home ownership is an essential part of the American dream.” And, in 1995, President Clinton proclaimed that “[t]he objective for young people…to be able to own their own home and to start a family…is a worthy objective.”

It should come as no surprise then, that today, still in the shadow of the Great Recession predicated on a housing crisis that economically devastated whole regions around the country and stunted the earning potential and homeownership ability of an entire generation, there is temptation to have the federal pen restore what was lost.

{mosads}Currently, mortgages purchased or securitized by Fannie Mae and Freddie Mac (the GSEs) require that the lender obtain a FICO credit score. In 2014 alone Fannie Mae purchased over 2 million mortgages, while Freddie Mac purchased well over 1 million that same year. With each of these mortgage purchases representing one or more homebuyers, credit score policies affect millions of borrowers each year and act as the de facto standard for the mortgage industry.

The Federal Housing Finance Agency (FHFA), which regulates the GSEs, is in the process of evaluating alternative credit scoring models that would potentially alter the credit scoring processes used by GSEs and the lenders from whom they purchase loans. The issue at hand is whether the FHFA should accept a wider selection of credit scores. Some credit score providers claim that their models will expand credit access to tens of millions of Americans who currently have limited credit histories. These same claims suggest that more credit scores mean more credit availability, and therefore, increased homeownership rates.

While increasing homeownership rates is a worthy goal from both sides of the aisle, there should be serious consideration of possible negative repercussions that might come from loosening credit standards just to give credit scores to the previously unscorable.

As with all government processes, the FHFA should regularly evaluate their standards and procedures and decide whether to implement new technology. Considering the vast impact the GSEs have on millions of homebuyers, taxpayers, and the economy, they should be using the most efficient tools at their disposal. H.R. 4211, legislation introduced last December, focuses precisely on this issue. It aims to create a process for review, not unlike the one currently in place at FHFA, that would review and consider alternative credit scoring models, and publicly detail the evaluation process it uses to determine which credit scoring models to use. Unfortunately, some supporters of this bill and of alternative credit scoring methods appear to be pushing FHFA to lower its standards in an effort to score the unscorable, which raises real credit risk concerns.

With memories of the housing crisis still fresh, FHFA leadership should not be pressured to adopt new scoring models that promise to expand access to credit at the expense of loosening standards that would raise safety and soundness concerns. Just last week, Freddie Mac announced that it was already loosening its borrowing standards. Do we need to go even further? Weak mortgage origination and risk management processes were after all a major cause of the recession and housing meltdown.

Relaxing credit standards carries real risk, not only to the housing market, but to the economy as a whole. Homeownership will always be a pillar of the American dream, but only if we keep our standards consistent and reliable. The last time lending standards were relaxed was in the early 2000s, and, as the Financial Crisis Inquiry Commission reported, “Lending standards were lax enough that lenders could remain within the law but still generate huge volumes of bad mortgages.”

Mel Watt and the FHFA have an important and far-reaching decision before them, and they should allow the current evaluation to conclude before rendering a final verdict. Updated credit scoring models could be a step in the right direction, but only if their benefits and accuracy are tested and proven. FHFA must continue to focus on safety and soundness in order to prevent a future housing crisis and continue to carry out their mission of strengthening and securing the United States mortgage market.

Ms. Milloy is Financial Services Policy Director at the American Action Forum, a center-right think tank based in Washington, D.C.

The views expressed by authors are their own and not the views of The Hill.


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