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Things to Know About Evaluating Credit

Orion’s brokers know that FICO credit scores played a critical role in determining homeownership for many Americans, but regulators and lenders recently opened the door to using rival Vantage Score, a joint venture by credit-reporting firms Equifax, Experian, and TransUnion, for their mortgage underwriting decisions. What does it mean for our broker’s borrowers?

The Trump Administration says the credit-score change will make it easier and cheaper to get a mortgage. But so far, the market is seeing the score changes as increasing risk, and there are early indications that it is leading to higher interest rates on some mortgages.

The FHFA (overseen by Bill Pulte), Fannie Mae and Freddie Mac all said in statements that the changes would modernize the credit-scoring system, making it more predictive, and create a safer and sounder market. Pulte directed Fannie Mae and Freddie Mac to approve all lenders to use VantageScore 4.0.

Orion’s brokers know that Freddie and Fannie don’t base the decision to purchase a loan on credit score. The grids determine the fees Fannie and Freddie charge based on borrowers’ credit score and loan size compared with the value of the house they are financing.

The administration is now adding VantageScore to the equation. One iteration, released in early September, treated the scores as different. For instance, a 720 VantageScore should be thought of as a 700 FICO, the grid showed. Then, at the end of September, Pulte erased that differential. He announced there would be one set of pricing grids that treat FICO and VantageScore equally. But FICO and VantageScore credit scores are calculated using different algorithms and with different data. In general, the FICO score that has long been used for Fannie and Freddie is a tougher bar for consumers to clear. For example, it requires that consumers have a lengthier credit history (about six months) than the VantageScore version.

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So far, the market isn’t treating the scores as equal. Mortgage-bond investors who buy bonds from Fannie and Freddie are now worried about their own models and ‘if they are being compensated for risk,’ said Scott Buchta, head of fixed-income strategy at investment bank Brean Capital. An analysis by Milliman found that during the pilot period, borrowers with similar credit score ranges were charged a higher interest rate (up to 0.2 percentage point more) when their loans were originated using VantageScore instead of FICO.

Orion’s management and Account Executives are watching developments in the credit sector closely, as they impact our brokers an your valued clients.

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