Pending Agency Decision Could Stir Echoes of '08 Housing Crash
Heading into the midterm elections, consumer confidence in the economy is at its lowest point since the financial crisis of 2008, a historic calamity those old enough to remember are content to forget. What must not be forgotten are the causes that led to that horrendous economic meltdown: America’s housing and mortgage industries collapsing upon the cracked foundation of subprime lending and the failure of government-sponsored enterprises (Fannie Mae and Freddie Mac) to maintain proper margins of liquidity.
With inflation hitting a new 40-year high five months in a row, empty store shelves, and nationwide supply chain problems, the last thing we need is any additional news to agitate our nerves concerning the economy. Unfortunately, the Federal Housing Finance Agency (FHFA) may be offering up just that, with a looming decision that would upend a currently stable mortgage industry by reconfiguring the way credit scoring models are applied to lending decisions. This is a path we should all hope they decline to follow.
Specifically, the issue is whether FHFA will stick with allowing a single credit scoring model to be used in mortgages underwritten by Fannie and Freddie, or allow an unproven credit bureau-owned scoring model to permeate lending decisions. As I wrote last month, moving away from the current and highly stable single-score model accomplishes only one thing: introducing unnecessary risk and chaos into a housing industry still laboring under the consequences of the 2008 fallout.
Fresh from a series of “listening sessions” with dozens of industry stakeholders and public policy advocates, FHFA now holds all of the empirical data required to make an open-and-shut case against adopting multiple scoring models. FHFA themselves review alternative scoring models on a semi-regular basis, thoroughly testing the data and technology contained in each score and its application to sound lending criteria. It has yet to identify any model or series of models superior to the single-score in providing financial stability and expanding loan access to qualified borrowers.
In reaching this conclusion it follows that adding weaker models, such as those offered by the inherently conflicted credit bureaus, would impair stability in lending and open the door for more bad loans by careless or unscrupulous brokers, who could easily game the system or mislead borrowers with a three-card monte of confusing credit scoring data. Whether intentional or not, these inferior scoring models would green-light higher risk loans, which can wreak havoc on our banking system like a virus, which we should have been inoculated against by the lessons of 14 years ago.
Further, rubber-stamping other models comes with a mammoth makeover price — over $600 million by one estimate — with the potential to go much higher. The huge price tag of new software, exchange protocols, data verifications, compliance, and a host of other system changes — none of which offer identifiable benefits to consumers — will raise costs across the board. In the midst of a 30-percent increase in housing prices over the past two years, with a 10-percent increase predicted this year, does FHFA really want to put potential home buyers deeper in the hole?
Lastly it sends a terrible message for the FHFA and the administration to reward credit bureaus by adopting their costly and unproven scoring methods. Just this week, the CFPB cited one of the credit bureaus for violating a law enforcement order and fraudulently deceiving consumers.
In our divided political environment there are few “stop the presses” moments when groups from both the right and the left are in full-throated agreement regarding the dangers of a government policy. So when organizations as disparate as the National Taxpayers Union and the National Consumer Law Center plead with the FHFA to stick with the current single-score model to protect consumers and taxpayers, it speaks volumes.
Given the painful lessons of 2008 and the enormous financial insecurity millions of Americans currently face, a wholesale rewrite of mortgage lending models is both entirely unnecessary and incredibly precarious, especially considering the FHFA is tasked as the nation’s preeminent guard-dog to police financial risk and promote stability in mortgage lending. Government agencies typically don’t offer private industry choices on what standards of product safety or environmental quality to which they should be held. Subjecting mortgage lending to inconsistent and incompatible scoring models would be just as ludicrous — and potentially ruinous.
Right now, American consumers need reassuring economic news and signs of stability. By sticking with a single-scoring model the FHFA would broadcast stability in the housing market, while the adoption of unproven alternative credit scoring models conjures the image of a rickety Jenga tower. Let us hope the FHFA decision prioritizes lending stability, economic security, and consumer interests. By simply doing this, choosing to keep the current single credit score model in mortgage lending will be the easiest decision they could ever make.
Gerard Scimeca is an attorney and chairman of CASE, Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.
