Credit Score Evaluation Deviates from Congressional Intent
The Federal Housing Finance Agency has solicited a four-option credit score proposal that deviates from Congressional intent and threatens to harm taxpayers by exposing government-backed Fannie Mae and Freddie Mac to risky mortgages. As inflation surges and interest rates on mortgages are continuing to rise, implementation of a singular, accurate, and cost-efficient credit score model for the secondary mortgage market is essential to ensuring that homebuyers continue to have housing options now and in the future.
Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act did not authorize FHFA to consider four separate options to determine which credit scoring models to use for borrowers when Fannie Mae or Freddie Mac (the enterprises) purchase a mortgage loan. The four options FHFA is considering are whether (1) to use one credit score model (2) require two scores for every loan (3) allow lenders to choose the credit score or (4) use a “waterfall” approach that establishes tiers of credit scores. The FHFA is only supposed to ensure the enterprises conducted the credit score validation and approval processes adequately. This diversion from Congressional intent is unlawful and will likely spur future litigation.
Congress intended the enterprises to use the proper credit scores to limit taxpayer exposure to risky mortgages. Among other factors, Congress directed the enterprises to validate and approve a credit score model that both satisfied “minimum requirements of integrity, reliability, and accuracy” and possessed “a historical record of measuring and predicting default rates and other credit behaviors.” Congress intended for the enterprises to adopt a credit score model that could accurately determine the level of risk for mortgage borrowers. Statute did not intend for FHFA to offer a menu of four combinations to choose from.
Taxpayers will pay the price of any defaulted mortgages that are on the enterprises’ balance sheets. Fannie Mae and Freddie Mac collectively own over $7 trillion of mortgage loans in the U.S — over half of all outstanding mortgages. Under FHFA Director Mark Calabria, the enterprises reduced risk and attempted to reduce the amount of taxpayer losses. Under Biden-appointed FHFA Director Sandra Thompson, the enterprises will return to taking on additional unnecessary risk that is reflective of the risk exposure that induced the 2008 financial crisis.
One uniform and validated credit score model would mitigate losses should borrowers be unable to make mortgage payments or even default. Allowing the usage of multiple credit scores or a tiered framework could make it easier for the enterprises to purchase additional mortgages that carry more risk than others. This exposes taxpayers to higher risk and greater chances for losses.
FHFA has admitted that allowing the submission of multiple scores is more expensive and more difficult to implement than usage of a single score. Usage of multiple scores could cost more than $600 million, or a couple hundred million dollars more than if the enterprises stuck to a single score. FHFA also pointed out it could take an extra year to implement multiple score models over a single score model.
The enterprises are highly leveraged and need to minimize additional costs as much as possible.
FHFA’s contemplation over the four different credit score options should be simple — go with a single score that will save taxpayer dollars.
A cost-benefit analysis should also be presented to stakeholders prior to implementation of the validated credit score model. Homebuyers, lenders, investors, and mortgage insurers all need to understand the effects FHFA’s final decision. Transparency will also give Congress a better sense of the additional cost to their constituents and the need for any future reforms.
To limit the enterprises’ losses on mortgage defaults, and by extension losses borne by the taxpayer, FHFA needs to rescind its four-option proposal and stick to one credit score model. Remaining in line with Congressional intent will ward off threats of lawsuits and further reduce potential losses that taxpayers will inevitably have to bear. While the enterprises remain in conservatorship, taxpayers need to be put first when reforming the secondary mortgage market. Anything less would be a slight to American citizens and the very foundation of our democratic republic.
Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.
