by Patsy Writesman
Could the Federal Housing Finance Agency’s Director Bill Pulte be making decisions that will destabilize the U.S. housing market and lead to another financial crisis? That’s what many right-of-center organizations are warning.
Groups like Grover Norquist’s Americans for Tax Reform which joined 34 other conservative advocacy groups to urge the Federal Housing Finance Agency Director Bill Pulte to proceed with caution on credit scoring decisions and the U.S. housing market. The concern is simply how Director Pulte unilaterally implemented via Tweet a Biden administration proposal to allow untested VantageScore 4.0 in conjunction with widely known, accepted and tested FICO score.
Allysia Finley with the Wall Street Journal is questioning why Director Pulte is continuing a Biden administration push for “inclusive” credit scores that could inflate credit scores and issue in another housing bubble. Almost 20 years after the last housing crisis, FHFA is creating new perverse incentives that will inflate credit scores and lead to riskier lending practices.
The issue is the nation’s top three credit bureaus created their own credit score called VantageScore and got it pushed through without proper analysis. As noted in the Wall Street Journal, “VantageScore advertised its credit-scoring model as more “inclusive” than FICO because it used utility, rent and telecom payments. That meant borrowers who had never used credit cards or taken out loans could score relatively high. “By scoring more individuals from minority and lower-income backgrounds, VantageScore 4.0 can help bridge a homeownership gap that has persisted for decades,” the company claimed.”
Unfortunately, the largely untested VantageScore 4.0 does not create as holistic of a picture of a borrowers’ credit worthiness. When given the option of two credit scores, lenders are incentivized to pick the credit score that lets them make the biggest loan possible without appropriately vetting the borrowers.
These home mortgage lenders who bundle up mortgages and sell them off as securities to larger investors do not hold the risk. This is déjà vu all over again from 2008.
Additionally, FICO has a new 10T score that is not yet approved by FHFA, but the untested VantageScore 4.0 is. The market needs clear communication, guidelines and stability, not uniliteral decisions made by Director Pulte on social media. Independent analysis done by National Taxpayers Union echoes these concerns.
And, Director Pulte, according to a Housing Wire article, acted against the GSEs’ (Fannie Mae & Freddie Mac) recommendation. Open records requests show that the GSEs did not recommend approving two scores including VantageScore 4.0, but rather just the approval of FICO 10T. “It appears safe to assume that the GSE approved score (FICO 10T) must have outperformed the unapproved score (VantageScore 4.0) when subjected to independent testing and validation. So why move to a lender-choice model?”
Economic Douglas Holtz-Eakin, President of the American Action Forum similarly noted in a recent piece, “Giving the lenders a choice between FICO 10T and VantageScore 4.0 means that they will choose the score that makes the buyer look best. This will qualify weaker borrowers than otherwise would be the case.”
“This increased uncertainty in mortgage finance is the bad news in the announcement. It is compounded by the fact that VantageScore 4.0 is owned by the credit bureaus, whose incentive to underprice the product can be subsidized by the necessity of getting the credit bureau data. There are lots of other questions regarding the nuts and bolts of implementation of the announcement. But even at this juncture there are good reasons to be concerned about the outlook for the mortgage market,” Holtz-Eakin continued.
Where do we go now? The truth is Congress should be looking into how and why these decisions were made and exert their authority to bring more accountability to Director Pulte and decisions made by the FHFA, especially when it means implementing policies started under the Biden administration.
Tennessee’s U.S. Senator Bill Hagerty serves on the Banking, Housing and Urban Affairs Committee along with Congressman Andy Ogles and Congressman John Rose who both serve on the House Financial Services Committee. These committees should use their oversight authority over these housing finance and banking issues to ask tough questions of Director Pulte and the Federal Housing Finance Agency and bring more accountability, transparency and stability to decisions surrounding changes to housing finance and implementing riskier loans on untested models like VantageScore 4.0.
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Patsy Writesman is a nationally recognized health care speaker, consultant and owner of ManageHealthCareCosts.com
