This change in credit scores could help millions of people buy a home

A change in government could tip the balance for millions of “credit invisible” Americans and trigger hundreds of billions in mortgage loans.

In a rule change finalized last month, government-run mortgage giants Fannie Mae and Freddie Mac said they would accept mortgages underwritten with a credit scoring model that takes into account on-time rent payments.

VantageScore, The company behind the credit scoring system estimates that recording rent payment history will allow approximately 7.7 million Americans to raise their credit score above 620, potentially qualifying them for traditional mortgages.

Additionally, the company says this approach improves risk prediction by identifying up to 11% more defaults in the riskiest score ranges, potentially reducing the number of future defaults.

The change “could make a difference for a small but growing share of borrowers: freelancers, self-employed households, gig workers, or young people and immigrants with good, reliable cash flow but a thin credit base,” says Realtor.com® senior economist Jake Krimmel. “They are probably qualified as a whole, but not on paper under the current rigid, outdated system.”

This is what has changed

Fannie and Freddie buy entire loans from mortgage lenders to package them as collateral for investors, and the rules they set for qualifying “conforming” loans have a major impact on the market.

Director of the US Federal Housing Finance Agency William Pultewhich also oversees Fannie Mae and Freddie Mac, announced on April 22 that they were expanding a pilot to allow mortgage lenders to use VantageScore ratings to assess borrowers’ creditworthiness, in addition to or instead of traditional FICO 10T scores.

VantageScore is a scoring model developed by the three major credit bureaus, Equifax, Experian and TransUnion. They operate it through a joint venture called VantageScore Solutions LLC. The “trended data” takes into account the rent and utility payment history reported to the agencies.

Montana-based credit score mainstay FICO now also takes into account the positive and negative history of rental payments reported to the agencies in its FICO 10T.

In the announcement, Pulte described the change as a modernization of consumer credit. Late rent and utility payments can negatively impact credit scores, so the lack of a positive impact from payment history was “nonsense,” Pulte said.

The National Association of Realtors® and the Association of Mortgage Bankers welcomed the move as a modernization of credit reporting.

Tipping the scale for ‘credit invisible’

Last year, only about 13% of renters benefited from a positive rent payment history on their credit reports. California, Colorado and New York have already implemented rent reporting programs. Nine other states have considered legislation.

VantageScore Solutions believes nearly 7.7 million Americans would see a boost to their credit if the model were rolled out nationwide. And it also believes that data can better predict who will default and who will not.

The average credit score of young consumers increases by 67 points. But some grew by as much as 100 points, according to VantageScore chief economist Rikard Bandebo.

The model “enables borrowers to engage in responsible financial behavior that older credit scoring models currently overlook,” Bandebo said.

In a survey VantageScore conducted last year among 600,000 peopleshowed that about 10% of 77 million credit relevant tenants in the country would benefit from credit score updating. For these Americans, adding rent payment history would result in a score of at least 620, qualifying them for a mortgage under current GSE (Government Sponsored Enterprises) guidelines.

In fact, a fraction of these renters are “credit invisible,” meaning that outside of rental history, they have no credit at all by traditional measures. VantageScore used this data to estimate that there is a market opportunity of 2.1 million households and new mortgage volume of $777 billion.

At the same time, positive rent payment scores could indicate an 11% increase in defaults and a predictive increase of 3.7%. As Pulte said, the history of rent payments is indicative of the history of mortgage payments, giving banks a better idea of ​​a person’s risk.

Mortgage lenders are embracing the change

Pennsylvania-based mortgage lender Newrez, which made the first $10 million in loans using this data, found that the process could be very similar to the normal lending process, said Bob Johnsonhead of originations at the company.

That ‘confirmed’ the idea that a new credit scoring model can be applied using the same processes. Combined with “strong controls and underwriting discipline,” the new model provides a more holistic view of a person’s credit, Johnson said.

And it proved that Newrez’s first experiment, or “limited involvement,” is scalable.

“For consumers, the takeaway is simple: consistent on-time payment behavior across a broader range of obligations can now be reflected in a credit score in ways that were often not the case under older models,” Johnson said. “That is especially meaningful for borrowers with a thin file and previously unscorable.”

In one Called April 29Fannie Mae acting CEO Peter Akwaboah said the move would “support affordability and access through industry innovation and competition.” Fannie Mae provided $116 billion in liquidity to 385,000 households in the first quarter. It shared no further details on how it would integrate VantageScores.

An increasing number of mortgage companies have joined. Michigan-based United Wholesale Mortgage Announced April 29 for example, it would start accepting FICO and VantageScore. Secretary of Housing and Urban Development Scott Turner said this would follow “soon” with VantageScore usage.

Assessing potential risks

Economist Krimmel says modernizing credit scoring criteria in this way will help people on fixed incomes but who may have thinner credit histories.

“However, there is a risk,” he says. “FHA delinquencies have increased, although this may partly reflect the fact that these ‘right’ marginal borrowers are being left out while the wrong ones are slipping through.”

Yet the change is happening at a time when young people are overwhelmingly pessimistic about the housing market. They blame several factors, including a lack of housing supply for driving up prices. Given economic uncertainty and high interest rates, the lending formula is just one factor in the larger housing puzzle.

“However, the most important thing for downside risks is that the economic backdrop is somewhere between uncertain and unstable,” Krimmel said. “Policies that expand the credit pool are only as healthy as the labor market that supports them.”