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Will the new FICO scores make a difference?

by MPA | Sep 04, 2014
By Tracy Becker
Special to MPA

The new FICO 09 score will become available in the fall of 2014. But just because the new model is sold online by the myfico site as well as being available to mortgage lenders, doesn’t mean it will be used by the mortgage industry. For lenders, switching to a different FICO score is a complicated risk.

Lenders who decide to try the new FICO version will go through a testing process before they decide whether to adopt them. Barry Paperno, who worked at FICO for many years, explains:

“(Lenders) begin to test it on their portfolios through a process called ‘validation’ to help determine when, and if, they choose to go with the new score,” he says. “Briefly, validation consists of looking at past credit decisions and customer credit performance using both the FICO version used in the initial decision and a ‘what if’ scenario using FICO 9. If, from this analysis, it looks like FICO 9 would have done a better job of weeding out more poor performers than the score they used, the lender may decide the possible reduction in future losses will be worth the resources required to switch to FICO 9. If, on the other hand, the validation shows FICO 9 not appearing to provide any increased risk prediction value, then they’re likely to stick with what they’re currently using. Many of the large banks use their own custom proprietary scoring models in which FICO scores are just one of many components, making changes to these complex scoring systems, as would be required by a change to FICO 9, is no small logistical feat.”

Lenders will be wary about having to change their whole system since the process takes time and can be quite expensive. Like most businesses, lenders have lots of priorities and the new score might not be one of them. FICO’s last version, FICO 8, was released in 2008 and has only recently been adopted by a minimal amount of lenders. To date, Fannie Mae and Freddie Mac have not adopted the 2008 version.

In addition, lenders can also consider factors outside the FICO score when approving or declining a loan. The FICO 09 score has gotten a lot of press because it will place less weight on medical debt. However, a lender reviewing a credit report would still be free to question collection accounts or decline applications from consumers whose credit reports contained one or more of them.

Those planning on applying for a mortgage should note that if they are ordering FICO scores from the myfico site in the fall they may have very different scores in comparison to what the lender pulls. Bankers have to be mindful that they may need to explain this to disappointed and frustrated mortgage applicants.

Tracy Becker is the president of North Shore Advisory, Inc.

Mortgage Lenders Divided on Rates in Second Week of September

Depending on which mortgage lender you’re talking to, rates either rose or dropped going into the second week of September. Various lenders have adopted different pricing strategies following the volatility that the financial markets saw on Friday afternoon; some lenders made the decision to raise rates more aggressively, while others chose to cool off a little. On Monday, we saw a similar thing happen with lenders recalling rate sheets on midday for revisions.

Fortunately, these rate revisions are small enough that the average rate has not changed significantly from Friday. Indeed, it would appear that mortgage rates have been largely stuck to the 2014 floor. Meanwhile, broader bond markets have been weakening to the point that there is some concern regarding short-term losses. Weakness is expected to continue in the short term as the market continues to correct itself, whereas the long-term outlook remains unclear. Committing to locking into a rate today is advisable.

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Mortgage Rates in the Eye of the Storm

Rates in the mortgage loan market remained steady today. Current rates put the market on par with the very best performance for September so far. For the past eleven days, rates either remained the same or climbed higher. However, we are likely to see some volatility in the near future.

The recent upward trend is likely based on anxieties stemming from the upcoming Fed announcement, where it is expected that Federal policy will be changed in favor of an early rate hike. When such an event occurs, bond markets have a tendency to weaken, which in turn causes mortgage rates to rise.

Despite this, bond markets were actually stronger today. However, it was not enough to allow for significant improvement in mortgage lender’s sheets. Some lenders improved and some grew weaker, with an overall effect of “unchanged” over last Friday.

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Second Annual Ginnie Mae Summit Outlines Position of Mortgage Giant

This Monday, Ginnie Mae kicked off their second annual Ginnie Mae Summit in Washington wherein the mortgage giant shall be describing its position vis a vis the current issues within the mortgage world. With the housing industry in a state of change, the company shall be exploring how mortgage loans and the position of lenders shall be transformed as we emerge fully from the financial crisis.

In a keynote speech from Julian Castro, the new Secretary of Housing and Urban Development, the housing industry was called upon to create a stronger market to serve the American people. “We need to work together to see a robust, healthy housing market, where those who are ready can buy a home,” said Castro. “Our nation is making progress across the board, and HUD is focused on ensuring these opportunities reach every American.”

To this end, Ginnie Mae has announced the following:

The company’s net worth and liquidity requirements are undergoing final changes, to be announced at the Mortgage Bankers Association Annual Convention next month.
The company’s acknowledgement agreement is being changed to achieve a balance in the needs of mortgage lenders and Ginnie Mae’s risk management. The company hopes that this will expand liquidity.
The company has decided upon a Dormant Issuer Policy, which would require issuers to be more active. The purpose of this policy is to allow Ginnie Mae to make more efficient use of the resources that go into monitoring the activities of issuers.
In conjunction with the Federal Home Loan Bank of Chicago, Ginnie Mae is initiating a program which would give small financial institutions greater access to the secondary market. Ginnie Mae will thereby be guaranteeing securities issued by FHLBC, beginning in November of this year.

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Foreclosure Inventory Expected to Drop Below Half-Million by 2015

The financial crisis was marked by a surplus of foreclosure properties. This serves to drag down home prices and mortgage rates as lenders and sellers desperately compete with a flooded marketplace. However, the past year has shown a distinct improvement: the last twelve months has given us the lowest level of foreclosures since November of 2007.

As of last August, there were 629,000 foreclosure properties on the market, representing a drop of 2.6 percent from July and 32.8 percent from August of last year. This makes August the 34th consecutive month that the number of homes in some state of foreclosure has dropped. If this trend continues, it is entirely possible that the national inventory of foreclosure properties could fall below 500,000 before the end of the year.

Twenty-seven states enjoyed a foreclosure rate of one percent or less as of August. Unfortunately, the market here in Washington has not yet reached this point. With a foreclosure rate of 1.5 percent, Washington sit roughly in the mid range for the nation. We therefore look forward to greater improvement going into 2015.

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