The sound everyone heard last month was the housing market slipping into recession. After three white-hot years of double-digit price increases, list prices are now falling, inventory is growing, interest rates are rising, canceled sales contracts are accelerating and mortgage applications continue to slide.
The implications for the U.S. economy are obvious, as housing is both a bellwether economic indicator and a pillar of our financial sector. Nobody needs a reminder of how trouble in the housing market can spiral into something much worse, which is why the focus of every federal agency and regulator must be to prioritize market stability, increase oversight of risk exposure and ladle out extra helpings of alert and caution in all matters pertaining to mortgage lending. The motto above all else should be "safety first."
Unfortunately, it appears nobody read this memo at the credit scoring model company owned jointly by the three credit reporting bureaus: Experian, TransUnion and Equifax. They are currently lobbying the Federal Housing Finance Agency to permit their inclusion for mortgage applications underwritten by Fannie Mae and Freddie Mac while simultaneously hoping that nobody notices that they have tinkered with their untested scoring model.
In August, VantageScore announced it would no longer include unpaid medical debt collections in its credit score. The practical effect of this maneuver is to render the credit scoring model it previously submitted to the FHFA as essentially defunct and obsolete, having now removed data points it previously claimed were relevant to the risk assessment of mortgage applicants.
As the FHFA is currently conducting diligent evaluations of credit score models for possible inclusion in mortgage lending, it is troubling that one of the applicants has switched horses midstream, raising a series of questions for consumers, regulators and their friends in the Biden administration:
— How can the FHFA properly appraise the predictive qualities of this new modified credit model when just months ago the credit bureaus submitted an entirely different scoring model under the premise it was tested and accurate?
— Which version of their scoring model is the FHFA supposed to trust? And how can lenders be sure that a recently altered scoring model is within the margins of acceptable risk?
— And lastly, why are the three bureaus still collecting consumer data on medical debt and collections while the scoring model company they jointly own dismisses their relevance?
The burden of mitigating risk and limiting defaults and foreclosures in mortgage lending rests on the reliability and predictability of the credit scoring models used by mortgage brokers and lenders. Arbitrary changes to these models are not conducive to reliability, predictability and risk mitigation in lending.
Efforts to help Americans impacted by medical debt gain better access to credit should be applauded. But such assistance must be achieved through an exhaustive and thorough analysis that rigorously tests the impact of medical debt on consumers' credit profiles. The bottom line is that lending security is built on a foundation of well-tested mathematical models, and the three bureaus' credit scoring company is now proposing a model to the FHFA that seems to fall startlingly short of this standard.
In April, the Biden administration announced that federal agencies granting loans or loan guarantees would no longer factor in medical debt in loan applications. VantageScore's scuttling of its original model in exchange for political approval is the opposite of sound policy. Altering a data model without profound evidence to justify the change is an invitation for the exact species of risk that the FHFA is charged with rooting out of the economy.
As the housing market buckles in for a bumpy ride, an affirmation of safe and tested lending practices are what consumers, lenders and our overall economy require most. This shift in the wind by the credit scoring company owned by the credit bureaus raises too many questions regarding the risk of using their untested and apparently malleable credit scoring model in mortgage lending. It's a risk the FHFA should avoid at all costs.
