24th January 2019

Will new FICO model be key to increasing homeownership?

posted in Appraiser News |

FICO announced its new credit score model earlier this week, but will it revolutionize the lending industry, or fall through the cracks?

While time may be the only true way to tell the answer to that question, HousingWire spoke to FICO executives in order to determine the vision and capabilities of the new model, UltraFICO.

As we previously reported, UltraFICO has the potential to increase the FICO score for millions of consumers, that is, if they opt in. The new model depends on consumers to “build their own credit score,” and give permission for access to their bank records.

Once this permission is given, FICO, Experian and Finicity team up to provide a score that looks not just at the applicant’s credit file, but also how they manage their personal finances.

FICO explained that this could be a tool to increase homeownership by boosting the score of applicants with thin files, those who have previous marks against them but are working to improve their score or even those who are credit invisible (consumers who have no credit file whatsoever.)

FICO Senior Director of scores and analytics Joanne Gaskin explained in an interview with HousingWire that they had two options to expand access to credit: lower the standards or increase the data used to generate the score. FICO chose the latter.

About 4 million consumers could see an increase of about 20 points to their credit score. While this may not be much, FICO explained it will help consumers who are just on the cusp of being able to qualify for a mortgage.

Gaskin also explained that because this score includes more information, it will be able to provide a more predictive score to lenders, allowing them to originate loans with more confidence.

“We have found that that information is exceedingly predictive,” Gaskin said of consumer banking data. “We have found there is a high correlation between personal finances and ability to repay.”

However, there is one major barrier to utilizing the score to qualify more consumers for mortgages – the score could only be used in the non qualified mortgage space.

Currently, mortgage lenders use an older FICO model, Classic FICO, to originate mortgages for the qualified mortgage space. And while their was a potential for change as the Federal Housing Finance Agency conducted its review of different credit models, that decision continues to get pushed back.

Back in July, the FHFA announced it was postponing its search for alternative credit scoring models in order to focus on implementing section 310 of S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act, which passed into law in May.

Previously, the FHFA had announced it would make its final decision on credit scoring models in 2018, however now, that decision could be delayed as far out as 2020.

So while there may be hope for using UltraFICO in the QM market in the future, it won’t be happening anytime soon.

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