Lenders may have made it a little easier to get a loan over the last three months, but a new survey shows they’ll be holding on tight to their money in the months ahead.
Fannie Mae does a Mortgage Lender Sentiment Survey every quarter that assesses the views of various bank executives. The second-quarter survey came out June 14th and reported that there was a moderate easing of credit standards last quarter.
10% of the institutions involved in the survey said they may open up their credit standards even further.
Fannie Mae’s chief economist Doug Duncan says that lenders appear to be cautiously optimistic. But he added that the credit easing trend seems to be tapering off for most institutions, possibly because of May’s weak jobs report.
As you may recall, the Labor Department reported only 38,000 new jobs in May – which was the lowest number since 2010. Economists were expecting 4 times that number and called it very disappointing.
The labor participation rate also dropped to 62.6 percent, which may mean that many people who couldn’t find jobs have given up and left the workforce altogether.
Just a few days ago, the National Association of Realtors showed their support for an alternative credit scoring process that could help more people qualify for today’s home loans.
Interest rates are at all time lows, and it’s still much cheaper to own than rent in at least half of the country…yet so many qualified renters can’t qualify for a home loan.
NAR said it was in favor of legislation by California Republican Representative Ed Royce and Alabama Democratic Representative Terri Sewell called “Credit Score Competition Act of 2015”.
This bill would allow Fannie Mae and Freddie Mac to consider the use of new credit-scoring models that could help borrowers who don’t qualify under current FICO credit scoring. These other models would presumably still provide accurate risk assessments but would be based on screening methods that might be more appropriate for the various applicants.
The GSEs currently use FICO Score 4. That’s based on data from the TransUnion credit score agency. FICO 5 is based on Equifax data and FICO 2 is based on Experian data.
FICO’s latest score version is FICO 9, which it claims is more predictive than other scoring methods but it is not yet widely used.
According to Housing Wire, FICO 9 could be a huge help for millennials and Hispanics buying their first homes. It’s these two groups that are expected to buy the most homes over the next ten years but widely used credit scoring methods are making it difficult for them to get home loans.
FICO 9 takes into consideration that many millennials pay their bills online or make automatic payments.
Medical bills are often sent by snail mail, and can be overlooked or lost in the shuffle. With typical credit scores, any late payments for missed medical bills would ding your credit score. Under FICO 9, those unpaid medical bills would “not” have a negative impact.
FICO 9 also ignores any third-party collections that have been paid off. And it will take into consideration rental history. That would be especially helpful for Hispanics who may be very good about paying their rent, but may not have credit cards and or any substantial credit history. They may even conduct most of their transactions in cash.
The House bill for the use of alternative credit scoring methods is not specifically supporting FICO 9. It’s meant to open the credit-scoring field to more options and to help strengthen and stabilize the housing industry by getting more qualified borrowers into homeownership.
Representative Royce told Housing Wire that, “The current practice of using a single credit scoring model hampers the ability of Fannie and Freddie to mitigate their risk, and places the GSEs on a weaker foundation.” He says, “Breaking up the credit score monopoly at Fannie and Freddie introduces competition into the credit scoring industry and ultimately decreases the potential for another taxpayer bailout.”
Housing Wire reports that in 2014, Freddie Mac’s CEO Donald Layton said his GSE was considering “one or two alternatives to FICO”. The Federal Housing Authority also said in it’s 2015 Scorecard Progress Report issued in March of this year, that the issue of alternative credit scoring quote, “remains an ongoing priority for FHFA” and that it “will continue to work with the Enterprises toward concluding this assessment during 2016.”
The “Credit Score Competition Act” was introduced last year. Housing Wire reports that the House Financial Services Committee has not yet reviewed the bill.