FICO, the company that develops proprietary scoring models for credit bureaus and lenders, announced August 7 that a new model (FICO Score 9) would be released this fall. FICO’s press release caught buyers’, Realtors’, and lenders’ attention, as the new model was touted as significantly more “borrower friendly”. Paid collections would no longer impact credit scores. Medical debts (paid or not) would hurt scores less as well. FICO predicted some consumers’ scores could rise by 25 points, an amount that would significantly reduce their loan costs or interest rates.
The pending changes (which followed a CFPB study on the fairness of FICO’s scoring models) ignited a frenzy of optimism from Steve Brown, president of the National Assn of Realtors who gushed they would “make a real difference in the lives of millions of American who have been shut out of the mortgage market or forced to pay higher mortgage interest rates because of flawed credit scores.”
Fanfare aside, the reality is that the changes are unlikely to impact credit scores for the foreseeable future. Fannie Mae, Freddie Mac (the GSE’s), and lenders currently use three scoring models, and have shown no interest in switching to FICO Score 9. Those models (Equifax Beacon 5.0, Experian FICO V2, and Transunion FICO Classic 4) have been the norm since 2009. That same year FICO unveiled another “improved” product touted as “consumer friendly” (FICO 08), but neither the GSE’s nor lenders opted to adopt it. In other words, all of this has already happened before and it did nothing to help the housing market!
FICO says their new model more accurately evaluates consumers’ credit (just as with FICO 08), but until it’s put into national use by the GSE’s (and, by default, lenders), FICO Score 9 is essentially a curiosity. There are large costs to rewrite automated underwriting programs for new score models, and (more significantly), higher default risks if FICO’s conclusion of more “accurate credit evaluation” proved to be inaccurate.
While loan officers, home buyers, and Realtors would love more accessible, affordable loans, FICO Score 9 won’t be boosting housing sales anytime soon. Our recent mortgage meltdown leaves little industry appetite for additional credit risk. While FICO Score 9 could well be hugely popular with consumers, it’s irrelevant unless the GSE’s embrace it. Until then, buyers should keep paying those medical bills and avoid collections to ensure their loan approvals!