February 2016 - The Industry's Best Kept Secret

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TH E M R EP O RT | 61 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST Scoring Model Wins Bipartisan Support The call to end Fannie and Freddie's FICO-only system garners approval from both sides of the aisle. C urrently, Fannie Mae and Freddie Mac only consider the FICO credit scoring model when making mortgage pur - chase decisions. A new bill is trying to change this singular model and move toward a more multifaceted one. The H.R. 4211 bill, also titled the "Credit Score Competition Act of 2015," was introduced by U.S. Rep. Ed Royce (R-California) and U.S. Rep. Terri Sewell (D-Alabama)— both members of the House Financial Services Committee—to the House of Representatives. Both Reps. Royce and Sewell announced on their websites that the bill would allow Fannie and Freddie to consider alternative credit-scoring models instead of the FICO model, which would open up homebuying options for many consumers whose credit does not meet the current standards. "Fannie Mae and Freddie Mac are the largest mortgage purchas - ers in the nation, but they rely on credit score models that don't necessarily take into account something as simple as whether borrowers have paid their rent on time," Rep. Sewell explained in the release. She continued, "Homeownership is an integral part of the American Dream that shouldn't be out of the reach for low-income, rural, and minority borrowers who lack access to traditional forms of credit. This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across the country." Reps. Royce and Sewell noted that if the GSEs are allowed to make mortgage purchase decisions with access to "multiple empiri - cally derived, statistically sound credit scoring models," risk found in their portfolios would be miti- gated and the chance of systemic risk in the U.S. housing market would lower. Together, Fannie Mae and Freddie Mac occupy 90 per- cent of the secondary mortgage market. Reps. Royce and Sewell suggest that additional credit scoring models would "foster competition and innovation in the credit scoring industry." Consumers looking to pur- chase a home with no FICO score or one under 620 are not eligible for a mortgage that can be sold to Fannie Mae or Freddie Mac, and lower-to-middle- income Americans who qualify to purchase a home but cannot due to their low or nonexistent FICO score are finding them - selves locked out of the housing market. These two groups of consumers could greatly benefit from other credit-scoring models, Reps. Royce and Sewell said. "The GSEs' use of a single credit score is an unfair practice that stifles competition and inno - vation in credit scoring. Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout," Rep. Royce said. The VantageScore credit score model, an alternative to the FICO score, recently praised the new legislation introduced by Reps. Royce and Sewell in a statement on the company's website. Barrett Burns, President and CEO, VantageScore Solutions, LLC, explained that "outdated credit scoring models required by Fannie Mae and Freddie Mac limit opportunities for millions of creditworthy borrowers who, through no fault of their own, are unfairly locked out of the au - tomated underwriting programs used by most mortgage lenders." "Locking out competitive models and creating what is essentially a government sanctioned monopoly also undermines innovation among model developers, which must be preserved and encouraged in order for the market to oper - ate efficiently for borrowers and lenders," he added. "We strongly support a bill that promotes access to sustain- able mortgage credit, and healthy choice and competition among credit scoring models. We en- courage industry leaders to voice their support of this bipartisan measure," Burns said.

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