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62 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION Credit Scores Sorely Outdated The FICO system is in dire need of an overhaul, industry think tank contends. A s the years go by, technology progresses. New computers and cellphones and more efficient ways of handling pa- perwork—but what about credit reporting? According to the Urban Institute, which has written mul- tiple times on tightness of mortgage credit, the mortgage market is taking on less than half of the risk it was assuming in 2001 and less than a third of the risk in 2006. This can be attributed to the current credit score model, which is outdated. FICO 4, which was created in the late 1990s, is much less granular than the more recent models, FICO 9 and VantageScore 3, which is soon to be dated com- pared to VantageScore 4.0, coming out in the fall. FICO has versions 2, 3, 4, 5, 8, and now 9, so why is FICO 4 still the GSE requirement for originators to use? For example, student loan debt is included in installment debt in FICO 4, and first and second mortgages are seen as the same thing. The newer models also have a better wealth of information re- garding student debt, which Urban Institute says has increased expo- nentially since the late 1990s. At the time, student loan debt was less than $100 billion, but as of Q1 2017, that number has risen to $1.34 tril- lion. In FICO 4 and VantageScore 3, student loans are looked at in a way that determines how they im- pact the performance of other debt. Other reasons FICO 4 is outdated include issues concerning medical debt and the consistency of infor- mation in reporting to more closely align the three models presently used: TransUnion FICO Classic 4, Equifax Beacon 5.0, and Experian/ Fair Isaac Risk Model v2. In a statement about how the GSEs use the FICO 4 family of models for screening and loan level pricing adjustments, the Federal Housing Finance Agency (FHFA) said in its 2016 Scorecard for the GSEs that it continued to work with Fannie and Freddie on implementing additional or alter- native credit score models with the Enterprises' businesses. "The enterprises have consid- ered other credit-score-related issues that can independently im- prove access to credit," the state- ment said. "As described above, this includes the enterprises' work to enhance their automated under- writing systems to process loans for borrowers who do not have a history of traditional credit and, therefore, lack credit scores." According to the Urban Institute, these credit-scoring models that are used by the GSEs and lenders who sell to them need to be updated. "The updated models have already been developed; it's time to conclude the ongoing stud- ies and modernize the system," Urban Institute said in the report. "Incorporating newer models into the mortgage origination process would allow the market to serve a greater number of creditworthy borrowers seeking to purchase a home." Urban Institute isn't the only one with this issue on its mind. Last month, Sens. Tim Scott (R-South Carolina) and Mark Warner (D-Virginia) introduced biparti- san legislation that has received support from 20 consumer and industry groups to get the FHFA to create processes for credit- scoring models to be validated and approved for use by the GSEs when they purchase mortgages. The current credit-scoring model doesn't take into account rent or utility payments and therefore, hurts African-Americans, Latinos, and young people who otherwise would be approved. 'Unavoidable' Costs Add Up Fast Things like insurance, utilities, and taxes can really take a toll on today's homebuyers. I f buyers want to avoid falling behind on their mortgage loans, they'll want to consider more than just a home's listing price—especially given new data released by Zillow in July. Accord- ing to Zillow and Thumbtack, the average U.S. homeowner spends an additional $9,080 on their home every year. In some cities, some spend as much as $16,000. "Buyers too often focus on a home's list price or mortgage payment to determine what they can afford," Zillow reported. "However, the numerous less- obvious costs associated with homeownership can affect the monthly bottom line." In total, Zillow found that homeowners pay an average of $6,059 in "unavoidable costs," which includes things like insur- ance, utilities, and taxes. These costs are highest in San Francisco, where homeowners pay more than $13,000 in unavoidable costs, and lowest in Indianapolis, where they pay just $4,699. Maintenance and repair costs— including carpet cleaning, HVAC maintenance, gutter cleaning, yard-work, and more—run the average homeowner about $3,021 per year. Maintenance costs are highest in Seattle ($4,052) and low- est in San Antonio ($1,962). According to Svenja Gudell, Chief Economist at Zillow, considering these added costs is crucial when buying a home. "Determining how much a home will ultimately cost you each year and what you can afford is one of the most chal- lenging aspects of homebuying, especially for first-time buyers," Gudell said. "Before starting a home search, take a good look at your finances to determine a monthly payment range you can comfortably afford. While that big backyard or larger home may be appealing, it is important to consider how much maintaining those spaces could cost you." All in, San Francisco had the highest total homeowner- ship costs, with residents paying $16,290 per year. Boston came in at No. 2, with $14,377 in costs, while San Diego ($13,488), Seattle ($12,924), and Los Angeles ($12,556) rounded out the top five. According to Zillow, more than a third of U.S. buyers go over their initial budget when buying a home. To help buyers better estimate these costs and factor them into their homebuying deci- sions, Zillow recently launched RealEstate.com, which offers an "all-in monthly pricing" calculator. It includes mortgage payments, taxes, HOA fees, insurance costs, and more.