Fair Isaac Takes Steps to Help the Home Buyer

Fair Isaac, the creator of the FICO scoring models has announced that this fall it will be releasing a new version of its scoring model – FICO 09. An exact release date has not been set. There are some major changes in this new model that could help more borrowers get into home loans. In theory these changes are great for the consumer, but unfortunately a borrower may never see the benefits from this scoring model if it isn’t accepted by Fannie Mae and Freddie Mac.

One of the biggest changes in FICO 09 is around medical collections. If a borrower has unpaid medical collections they will carry less weight than before. So a potential borrower with some outstanding medical debt could see an increase of up to 25 points in their credit scores. The borrowers that will gain the most benefit are those with paid medical collections, which will now be completely excluded from the scores. For some borrowers this could mean a potential of a possible 100 point increase in their scores, depending on what the rest of the credit report looks like.

According to data gathered by Experian, approximately 64.3 million people have a medical collection on their credit report. Out of that number, 9.4 million had a medical collection with no balance. That’s 9.4 million more possible home buyers with the new scoring model as those collections will no longer be factored into the scores. Collections that are not medical, paid or unpaid, will still be factored in as well as late payments on accounts, public records, etc.

Regulators and some large lending institutions have long thought that consumers were too heavily penalized for medical collections. The majority of medical collections are generally because of miscommunications with insurance companies or the result of unpredictable events such as a heart attack or car accident. Since over 50% of collections on credit reports are medical, according to the Federal Reserve, this change in the scoring model is long overdue. Vantage Score took this step last year and changed their model to exclude all paid collections, medical or not. While the Vantage Score is used by some banks it is not widely used by mortgage lenders as it is not accepted by Fannie Mae or Freddie Mac.

Not everyone agrees with the new scoring model though, some banks and lending institutions feel this may be opening the door to allow consumers to get into loans that they may ultimately default on. They have a choice as to whether or not to allow this scoring model to be used in their loan making decisions. At this point, it is too early to know which lenders will be willing to utilize the new model.

The biggest issue is that the change won’t help consumers at all unless Fannie Mae and Freddie Mac agree to use it. Right now they are very specific in the scoring models they will accept. When FICO 08 was released they never adopted it. The only scoring models Fannie and Freddie will accept are:
Experian Fair Isaac Version 2
Trans Union Classic 04
Equifax Beacon 05

These models are basically outdated and antiquated to some extent. Fannie and Freddie have both said they are very comfortable with the current models and “confident in the tools they use to set underwriting standards”. At this point they have no intention of utilizing the new scoring model. However with the benefits it could have for a great many consumers they will most likely get a lot of push back. Right now as far as when/if they will allow the use of FICO 09 is a waiting game. The hopes are that regulators and hopefully the Consumer Financial Protection Bureau can persuade Fannie Mae and Freddie Mac to consider changing to this new model.

The other parameters of the FICO 09 are for the most part the same as FICO 08. The scoring range is still 300-850 and as with FICO 08, the new model also places more weight on the balances on revolving debt. While the older models utilize keeping revolving balances below 30% of the high credit, FICO 08 and 09 place that percentage at 10%.

Once FICO 09 is released it will be a slow process for lenders to adopt. It will most likely be used first by credit card and auto lenders and slowly be adopted by some private mortgage lenders, but as to whether it will truly help the majority of potential buyers lies in the decisions made by Fannie Mae and Freddie Mac.