THE BASIS POINT

Is Trended Credit Data a Trojan Horse?

On June 25 we will see significant changes to how credit scores are calculated and how the FNMA underwriting system will make decisions on loans based on credit. 

The underlying concept is called “trended credit.” The way credit reports have been done is to take a snapshot of what a borrower’s credit looks like at the instant in time which a credit report is generated. Trended credit says that is is not the best way to do this. It looks at a 24-30 month history for credit card accounts and says that if someone’s credit usage (the percent of each credit line used) has been more of less steadily increasing then that person, even if he has a perfect payment history may be at greater risk of not being able to make his mortgage payment on time. Conversely if credit usage has been falling that person may be a better credit risk.

It is alleged that FNMA will give better pricing to someone who pays off their credit card debt each month than someone who is accumulating debt and making minimum payments.

This sounds sensible. But FNMA adds: The new FNMA system will allow more consumers to generate higher credit scores. Roughly three million “thin file” consumers, who may only have one credit account, could now potentially rank as prime or super-prime borrowers, he said. Such borrowers potentially could have better access to loans at better rates.

If this turns out to be another strategy such as the National Homeownership Strategy which mandated relaxed FNMA/FHLMC lending standards and helped create the mortgage mess then this will be another disaster. See: http://economy.typepad.com/the_economy/2011/10/rate-watch-795-the-national-homeownership-strategy-october-7-2011by-dick-lepre-dickleprerpm-mtgcom-wwwloanminecom.html

TransUnion and Equifax are the only repositories set up at this time to supply mortgage trended data in the beginning of the rollout. Experian could possibly offer it at a future date.

Trended data underwriting will be available only on loans sold to FNMA. This will be only for single family and will do only traditional (<$417,000) conforming loans.

There is no reason why approval of “thin files” had to happen at the same time as FNMA deployed trended credit data. It appears to me as if FNMA is lowering mortgage lending standards by approving loans for borrowers who previously were deemed risky because of lack of significant credit history. The government covers up its responsibility for the mistakes it makes. One of the two main causes of the mortgage mess/liquidity crisis/Great Recession was HUD’s mandate that FNMA and FHLMC lower their lending standards.

Just as before 2007 the thin file approvals may temporally support housing by creating more buyers and this will he hailed as positive until those thin file borrowers’ loans go bad. Then FNMA will blame lenders who made the loans approved by the new FNMA policy.