October 23, 2015
Fannie Mae announced on Monday that it would soon start taking a longer view of consumer credit histories when evaluating mortgage applications, a change that could help some borrowers and hurt others.
Beginning in mid-2016, Fannie Mae will require lenders to use what is known as “trended credit data” when submitting loan applications through the agency’s proprietary automated underwriting system, Desktop Underwriter. This widely used automated system can quickly tell lenders whether a borrower is eligible for a conforming loan and under what conditions.
Fannie Mae now requires a “tri-merge” credit report reflecting data from the three major credit bureaus — TransUnion, Equifax and Experian — for all mortgage applications, said Chris Cartwright, the president of information services nationally for TransUnion. That data, he said, is really a point-in-time “snapshot” of the borrower’s open credit balances and any delinquencies at the time the credit was pulled.
The trended data product developed by TransUnion and to be used by Fannie Mae (along with trended data from Equifax) will provide more of a credit chronology. It will go back 30 months, showing whether payments were made on time, and more important, whether borrowers tend to carry balances from month to month, pay more than the minimum or pay off balances in full.
Studies by TransUnion have found that consumers’ paying habits are key indicators of risk. Consumers who carry revolving credit balances, for example, have been found to be considerably higher credit risks than those who pay off their balances every month. Using this richer, longer-term data “allows the credit reporting agencies to score more consumers and to score them more accurately,” Mr. Cartwright said.
TransUnion’s research estimates that the widespread use of trended data could increase the share of consumers in the “Super Prime” risk tier — those who have access to the lowest-priced credit products — to nearly 21 percent of the population from 12 percent. It is already a popular tool for evaluating auto loan and credit card applicants, according to Steve Chaouki, TransUnion’s executive vice president at the financial services business unit.
Trended data can open up access to credit for those who previously couldn’t be scored because a point-in-time check showed insufficient credit activity, he said.
John Ulzheimer, a credit expert who has previously worked for the credit-scoring companies FICO and Equifax, said the use of trended data will lead to “smarter” mortgage lending, because it will help lenders more precisely link pricing to risk. But, he noted, it won’t work to all borrowers’ benefit. “Trended data could also mean you’re going to do worse,” he said.
The richer data could help borrowers who are “slam dunks” for approval get an even better deal, or push some borderline borrowers into approvals, he said. But, he added, it might reveal a risk profile that is cause for rejection.
In a statement, Timothy J. Mayopoulos, Fannie Mae’s president and chief executive, said the goal was to “make sustainable homeownership a reality in communities across the country while reducing risk for taxpayers.”
Fannie Mae also announced plans to make Desktop Underwriter capable of considering nontraditional credit histories. Borrowers without agency-generated credit histories must now be evaluated by lenders manually. “These are people who have lived off the credit grid by choice or necessity — they have no credit cards and no loans,” Mr. Ulzheimer said. “But they have paid rent, utilities, cellphone bills.”