HUD secretary Julian Castro said the Federal Housing Administration (FHA) is exploring alternative credit scoring models, in a discussion with a diverse group of housing industry stakeholders. The event sought to discuss how alternative credit scoring models could expand access to mortgage credit for responsible borrowers who may have thin credit histories or extenuating circumstance like medical debt.
Co-hosted by the National Association of Realtors (NAR), The Asian Real Estate Association of America, and the National Association of Hispanic Real Estate Professionals, the event included two roundtable discussions and a keynote address from Castro. Realtors within these organizations believe in safe access to mortgage credit for borrower who can show they are able to own a home and keep up with payments. However, due to restrictive lending many of the qualified borrowers are not able to enter the housing market, according to NAR President Chris Polychron.
NAR first called on federal regulators and the credit and lending communities in 2011 to reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers who are good credit risks. Work by the Harvard University Joint Center for Housing Studies indicates that borrowers with lower incomes as well as minorities face higher rejection rates on their mortgage applications. NAR analysis of mortgage data from 2007 to 2013 indicates that the share of rejected loans due to credit scores was significantly higher for African Americans and American Indians.
"If lenders and the government-sponsored enterprises were to adopt alternative credit scoring methods, such as FICO 9 and VantageScore 3.0, they could expand access to mortgage credit without dramatically increasing risk in the housing market," said Polychron.
The newer credit scoring models put less emphasis on the impact of unpaid medical bills, and the effect of missed payments on debts that have subsequently been paid off is eliminated. FICO 9 and VantageScore 3.0 incorporate public utility and rental housing payments, information that helps lenders to evaluate younger persons and minorities who might not have a history of credit use. FICO estimates that its new model could improve scores by 25 to 100 basis points.
"The biggest limitation to borrowing is tight credit standards," NAHREP Former President Jerry Ascencio said. "These conditions are exacerbated by outdated credit scoring models that don't take into account the unique spending and savings patterns of Hispanic borrowers. Alternative credit scoring models need to consider these patterns so creditworthy borrowers are not turned away from the American Dream of homeownership."
Jim Park, AREAA past chair, noted that there was a clear consensus from all of the symposium's participants that the government-sponsored enterprises should update their scoring models and also create added market competition in the credit evaluation system.
"These critical efforts will expand credit to more minority and immigrant consumers and reverse the unfortunate trend of homeownership decline in America," he said.
At the event, Secretary Castro underscored the agency's commitment to widening the circle of opportunity for responsible families by making homeownership more affordable and accessible.
"FHA's work alone will not solve all the industry's challenges, which is why I appreciate this focus today on out-of-the-box thinking," he said. "I know that new credit scoring models are being developed so that non-traditional factors can be considered when determining creditworthiness."
Castro said FHA is exploring the use of new credit scoring models. "We'll look at every option that brings housing opportunities within reach of more Americans," he said.