FHFA’s Lender Choice Policy Could Put Taxpayers at Risk 

The Federal Housing Finance Agency’s (FHFA) new policy to stimulate more competition in the credit scoring space for mortgage lending could wind up doing the opposite and leave taxpayers holding the bag for the risks associated with the new move.  

When homebuyers get approved for a mortgage, their lender does not typically keep the loan. Instead, the loan is usually sold to Fannie Mae or Freddie Mac, two government-controlled entities known as Government Sponsored Enterprises (GSEs). The GSEs buy residential mortgages, bundle them, and sell them to investors as mortgage-backed securities (MBS). And because the GSEs are under federal conservatorship, the government, and ultimately taxpayers are on the hook if those loans go bad.  

During the 2008 housing crisis, the Treasury gave $188 billion in capital to the GSEs and committed to providing another $258 billion if needed. Those costs were 

Credit scores indicate borrower risk. It is factored into approval of decisions and mortgage rates for individual borrowers. The FHFA is now greenlighting the use of a new credit score model–VantageScore 4.0– for lenders. Under the new lender choice policy, lenders would be able to choose which model they use to assess borrowers. In practice, this does not lead to competition, but rather translates into adverse selection.  

Since the lender is incentivized to get as many mortgages approved as possible, this means they can run different models and send whichever number makes the borrower looks safer to a GSE. Research from AEI finds that this “score shopping” pushes scores up for the riskiest borrower. In turn, this could lead to adjustments in how the GSEs assess credit risk and lead to higher fees for lenders wishing to sell mortgages. These costs then get passed on to the borrower. The added uncertainty over credit scoring accuracy could lead to an increase in interest rate costs of roughly $360 a year for borrowers.   

Additionally, VantageScore 4.0 would enter the market as a vertically-integrated monopoly. VantageScore is owned by the three major credit bureaus who provide the data on people’s credit history files. The data from each individual credit bureau, or all three combined, then applies a credit score methodology to generate a credit score. Since the credit bureaus control the inputs—data—and their respective prices, VantageScore could attempt to choke out competition by raising the price of retrieving such data. Such a system is not congruent with the principles of a free market, it is a manifestation of forced government interference attempting to simulate competition.  

The Housing Policy Counsel released a FOIA response by the FHFA in regards to their inquiry about the Biden administration’s decision-making on credit scoring policy. The report showed that the Biden administration neglected Fannie and Freddie’s findings that FICO 10T be approved for assessing mortgages. Despite Fannie and Freddie not recommending approving VantageScore, the Biden administration went ahead and chose to initiate a phased rollout of VantageScore.  

The FHFA should be careful to avoid a repeat of the 2008 housing crisis. Government initiatives to push more people into homeownership increases risk in the $13 trillion mortgage market and taxpayer exposure to the possibility of a government bailout. To protect taxpayers, the agency should follow a data-driven approach to ensure that the most predictive and tested scoring models are used for GSE-backed mortgages. 

The Trump administration has taken great strides to promote deregulation, reverse the disastrous policies of the Biden era, and empower the private sector to enhance competition and lower costs for consumers. The FHFA’s stance on VantageScore undermines the president’s agenda by increasing risky mortgage lending via a vertically integrated enterprise and making homeownership more expensive for borrowers.