Federal Housing Finance Agency by F Delventhal is licensed under CC BY 2.0 DEED
A new Freedom of Information Act (FOIA) report has been released exposing the Biden Administration’s opaque decision-making on mortgage underwriting standards in the name of ideology at the expense of taxpayers.
The Housing Policy Council released a FOIA response on the Federal Housing Finance Agency (FHFA) findings. The report showed that the Biden Administration sought to stimulate competition in the credit-reporting market by testing the empirical accuracy of two models: FICO 10T and VantageScore 4.0. These models are proprietary algorithms used to generate credit scores from credit bureau data for potential homebuyers when they seek to qualify for mortgages. Fannie Mae and Freddie Mac, two Government Sponsored Enterprises (GSEs) are under conservatorship by the federal government.
These entities purchase mortgages from lenders and bundle mortgage-backed-securities (MBS) to investors to provide liquidity in the housing market. GSEs’ rules shape what loans get made, what borrowers pay, and how much risk the system carries.
When underwriting standards weaken or pricing misfires, taxpayers can end up exposed, because the GSEs remain under federal conservatorship and are central to housing finance.
Under the Biden Administration, the FHFA began a modernization drive to increase competition in the credit scoring space under the guise of increasing affordability. The only issue is that the Biden Administration ignored the data and findings it collected.
In 2022, the Biden FHFA approved VantageScore 4.0 as a valid underwriting tool for GSE-backed mortgages with little proof to back up such a policy shift. When the FHFA released its report on credit score competition, the FOIA release indicated that FICO 10T was recommended as the sole credit score model to be used by Fannie and Freddie.
The Biden administration ignored its own agency’s findings to promote a less accurate and riskier credit model. This development should be worrying. The bailouts for the financial crisis in 2008 occurred due to excessive risk-taking. It is the reason why Fannie and Freddie remain in conservatorship today. Furthermore, VantageScore is owned by the three main credit bureaus, meaning VantageScore could operate as a vertically-integrated firm and potentially price out competitors.
That does not reflect real competition, such a move is tantamount to sanctioning a company with monopolistic pricing powers which would be detrimental for lenders who would be less equipped to calculate risk, and borrowers who may be unqualified to handle the commitment of a mortgage.
The FOIA findings show that the Biden Administration was never interested in promoting competition, rather, it was focused on the illusion of creating competition to deliver a cheap headline win for its team.
The Trump Administration should be careful to not repeat the Biden Administration’s mistakes and avoid centering housing policy around populist rhetoric.
