CHICAGO – The Federal Housing Finance Agency’s (FHFA) proposed change to utilize two instead of three credit reports during the mortgage application process could result in “unintended consequences for consumers while doing little to achieve the organization’s stated goal of reducing mortgage borrower costs,” according to TransUnion.
TransUnion said its analysis has found that moving to a bi-merge (using only two credit reports in the mortgage underwriting process) “could result in two-million consumers becoming ineligible for a government-sponsored enterprises (GSEs) mortgage. Their ineligibility would be due to gaps that can exist among lenders when it comes to reporting. Using only two credit scores will often result in an incomplete and inaccurate picture being painted of a potential borrower – particularly if a consumer’s most favorable set of credit data is the one that gets excluded.”
In addition, TransUnion said it found “600,000 new mortgage borrowers per year could end up paying more in interest under the bi-merge than they would have if all the tri-merge information were used.”
The company’s analysis said that could cost consumers $6,600 in additional interest over the life of the mortgages.
On the ‘Edge of Qualification’
According to TransUnion, consumers most likely to be affected – those with credit scores hovering around 620, the “edge of GSE mortgage qualification” – are disproportionately Black, Hispanic, low-to-moderate income (LMI) and first-time homebuyers.
“These groups of potential homeowners are 50% over-represented in that range. As a result, they will likely disproportionately bear the negative consequences of moving to a bi-merge,” TransUnion said.
‘Could Become Unscorable’
Added Joe Mellman, SVP and mortgage business leader at TransUnion in a statement, “Under a bi-merge, first-time homebuyers who have thin files or are new-to-credit could become unscorable or, if they are scored at all, could be charged a higher interest rate than they would otherwise,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion. “Just one missing tradeline that may result from using one less credit report could dramatically impact eligibility and monthly payments. Ultimately, the decision to only use two credit reports could make all the difference in whether an interested homebuyer is able to buy a home or not.”
Additional Findings
TransUnion’s analysis also suggests that addition to holding creditworthy borrowers out of the market, a bi-merge could have the reverse effect on otherwise ineligible borrowers, potentially increasing default risk.
“An estimated 200,000 consumers ineligible for an agency mortgage under the tri-merge will borrow a GSE mortgage,” TransUnion said. “They may find themselves in homes they cannot afford in an economic downturn. Incomplete information could also lead to some consumers paying less interest than their true risk merits. GSEs may annually lose out on $4 billion in risk-based interest fees due to such loans. If that risk premium is to be made whole, those costs will likely have to be passed on to taxpayers or subsidized through increased pricing for lower-risk borrowers.”
Mortgage Lenders Have Concerns
TransUnion said its survey found mortgage lenders cited concerns relating to compliance with fair lending laws and the risk of potential gaming of the system for the two highest scores by lenders and consumers.
They also questioned the value of moving to a bi-merge standard, given the significant expense the industry will incur to make the move, TransUnion said.
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