Credit Scores for Mortgages Spark Lender Rift With Banks
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen with Anne-Marie Fertoli in New York. There's a battle brewing between banks and rival lenders over the use of credit scores to decide if millions of Americans can get a mortgage. And Wall Street Journal reporter Anna Maria Andriotis is here to explain why. how it could impact those of us with mortgages and who are applying for one. So, Anna Maria, on one side we have the banks who want to use FICO scores to determine mortgage eligibility, and on the other side are non-bank lenders who prefer to use credit scores. What's the difference between those two scores?
So FICO scores have been pretty much the standard for decades for consumer lending in general and for a long time for mortgages as well. With FICO scores, basically, if lenders are giving out mortgages to people and the lenders plan to sell those mortgages off to Fannie Mae, Freddie Mac, that's about half or so, maybe shy of half. of mortgages being originated, then they need to use FICO scores.
What is the dispute between banks and non-bank lenders over mortgage credit scores?
They can't use other credit scores largely because that is the requirement set by Fannie and Freddie.
All right, so the credit scores, those are calculated and reported by Experian?
Right, right. So this is where things, I think, get really interesting. Because in this whole battle between the lenders and the credit score providers, you have the credit reporting firms. You have companies like Experian, Equifax, and TransUnion. And they play a role in several ways. One is that they are essentially involved in the process where lenders buy the credit scores, right? So a consumer goes to get a mortgage. A lender looks up their credit score. These credit reporting firms typically play a role in – there's this whole domino effect here. in which the credit reporting firms pass on the scores to these other middleman companies that then sell them off to the lenders. You also have these companies, the credit reporting firms, they are the owners.
They are the creators of this rival credit score, this vantage score that a lot of the non-banks are for.
Let's talk about the housing crisis. Lowering credit score requirements did play a role there. Are officials worried that changing the rules could cause something like that to happen again?
That's a concern that's been shared with me by some banks, bank representatives. There have been a few non-banks that have also cited some concerns about that. But you're really hearing it more from the bank side, which is, look, FICO scores have been tried and tested. They work. This is what they're saying. And the reason we had a housing bust last time around wasn't really because FICO scores didn't work. It was because lenders made the decision, like you said, Anne-Marie, to lower... their credit score requirements.
How do FICO scores and Vantage/credit-reporting scores differ for mortgage approval?
So lenders knew, I'm lending to subprime. I'm lending to risky people. Their credit scores show they're risky. But they made the decision to go ahead with it. So the banks are saying, why are we going to shake something up that has been a proven method for many years now?
So the argument that the non-bank lenders are making is that the borrowers who don't use credit are essentially being shut out. And it could be for a lot of reasons. Personal reasons, could be a bankruptcy or a foreclosure. But is there a legitimate argument to be made that those who chose not to use credit are actually being shut out?
There is a legitimate argument there. You can be a responsible person who has chosen not to really use credit cards or other types of debt and be negatively impacted with your credit score as a result. Because credit scores are largely based on the consumer's previous ability to manage debt. There's still questions around that. I mean, how many people get a mortgage without having used some type of credit in the past? There is a question.
Well, that was a big problem before the downturn is that so many people were eligible for a mortgage and to buy a house. I mean, it's like walking into a bank and you could do it.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–1:14
2
What is the dispute between banks and non-bank lenders over mortgage credit scores?
1:14–3:19
3
How do FICO scores and Vantage/credit-reporting scores differ for mortgage approval?
3:19–7:24
4
What role do Experian, Equifax and TransUnion play in the credit-score marketplace?
7:24–9:22
Speakers
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