This week, the Federal Housing Finance Agency released a long awaited rule as required by the landmark Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. FHFA’s finalized rule establishes new requirements for the validation and approval of credit score models by the two Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.
The rule includes a straightforward four-step process by which the GSEs evaluate and implement alternative credit-scoring models. The four phases include: Solicitation of applications from credit score model developers; Submission and initial review of submitted applications; Credit score assessment; Enterprise business assessment.
If there is one lesson from the 2008 housing crisis that should have been learned, it is that overly ambitious affordable housing goals and the rush to qualify numerous borrowers by any means can put the economy, and taxpayers, at great risk. GSEs utilize credit scores in several ways including benchmarks for risk fees, loan eligibility guidelines, and (for Freddie Mac) one of many attributes in making a credit assessment. They are also used internally to balance counterparty risk, an often-overlooked but very important role. Thus, allowing new credit score models into the GSE framework could have major consequences for their operations, their risk, and in turn taxpayer liabilities.
In response to FHFA’s rule, NTU Policy and Government Affairs Associate Thomas Aiello released the following statement:
After eleven years in conservatorship, Fannie and Freddie still pose a systemic threat to American homeowners and even the global economy. To that end, with taxpayers underwriting $7 trillion in mortgages, the activities of the GSEs remain a top of mind issue for taxpayer advocacy groups like NTU.
With so much at stake, it is crucial that all policymakers - both in Congress and in the bureaucracy - do everything in their power to ensure the GSEs safety and soundness are prioritized. While the rule mostly retains the proposed rule from 2018, which NTU strongly supported, we are disappointed that a provision that would have prevented conflicts of interest in the credit score process was removed.
As the credit score model approval process continues, we hope the GSEs will adopt scores that are well tested and precise. Maintaining rigorous credit standards will make sure qualified borrowers are able to obtain a mortgage while minimizing the risk of default. NTU looks forward to future engagement with Fannie and Freddie on this issue, and many other issues as they relate to taxpayer interests.
To read NTU-led coalition letter in support of the proposed rule, click here.
To read NTU’s policy paper on the consequences of relaxed credit scores on Fannie and Freddie, click here.