With interest rates sky-high, mortgages are once again a major concern for millions of Americans. But for taxpayer advocates like NTU, mortgages are never out of mind—not just because we’re worried about the affordability of monthly payments, but because of the federal government’s enormous role in the mortgage market. The 2008 financial crisis and the bailouts that followed may feel like a distant memory, but they weren’t that long ago. Today, the federal government appears to be once again expanding its footprint in housing finance and edging toward the very same risks that helped fuel that crisis.
That’s because Director of the Federal Housing Finance Agency (FHFA) Bill Pulte has been making decisions that increasingly threaten to endanger the safety and soundness of Fannie Mae and Freddie Mac (the mortgage finance Government Sponsored Enterprises that taxpayers have explicitly backed for nearly 30 years).
Case in point: Director Pulte’s series of moves—often by posts on X rather than formal guidance or requests for public input—that have the effect of degrading the quality of credit scoring methods. Taxpayers have a huge stake in ensuring that financial risks are properly and predictably measured for the government loan programs they have been forced to backstop. Credit scores are vital tools for taking those measurements, so the loan space has common reference points for creditworthiness. If a score is less predictive of a borrower’s risk, it could mean more people getting a mortgage with a higher probability of default. That would leave taxpayers holding the bag.
In fact, just earlier this week, Director Pulte issued an order to the GSEs over X to use the same Loan-Level Price Adjustment pricing grid for credit scores from VantageScore as they do for those from FICO. The LLPA framework is used by Fannie Mae and Freddie Mac to adjust mortgage pricing based on borrower and loan characteristics, such as credit score, loan-to-value ratio, and property type.
On face value it might seem positive, but it essentially eliminates the 20-point pricing adjustment that had helped account for differences between the two scoring models, potentially giving VantageScore’s credit indicators a more direct role in determining mortgage pricing.
This gives VantageScore a perceived leg up over FICO, thereby creating the possibility that lenders will choose Vantage because of its more permissive standards for qualification and then dump those mortgages to the taxpayer-backed GSEs. This is exactly the type of scenario that NTU has been warning about for nearly a decade.
The point isn’t to choose FICO over VantageScore or vice versa. Nor is competition in financial services, including credit scoring, a bad thing. But, when government rigs the rules toward a policy outcome that does not put safety and soundness first, taxpayers may be left in the system that fails to protect them. Even the non-partisan consulting firm Milliman found that the average interest rate was higher for VantageScore loans compared to FICO. Its report noted, “we found that loans originated under Vantage received interest rates higher on average than loans originated under Classic FICO. The data indicated that an unexplained interest rate gap of ~9.3 bps remains after controlling for observable borrower characteristics, loan characteristics, the underlying mortgage rate, and cohort effects.”
Higher interest rates for VantageScore mortgages mean monthly payments are higher and that borrowers may be riskier. NTU is still analyzing what this means for taxpayers, but this entire FICO-VantageScore saga has us asking more questions than ever.
1. Will there be a public comment period for these changes?
Given that the GSEs backstop such an enormous amount of part of the economy, will taxpayers, industry, and other stakeholders be allowed to comment on FHFA’s changes? The government works best when all voices are able to provide their input and this move is the latest where there is no ability to submit positive or negative feedback.
2. Are decrees via X legally binding?
Rather than issue formal rulemakings or other traditional agency actions, Director Pulte has frequently announced FHFA decisions over social media. This raises an important question: what legal effect does an announcement on X actually have? The FHFA is a federal regulator exercising significant authority over Fannie Mae and Freddie Mac, and its decisions can have substantial consequences for borrowers, lenders, investors, and ultimately taxpayers. Those affected by FHFA decisions deserve to know whether an X post is merely an announcement of an action taken through some other legal mechanism or whether the post itself is intended to constitute the agency’s operative directive. Either way, the word limits on X do not afford sufficient room for exploration and analysis of Director Pulte’s latest decree.
3. Will the report claiming this move will save borrowers $1,600 be made public?
On X, Director Pulte cited that this move would save the average borrower $1,600 at the time of closing. This figure appears to come from an analysis by Rocket Mortgage. Again, this estimate underpins a major policy change, and taxpayers deserve to see the math in detail.
4. Was there a stress test done of these changes?
Before implementing changes of this magnitude, did FHFA conduct any stress testing or scenario analysis to determine how they could affect mortgage markets, the GSEs’ financial condition, and ultimately taxpayers? In particular, was the impact of these changes evaluated under adverse scenarios, such as a housing-market downturn, rising mortgage delinquencies, declining home prices, or broader financial-market stress?
The biggest question that we have is where is Congress’ oversight? FHFA’s lack of transparency is an affront to taxpayers, borrowers, and lenders—something that must be addressed. From our conversations, many members of Congress are concerned about FHFA’s direction and managerial approach. Let’s hope they begin demanding answers sooner rather than later.