New Housing Agency Rule Takes Promising Turn for Taxpayers

Yesterday, the Federal Housing Finance Agency (FHFA) unveiled a long awaited rule that could potentially change the credit score policies of Fannie Mae and Freddie Mac, the two Government Sponsored Enterprises (GSEs). This Notice of Proposed Rulemaking (NPRM) is a result of Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155, Public Law 115-174), requiring FHFA to create a process by which new credit scoring models can be validated and approved for use by the GSEs when they purchase mortgages.

NTU has consistently maintained that neither the legislation nor the rulemaking should serve as a pretext for other policy goals, such as meeting a predetermined level of qualified borrowers in GSE or other government lending programs. Fortunately, FHFA is taking those concerns seriously. The new rule avoided the path of sanctioning an illusory, government-driven form of “competition” among credit-scoring models by establishing sensible boundaries on how such models can qualify for consideration by the GSEs. The NPRM not only calls for sound cost-benefit analysis in evaluating new models, it also builds conflict-of-interest guardrails (which are standard in other regulatory spheres) to ensure that those models compete on a level playing field. This holds promise for creating a true market-driven competitive environment with an opportunity for innovation.

Prior to S. 2155 becoming law, FHFA engaged in an effort to hear responses from stakeholders to see how accepting multiple credit scores could impact the housing market. Their work resulted in a Request For Input (RFI) regarding “operational and competition considerations of changing Fannie Mae and Freddie Mac’s current credit score requirements.” National Taxpayers Union was pleased to submit comments in response to this RFI, urging FHFA to reject attempts to recklessly impose new mandates for credit scoring that could have heaped heavy compliance burdens on the lending sector. We believed then, as we do today, that doing so could also impact the bottom line of the GSEs, which remain backed by taxpayers.

From our comments to the RFI, which were joined by two other taxpayer-advocate organizations, we noted “We also strongly believe that introducing [government-driven] competition into this complex space has the potential to create a “race to the bottom” effect on our nation’s housing finance system. While it is a noble goal to encourage homeownership, reducing standards to achieve that outcome is reckless and perverse. In our view, imposing an alternative system with lower credit scoring standards would move in the opposite direction of these noble goals.” With its latest rule FHFA is showing commendable signs of embracing this view.

The Agency correctly notes in its NPRM that when FHFA considered its own RFI in late 2017 on whether to allow or even require the use of multiple credit scores in evaluating borrower qualifications, “a central theme from RFI respondents was that the operational challenges of implementing a multi-credit score approach would outweigh any benefits.” This too, would have downstream effects through the economy, as private-sector entities that evaluate loans backed by the GSEs would have to cope with numerous compliance and liability costs.

As the NPRM proceeds through the public comment stage, Congress will be able to support this progress by enacting comprehensive housing finance reform to reduce the amount of mortgage risk backed by the GSEs. For too long, taxpayers have been tasked with shouldering a burdensome amount of risk, which increases the likelihood of a future bailout. With the GSEs mired in conservatorship for more than a decade and having amassed more than $5 trillion in mortgage burdens, taxpayers need reform now more than ever. For many years NTU has weighed in on reforms to minimize taxpayer exposure to GSE risks while encouraging transparency and oversight of the entities. This has included comments submitted for several Congressional hearings this year.

The nation’s taxpayers can take some encouragement over the positive direction that FHFA’s rule appears to be taking. Maintaining this momentum in 2019 will be key.