On the heels of today’s announcement from Federal Housing Finance Agency (FHFA) Director Sandra Thompson that taxpayer-backed mortgage giants Fannie Mae and Freddie Mac would be forced to use dual credit scores for approving loans, Pete Sepp, President of National Taxpayers Union (NTU) provided the following statement.
“As the first line of defense for taxpayers against further bailouts of Fannie Mae and Freddie Mac, FHFA has a clear statutory mission to put the safety and soundness of the housing finance system above all other considerations. That mission, and the responsibility to carry it out, has not changed with Director Thompson’s decision to pursue a dual credit score policy. Although FHFA may not have chosen the most volatile and disruptive of the four options for credit score models that apply to Fannie and Freddie, there are now numerous questions and considerations that must be methodically explored.
As one of the participants in FHFA’s listening session over credit score models, NTU observed that the estimated regulatory costs on the private sector of requiring multiple scores, or ‘lender choice,’ or a ‘waterfall,’ are highly dependent on the particulars of how policy is formulated, the state of the housing economy as the policy is implemented, and a number of unknown factors that always seem to show up well after the policy has supposedly been functioning. Fannie and Freddie have, themselves, warned of these as-yet uncalculated costs, despite FHFA’s admirable attempts to capture the burdens during its policy formulation process. So did an NTU-led coalition of 11 organizations, which stated in a letter to Director Thompson, “our collective experience tells us that even [FHFA’s] compliance cost ‘ceiling’ is more likely to be a floor.”
Given widespread signs of a declining housing market as well as an emerging consensus among experts that the economy is slowing, introducing multiple credit scores in a key part of the mortgage underwriting process carries particularly greater peril to the financial system – emphasizing the need for particular care to understand this decision and methodically plan any transition.
This in turn raises critical questions for federal fiscal policy, and, by extension, taxpayers, who remain exposed to the risks taken by Fannie and Freddie. Is the goal of this new policy truly to introduce more competition in credit scoring, or is it to simply qualify more loans which may not be as creditworthy as before? Will new models all be held to the same neutral standards, again stressing accuracy and reliability? With the national debt having grown to record proportions in the space of a few years, how exactly will FHFA fulfill its critical duty to prevent a meltdown in Fannie and Freddie’s portfolios that could tip the federal balance sheet toward disaster?
These are not academic questions, and NTU is hopeful that Director Thompson’s characteristically thoughtful approach to sound processes will allow the entire policy community to concentrate on answers now. FHFA’s listening sessions and a 2018 rulemaking have outlined broad proposals for how the Government-Sponsored Enterprises (GSEs) might approach credit score models in the future. But such “models” are only worthy of the term when they are meticulously developed, rigorously tested, consistently predictive, and prudently employed to manage financial risk. So it should be with any policy toward such models, which has now moved from generalities to specifics.
Accordingly, NTU urges Director Thompson to order a public notice and comment period for what amounts to a new major rulemaking that could significantly affect the well-being of taxpayers. This should include disclosure of FHFA’s and the GSEs analysis of whether any models were more accurate than others. The House Financial Services and Senate Banking Committees should also hold public hearings on an action such as this, which could have serious implications for taxpayers. Other federal agencies, including the Small Business Administration Office of Advocacy and the Office of Information and Regulatory Affairs, should be consulted as well to focus on the two central matters to FHFA’s policy decision: obtaining more precise cost estimates for private sector compliance and measuring more precise risks to taxpayers.
Earlier this year, the NTU-led coalition noted that ‘by properly doing the job for which it was created, FHFA maintains the financially robust structure that is a prerequisite for any other policy decisions concerning GSEs.’ That statement has never been truer now. Director Thompson’s announcement today should be regarded only as the beginning of cautious deliberations involving all who will be affected by a policy shift with major consequences.”
Since the 1980s NTU has taken an active interest in the safety and soundness of the taxpayer-backed housing finance system. For more information, including a recent NTU study on government-mandated credit score competition entitled “Risky Road,” visit ntu.org.