A proposed change by the Federal Housing Finance Agency (FHFA) to the mortgage application process could have unintended consequences for potential homebuyers, according to credit reporting agency TransUnion. The change would involve using two credit reports instead of three to determine a buyer’s credit score. However, TransUnion warns that this shift could result in 2 million consumers becoming ineligible for a government-sponsored enterprise (GSE) mortgage, as it may create an incomplete picture of an applicant’s creditworthiness and exclude favorable data from the calculation. In addition, if 5% of all Americans were to borrow a new mortgage based on a bi-merge score, TransUnion estimates that 600,000 new borrowers could face higher interest rates and pay an additional $6,600 over the lifetime of their loan. The proposed change could disproportionately affect those with credit scores of around 620, who are often young, low-to-moderate income individuals and Black or Hispanic groups.
TransUnion also highlights potential issues for borrowers who do qualify for a mortgage under the new system. If economic conditions worsen or borrowers experience financial stress, they may find themselves in products they cannot afford. The TransUnion analysis suggests that these consumers could be at risk of losing their homes and life savings, as seen during the Great Recession. There are also concerns about lenders gaming the system by selecting the bureaus with the highest credit scores, which could lead to an artificial rise in credit scores without a corresponding decrease in risk. TransUnion warns that this could result in GSEs losing billions of dollars in risk-based interest fees each year, ultimately impacting taxpayers or leading to higher prices for lower-risk borrowers. Recommendations include analyzing the potential negative impact on consumers, exploring programs that encourage fair lending, and adopting rental reporting on a larger scale to assess creditworthiness.
In response to the proposed change, the FHFA has postponed implementation to allow for public engagement and feedback from market participants and stakeholders. TransUnion urges the FHFA to analyze their findings and release them to the public to account for any negative impact on consumers. They also suggest exploring other programs that promote fair and expanded lending and consider rental reporting as a factor in assessing creditworthiness. In the meantime, consumers are advised to educate themselves about mortgage underwriting, shop around for lenders that use the most favorable data, and be aware of the potential consequences of the shift to a bi-merge system.
