As a general rule, according to Eric Rosenblatt, Fannie’s vice president of credit risk analysis and modeling, the new system will “benefit borrowers who regularly pay off revolving debt” and should “provide more creditworthy borrowers access to mortgage credit.” That’s a big deal.
Starting June 25, the new reach-back data will become an integral part of Fannie’s automated underwriting — an online system that is used by the vast majority of mortgage lenders to determine whether applicants are eligible for the loan they’re seeking. Two of the three national credit bureaus — Equifax and TransUnion — will supply two years worth of continuous, month-by-month data on the credit management patterns of millions of mortgage applicants.
This should prove especially important for consumers who might not qualify for a mortgage because their credit reports contain too little information to generate a credit score. Many of these would-be purchasers are first-timers — millennials just starting out on their careers. Others are individuals who simply do not make much use of credit but now need a mortgage.
TransUnion conducted a study of “unscorables” and found that by adding credit usage data into their reports, 26 million thin-file or unscorable consumers could generate credit scores and that nearly 3 million of these consumers could be classified as “prime” or “super prime” credit risks — possibly qualifying them for reduced interest rates from lenders, according to Joe Mellman, TransUnion’s vice president and mortgage business leader.
Fannie Mae’s use of the new credit report data will not affect anyone’s FICO credit score, but it will open the door for applicants who look marginal or unqualified yet demonstrate responsible credit management habits over time. They may not have vast amounts of credit available to them, but they pay off or limit their balances.
Experts in the credit industry consider the upcoming move by Fannie Mae to be a major advance in fairer credit. Terry Clemans, executive director of the National Consumer Reporting Association, says it amounts to “the biggest change to the mortgage credit report in nearly a quarter of a century.” Freddie Mac, the other big mortgage investor, is “evaluating” whether to adopt a similar approach, according to a spokesman.
Bottom line for you: Be aware that how you manage your credit could now become a key determinant of whether you get a mortgage. Transactors will reap the benefits; revolvers playing games with credit cards will get more scrutiny.
Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net