You may have noticed the big media splash recently when Fair Isaac Corp., developer of the FICO credit score, announced the debut of a new score version that no longer would penalize consumers who have medical debt-collection issues in their credit files.
The announcement hit the front pages of newspapers and was highlighted on national TV network news. Steve Brown, president of the National Assn. of Realtors, was so enthusiastic about the new score's potential that he predicted it would "make a real difference in the lives of millions of Americans who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores."
Wow. Break out the champagne, right? Maybe not so fast. What nobody mentioned about the score, dubbed FICO Score 9, is that most home buyers aren't likely to see any direct benefit from it any time soon, very possibly not for years.
That's because the two dominant financing sources in the mortgage market —
None of this detracts from the merit or potential value to consumers of FICO's new score. The company says that by separating out medical debt-collection issues — which are commonplace negatives in millions of consumers' credit files — from other types of collection actions, the FICO 9 model will more fairly rank the actual risks posed by some applicants compared with others. For borrowers whose sole major negative credit file account is an unresolved medical debt, Fair Isaac estimates that the new model will increase scores by a median 25 points.
FICO 9 also is designed to more fairly treat applicants who have limited accounts on file with the credit bureaus — often young, first-time home buyers or consumers who have made minimal use of credit cards and other forms of personal credit.
So on the surface, the advent of the new score is a big deal. But here's the real world: New FICO score models only matter in the mortgage market if lenders choose to use them to evaluate applicants. And, based on my discussions with leaders in the mortgage field, FICO 9 is a long way off from adoption. It's not likely to help many buyers any time soon, despite the hype.
Start with Fannie and Freddie, the giant mortgage investors. Both use, and have confidence in, FICO scores from model changes dating between 2004 and 2008. Both tell me that they are still in the process of evaluating whether to use FICO 8, now 6 years old and the last big, consumer-friendly model change. Neither company can provide timelines on when even that set of earlier scoring advances will become part of their underwriting systems, much less FICO 9.
Asked whether and when it planned to use the new FICO score,
Some bankers note that they already ignore or discount negative medical debt items on applicants' credit reports and say a scoring change won't have much of an effect on approvals and rejections.
Pete Mills, senior vice president of the Mortgage Bankers Assn., said home loan industry adoption of the new FICO score will hinge on whether Fannie and Freddie include it in their underwriting guidelines that are provided to lenders. Until then, Mills said, "we expect industry adoption to be limited."
So why the general lack of urgency within the mortgage industry about using FICO's ballyhooed new model? Among other reasons, it can cost substantial sums of money to retool complex automated underwriting systems, especially at Fannie and Freddie. Lenders have to weigh the costs and benefits.
As one industry leader put it: "Will the relatively small improvements be worth the expense" and hassles? And with all the other regulatory changes mandated by recent financial reform legislation, do we have the time and manpower to devote to analyzing the effects of FICO 9?
The sobering answers for home buyers appear to be no.