You may have noticed the big media splash recently when Fair Isaac, developer of the iconic 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 publications such as The Wall Street Journal and was highlighted on national TV network news. Steve Brown, president of the National Association 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.”
What nobody mentioned about the score, dubbed FICO Score 9, is that most homebuyers aren’t likely to see any direct benefit from it anytime soon, very possibly not for years.
Role of Fannie, Freddie
That’s because the two dominant financing sources in the mortgage market – Fannie Mae and Freddie Mac – are not planning to use the new score in evaluating loan applicants for the foreseeable future. And major banks and mortgage companies aren’t jumping to adopt it either.
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 – 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 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 homebuyers 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.
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 they are still in the process of evaluating whether to even use FICO 8, now 6 years old and the last big, consumer-friendly model change. Neither company can provide time lines on when even that set of earlier scoring advances will become part of their underwriting systems, much less FICO 9.
Major lenders hesitating
Major mortgage lenders feel the same way.
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 impact on approvals and rejections.
So why the general lack of urgency within the mortgage industry about using the new model? Among other reasons, it can cost substantial sums of money to re-tool complex automated underwriting systems.