The Biden Administration took steps to enable less credit-worthy borrowers to qualify for mortgages to support the housing market. Now the Trump team is doing the same in the name of boosting home ownership and lowering costs for borrowers. Why is the administration pushing a more “inclusive” housing program? Does a cell phone now qualify you for a no down payment mortgage? Who pays when things don’t work out as planned?
The new Trump proposal to change credit scoring
Enter Federal Housing Finance Agency (FHFA) director Bill Pulte, who announced Tuesday that Fannie and Freddie could begin to guarantee mortgages based on credit scores generated by the firm VantageScore. “My ORDER today (thanks to my boss, POTUS) will allow for Americans to use their RENT to qualify for a mortgage,” he tweeted.
On the surface, changing the credit scoring model doesn’t sound like a major change, but as I dug deeper, a profound shift is happening. VantageScore promotes its scoring model as more “inclusive” than FICO because it incorporates rent, utility and telecom payment histories. This means younger and lower-income people who rarely borrow or use a credit card can still get good scores. VantageScore says its credit model could allow five million more prospective homebuyers to qualify for loans.
Vantagescore vs Fico
Vantagescore promotes itself as more inclusive in order to develop credit scores with very little data.
FICO: Requires at least six months of credit history to generate a score.
VantageScore: Can generate a score with as little as one month of credit history, making it potentially useful for those with limited credit history. Furthermore, the payment history could include rent, utility payments, etc…
Why care about a change in scoring models?
The big risk is that mortgage lenders will rely on VantageScore’s ratings to qualify marginal borrowers and make riskier loans. The left-leaning Urban Institute last year found that VantageScore’s scores on average were higher than FICO’s. Furthermore, the data used by VantageScore is considerably different. For example a car payment on time over a long period of time is much more important to credit worthiness than a cell phone bill for one month. Under VantageScore borrowers with only for example a cell phone bill or a utility bill could receive high credit scores.
Furthermore the VantageScore gives a 10% less weight to utilization. In every cycle we have seen the more leveraged you are the higher the default rate is. Long and short VantageScore is allowing considerably riskier borrowers to receive high credit scores and in turn get mortgages that are ultimately backed by every taxpayer if there is a default.
VantageScore utilization will result in higher defaults
The Government is already playing with fire in real estate providing loans with as little 3.5% down. With the new VantageScore, someone theoretically who only has a cell phone bill that they have paid on for a month would have a score high enough to qualify for an FHA loan with only 3.5% down. Furthermore, that same borrower could negotiate so that the seller credits them 3.5% at closing for “repairs”. Now the borrower is putting nothing down.
The riskiness to taxpayers is off the charts and will lead to a huge uptick in defaults. Couple this new program with the peak of a real estate market and the results will be catastrophic.
How will this play out in real life, look at solar bonds
Over the past 10 years or so fintech companies have been using alternative methods to qualify borrowers for loans. This is similar to what VantageScore is aiming to do. To see what happens in real life, we can look at the price of bonds tied to rooftop solar. The fintech companies focused on rooftop solar installations and sold bonds on Wall Street. We now have some data on what happens after the dust settles and it is not pretty. Some of the bonds sold are now trading at 40 cents on the dollar meaning the market is factoring in that they might get back at most 50 cents on every dollar invested. Essentially the solar bonds have lost 60% of their value as there are questions on repayment of the loans.
The same thing will happen with mortgages using VantageScore coupled with a low downpayment loan. We saw in the last cycle that defaults increased based on equity. This same trend will be turbocharged with even less creditworthy borrowers.
Summary:
On the surface, changing a scoring model should not be monumental, but as I read and learned more, the reality is far different. Once I look at the details it is quickly apparent that the federal government is setting up another subprime type of disaster we saw in 2008.
Using a new scoring model that allows good credit scores with only one month of payment history on items like a cell phone is a recipe for disaster. When you couple inflated credit scores with low downpayment loans while at the peak in the real estate market a disaster is in the future. Although we don’t know when the reset will occur the losses will be extraordinary. If we look at what is happening on solar bonds trading at 40 cents on the dollar taxpayers are going to be on the hook for some huge losses. The sad part is that the federal government should be doing just the opposite at this stage in the real estate cycle by increasing credit scores and along with requiring higher downpayments in order to mitigate risk at the top of the market. Unfortunately, at the end of the day this will lead to huge losses for taxpayers, ultimately higher deficits, and higher interest rates for everyone else.
Additional Reading/Resources
https://www.fairviewlending.com/credit-scores-fall-25-impact-real-estate/
https://www.fairviewlending.com/why-are-mortgage-rates-rising-when-they-should-be-falling/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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