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New FICO score may reduce mortgage defaults, but will the GSEs use it?

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FICO plans to release a new suite of scores that could reduce defaults on newly originated mortgages by 17%, but home lenders may not use it unless the government-sponsored enterprises do.

The release of the FICO Score 10 Suite — which also could reduce defaults on new-origination financing by 10% for bankcards and by 9% for auto loans — is scheduled for this summer, according to a company press release.

The new score incorporates trended data from the credit bureaus with the aim of improving risk management. Trended credit bureau data provides a view of consumer credit account balances over time rather than traditional static view of a consumer’s balances at a point in time.

The GSEs dominating the secondary market for U.S. mortgages show signs of getting more interested in exploring this type of credit analysis, but whether they will adopt an advanced FICO score remains to be seen.

To date, the older Classic FICO score is used in GSE underwriting, but Fannie Mae has asked lenders to submit trended data with their loans, Freddie Mac has tested an advanced underwriting model and the Federal Housing Finance Agency has a plan to evaluate credit scores.

"One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk," FHFA Director Mark Calabria said in a press release last year, when the FHFA issued its final rule on credit scores models.

In the rule, the FHFA permitted GSEs to use their current credit score model through Nov. 20. All credit score developers can vie to compete with Classic FICO and FICO’s advanced scores may be in the running.

Non-mortgage consumer-finance sectors have generally made more use of advanced credit scores and underwriting models than the mortgage industry.

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