FHFA Dual Credit Score Mandate Faces Scrutiny

The Federal Housing Finance Agency's (FHFA) decision to mandate the use of two credit scores for mortgages sold to Fannie Mae and Freddie Mac is facing criticism for potentially increasing costs and complexity without clear benefits. This mandate, revealed through Freedom of Information Act (FOIA) disclosures obtained by the Housing Policy Council, contradicts the recommendations of Fannie Mae and Freddie Mac themselves.

Both government-sponsored enterprises (GSEs) had evaluated credit score models and recommended a transition to a single, modernized credit score that includes trended credit data. They advised against requiring an additional score, suggesting it would complicate the process. However, the FHFA overruled this recommendation, opting for a dual-score framework. This decision is expected to have significant consequences for borrowers, lenders, and small businesses by introducing uncertainty into mortgage underwriting and raising operational costs.

The FOIA disclosures highlight that the FHFA's internal review process also acknowledged the complexity of implementing a dual-score system. The agency recognized that requiring two different scores represents a "significant change" and would necessitate a multiyear effort due to its "complexity and broad impact to the industry." Furthermore, the FHFA noted that credit scores are integral to the entire mortgage process, and coordinating the operation of two distinct scores across various systems would demand extensive collaboration among lenders, investors, mortgage insurers, and other stakeholders.

Despite these acknowledgments of complexity and the GSEs' contrary recommendations, the FHFA proceeded with the dual-score mandate. Critics argue that the agency has not adequately demonstrated the benefits of this approach to justify the increased costs and operational challenges it imposes on the mortgage market. The Housing Policy Council's FOIA request aimed to shed light on the review process and the rationale behind the FHFA's decision, raising questions about whether the mandate truly serves the stated goals of lowering costs and expanding credit access.