Trended Credit Data Unintended Consequences

Trended Credit Data unintended consequences.

Fannie Mae has postponed(until further notice) the new automated underwriting system DU 10, including introducing Trended Credit Data.

Fannie Mae was expecting all three of the repositories to be ready with their trended credit data. Unfortunately, Experian® is not ready with their account history. Fannie initially considered moving forward using the old FICO®5 scoring model with Trended, but that is now on hold.

Trended credit data is an important improvement to the FICO® scoring model. FICO® scores were designed to predict the likelihood of repayment based on a consumers past payment behavior.

What consumer below do you think is more likely to pay their bills in the future?

  • The consumer that keeps their balances low and pays more than the minimum amount over the course of two years?
  • The consumer that keeps their balances maxed out during the same time period and makes the minimum payments. Then that consumer pays off their credit cards in the current month?

Under the old credit scoring system, both borrowers would be scored the same. The argument could be made that the second borrower may just pay their balances differently. If you are trying to make the case for a more predictive scoring model, Trended Credit data is a clear advantage for predictability.

Fannies original plan was to Update to FICO®9 (I criticized FICO®9 when it was initially introduced). When FICO®9 came out relatively soon after FICO®8, I thought completely ignoring collections after they were paid was a mistake. I believed consumers with a collection should pay some sort of penalty even if the collection was paid (but not the crazy penalty that they pay today on FICO®5). FICO®9 ignores all paid collections. In addition they said that medical collections would be discounted in their impact on the FICO®9 credit score (something I agree with). This new trended information will off set the ignored collection with better analytics.

So here we are June 30th and no Trended Data, no FICO®9 and no VantageScore®. Mel Watt has been getting a lot of pressure to update the scoring models and VantageScore 4.0 is on deck. Yes Congressmen have been pressuring the Director of the Federal Housing Finance Agency to allow VantageScores to be used to originate mortgages using VantageScores for the first time ever.  Why would congressmen care what scoring model Fannie and Freddie use?

Did I mention that VantageScore® LLC is wholly owned by the three major credit repositories? Those are the “deepest of pockets” my friends.

What are the trended credit score unintended consequences going to be?

Credit scores are actually going to be less relevant if desktop underwriter version ten uses FICO®5 scores. FICO®5 do not include trended credit data.

Some lenders are going to have two borrowers with the same score get different underwriting decisions. If one borrower has a better trended credit profile than the other one will get approved and one will not. That will probably create more confusion around credit scores and consumers will get frustrated.

So Fannie and consumers are forced to use a FICO® score that is over ten years old. Hopefully we will get some changes shortly and when we do it will be the biggest change in the credit industry over the last twenty years.

 

Trended Credit Data Unintended Consequences
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Trended Credit Data Unintended Consequences

Trended Credit Data unintended consequences.

If you want to see more videos about credit and credit scoring check these out at www.thecreditguy.tv. If  you are a mortgage lender please share this on your Facebook or LinkedIn page.   If you have any questions, leave them down below I’d be happy to answer them.

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Go to www.getloanready.com to find other ways to improve your credit score. I’m Dave Sullivan here for the credit guy TV so you with a little bit me we’re going to change the credit industry thank you

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