Why New FICO Standards Should Keep Risky Borrowers Out of the Housing Market

Why New FICO Standards Should Keep Risky Borrowers Out of the Housing Market

Starting this summer, 80 million Americans could see changes to their FICO score, the key credit score used to determine rates on everything from credit cards to mortgages. The new standards should help keep riskier borrowers out of the housing market, said Doug Duncan, chief economist at Fannie Mae. 

“The credit analysis business is to determine who's on a knife's edge, [whether] getting into a mortgage would actually tip them over if there's a problem in the economy,” said Duncan, who helps analyze the economy for Fannie Mae, the government-sponsored entity that is one of the largest buyers and packagers of home loans. “You've seen some things in the news about credit scores and the rejiggering of credit scores. That's key in trying to figure out what's sustainable in terms of a mortgage. They don't just want to give people a mortgage, you want to make sure it's sustainable.”

The new score, called FICO Score 10, will look at a potential borrower’s past 24 months of credit history — versus the snapshot used now — and is designed to have better predictive ability in determining an individual’s ability to repay a loan.

Duncan pointed out that it’s only one important tool for lenders. Also part of the “complex calculation” of whether to give a loan and at what rate is the borrower’s debt composition, ie student debt, etc. 

After reaching a peak of 11.5% in the first quarter of 2010, following the financial crisis, the delinquency rate for single-family residential mortgages has been steadily declining, according to the St. Louis Federal Reserve. It stood at only 2.5% in the third quarter of 2019. 

Duncan said 2020 should be a strong year for housing, in part because mortgage rates should continue to be low. “The expectation for the housing market is it will pick up strongly this year, probably about a 5% increase in new home sales and a 1.5% increase in existing home sales.”

Source: "Why new FICO standards should keep risky borrowers out of the housing market" Yahoo Finance (January 24, 2020) Julie Hyman