“lender Choice” Relies On The Myth Of Adverse Selection

The idea of “lender choice”, or the insinuation that mortgage lenders will choose the credit score that allows them to originate more mortgages, relies on the myth of adverse selection. This concept assumes a level of discretion and disorder that simply does not reflect how the current (or future) mortgage market operates. 

The false underlying premise is that lenders will freely game credit scores because mortgage lenders now have a choice between using the outdated FICO Classic credit score and the newer, more predictive VantageScore 4.0 credit score. That false conclusion rests on the premise that there are no governing rules implemented by the FHFA, Fannie Mae and Freddie Mac.

There are now two scores in the mortgage market: an older, legacy FICO Classic score and a newer, more predictive one: VantageScore 4.0. Treating them as interchangeable ignores the fact that one demonstrably improves risk assessment, while the other has well-known limitations. The real question is not whether credit score choice exists, but how it is structured. Mortgage lender credit score choice is here to stay because it is mandated by the 2018 Credit Score Competition Act.

Neither lenders nor other market participants believe in the myth of “adverse selection.” Lenders already operate under internal controls designed to avoid it, and the GSEs will impose their own rules through automated underwriting, monitoring, and enforcement. The idea that this will devolve into a “Wild West” is simply inconsistent with decades of GSE practice.

It is also important to note that the status quo, which led to Fannie Mae and Freddie Mac entering conservatorship, relied on a single credit score. That model was FICO Classic. That model was the only one being used for mortgages during the 2008 financial and it failed to predict the mortgage crisis. Does the author really want a return to that fiasco? 

Rather than suspend enacted law and policy based on contrived and fantasy assumptions, the industry would be better served by carefully reviewing and implementing FHFA rules expeditiously. 

Tony Hutchinson is the EVP and Head of Public Affairs at VantageScore.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.