You may be aware that the Federal Housing Finance Agency has introduced new credit timelines. Why? Its main motivations are:
- To streamline loan production
- To reduce the amount of loan fraud and repurchase requests
What does that mean for lenders? What about the broader housing market and those wanting to purchase a home using a mortgage? Read on for insights from A and N Mortgage’s industry experts as they discuss this new FHFA rule.
Overview: What is changing for the credit industry, and when is it changing?
The original FHFA guidelines required lenders to acquire credit reports from three different agencies to issue a loan. Now, the number of required reports will drop from three to two. This exciting change also coincides with the FHFA switching from its long-standing FICO credit score model to a new approach: VantageScore 4.0 and FICO 10T.
The agency announced the new rules back in 2023, but the public comment period ended only in February of the following year. While the cogs start turning on this credit modernization, the FHFA has vowed to work closely with all stakeholders to ensure a smooth transition (rolling out in the first quarter of 2025).
The FHFA’s Credit Modernization Strategy’s Goals
These new guidelines aim to modernize credit reporting, which would strengthen the process of validating and approving borrowers’ credit scores. More specifically, the new credit reporting models will use trended credit bureau data instead of traditional data.
Trended data covers a borrower’s history for the past 24 months. It’s a bigger-picture view of how a borrower manages their finances.
The FHFA Announced an Extension to Modernize Credit Scores by 2026
In the two years since the FHFA’s original announcement, transitional timelines have emerged. The two major phases include the following:
- Phase 1: The FHFA will start introducing new credit score delivery and disclosure models to lenders during Q3 2024.
- Phase 2: The industry will incorporate these models for pricing and financing completely by Q4 2025.
Why Did the FHFA Extend the Credit Modernization Timeline?
The agency’s new reporting requirements were another step in the FHFA’s attempt to modernize credit score reporting, which started with Congress’s passing of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2014.
The EGRRCP Act is part of a broader attempt at strengthening consumer protections. The framework could stabilize the nation’s teetering mortgage industry, so nobody wants to rush things.
Are There Practical Implications of This Extended Rollout?
For lenders, the new FHFA rule could mean the following:
- Lenders will need to provide FICO 10T and Vantage 4.0 scores (during GSE purchasing)
- Traditional FICO scores fall away with only two credit reports required
- Lending institutions will start receiving new reporting data by the end of 2024 and need to adjust capital and pricing as this comes in (likely by the end of 2025)
The Credit Modernization Plan’s Impact on Stakeholders and Financial Market Dynamics
Experts understand that the new Fannie Mae credit score changes and ensuing timeline will have both positive and negative effects on the nation’s lending institutions.
Lenders
The most obvious benefit is reducing the credit reporting requirements, which should lower a lender’s costs. Savings on updated fees may pass to borrowers in the form of lower mortgage costs and interest rates.
On the other hand, lenders that continue to pull three credit reports (not two) may see higher fees from reporting—reporting policies and processes determine this. However, the FHFA still believes that the reduced risk of loan defaults will stimulate borrower interest. It also hopes to promote competition in the mortgage market for higher loan volumes.
Borrowers
From a homebuyer’s perspective, the new reporting guidelines provide access to housing through:
- Lower interest rates
- Lower credit score and down payment requirements for mortgages
- More precise Vantage 4.0 reporting system reducing potential loan defaults (the FHFA estimates by as much as 17%)
According to the FHFA, 37 million additional Americans will also be able to get loans.
Actionable Steps for Key Players After the Fannie Mae Credit Score Changes
Do the new credit reporting standards present a perfect opportunity? Yes! Lenders will reassess inefficiencies and reduce reporting overheads while incorporating the new reporting models into their decision-making.
Do you have questions about the new FHFA rule for credit reporting? Contact A and N Mortgage online or call (312) 961-4380 for clarity!
