TransUnion has released a new analysis evaluating the potential consequences of the Federal Housing Finance Agency’s (FHFA) proposed switch from tri-merge credit reporting to a bi-merge model, finding that the change could result in an unintended step back for credit availability.
Billed by the FHFA as a way to promote competition between credit bureaus and reduce lender credit reporting costs (and pass the savings to borrowers), TransUnion claims that the biggest impact would be two million consumers becoming ineligible for a mortgage backed by Fannie Mae or Freddie Mac.
That ineligibility, per TransUnion, would stem from gaps that can exist among lenders when it comes to reporting a complete credit picture, particularly if a potential borrower’s most favorable set of credit data comes from the bureau that would get excluded in the bi-merge.
The shift could also end up costing consumers more than it saves, with 600,000 new borrowers every year paying more in interest due to an incomplete credit picture being used for underwriting. Per borrower, it could cost $6,600 in additional interest over the life of a loan, according to TransUnion.
“Under a bi-merge, first-time homebuyers who have thin files or are new to credit could become unscorable or, if they are scored at all, could be charged a higher interest rate than they would otherwise,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion. “Just one missing tradeline that may result from using one less credit report could dramatically impact eligibility and monthly payments. Ultimately, the decision to only use two credit reports could make all the difference in whether an interested homebuyer is able to buy a home or not.”
Most likely to feel the impact in such a situation are low- and moderate-income earners, as well as many first-time buyers. Additionally, there could be unforeseen negative impacts on mortgage equity, as Black and Hispanic borrowers comprise a large part of the cross-section of potential borrowers with credit scores around 620, nearing the eligibility threshold for a government-sponsored enterprise mortgage.
Moreover, TransUnion asserts that, on top of disqualifying potentially creditworthy borrowers, the reverse could also come to pass: an inaccurate picture of otherwise ineligible borrowers could result in more unqualified approvals, potentially raising the risk of default. The company estimates that 200,000 applicants who would be turned down for an agency mortgage under the tri-merge would be able to borrow under the bi-merge plan. Incomplete information could also result in some borrowers paying less interest than merited by their true risk picture, depriving Fannie and Freddie of some $4 billion in risk-based fees.
“By intentionally bypassing vital consumer credit information from the third credit bureau, the proposed changes could result in miscalculated consumer affordability and risk,” said Jason Laky, executive vice president and head of U.S. financial services. “As a result, many consumers will be given mortgages that they cannot afford or at higher cost. We’ve seen the devastating effect that had on homeowners during the Great Recession.”
“Not only will consumers save less than one fifth of one percent of mortgage origination costs by not paying for complete data,” added Mellman, “but mortgages could ultimately become more expensive if investors demand higher premiums to compensate for additional risks, vendors charge more to make up for a complex transition, and lenders charge more to recoup additional legal, compliance, and regulatory oversight needed.”