The S-Curve

Insights on Updating GSE Credit Score Policy

Richard Cooperstein

FHFA held a listening session for interested parties on its proposed rule on the GSE process for credit scores.  The objective is making mortgage underwriting and pricing more accurate and more fair while balancing practical implementation by firms in the mortgage ecosystem.  Along with many others, I had the opportunity to provide insights on this proposed rulemaking.


  1. The mortgage credit score market is better served by 2 providers rather than 1, or 10. Other consumer credit markets have had two major providers for years and the main reason only one score is used for mortgages is regulatory restriction. Why two? The credit score market has core characteristics of a regulated utility. Providers are commercial enterprises that have barriers to entry and large externalities; negative if run poorly, positive if run well, and large information asymmetries. Their mission is profitable but not profit maximizing. Two regulated actors provide innovation and service to market while limiting confusion or destructive competition.

  2. Credit providers set the rules for which score, not the credit requesters. There is concern that with a choice of credit scores, originators will pick off the GSEs. This is a false concern since FNMA (soon FRE) hasn’t used credit scores for years. As a major investor in credit risk, FNMA uses core consumer data and doesn’t rely on third party metrics. Estimates are that a dual score model could cost $500 M over three years. Since several thousand originators in other markets already use two scores this seems unlikely. Even if true, this amounts to 1 basis point on mortgage origination volume over this time.

  3. Important consumer data is not included in classic credit scores today, and some may never be because they’re not credit data, such as Trended Data, Telecom Utility data, and rental data.  Regulators should ensure that all card companies report Trended Data.  Even if it’s possible to combine into one score, it may not benefit consumers to have an even broader opaque metric of their financial lives controlled by private companies.

  4. It’s likely that expanding consumer financial data in mortgage underwriting and pricing will benefit first-time buyers and under-banked populations that have been historically discriminated. Since digital availability is widespread, transition expenses should not be a reason to avoid improving lending fairness.

  5. The data necessary to build a quantitative bridge from old scores based on limited data to new scores based on expanded data should eventually be generally available so the broader market can make their own risk decisions as well as the GSEs (MIs, servicers, investors, researchers, etc.).

It’s clear that important consumer credit data is available outside classic credit scores and that perhaps should not be embedded into single consumer credit metrics. This extra data is quite likely to benefit first time homebuyers and underserved populations. Finally, it’s quite likely that this highly regulated, private market will provide larger benefits to consumers with two actors rather than one, or ten.