Economists' Outlook

Housing stats and analysis from NAR's research experts.

The Fair Isaac Corporation recently introduced a new scoring model. The model could help to expand credit to first-time and minority groups. But there is a problem: Fannie Mae and Freddie Mac, who support the majority of the mortgage market, don’t use the new model.

In "FICO 9", less emphasis is given to the impact of unpaid medical bills and the effect of missed payments on debts that have subsequently been paid off are eliminated. FICO estimates that the new model could improve scores by 25 basis points for the former group and by as much as 100 points for the latter group. Survey participants were asked if this new scoring model would increase accepted applications at their firm.


A 60% majority indicated that the new scoring model would increase accepted applications. Five percent indicated that it would not impact their decision to accept as they use an earlier version of the model, while 35% deferred to their investor’s model or that of the GSEs. This result was a surprise on the upside, but likely reflects the large share of small banks in the survey panel. Small banks can portfolio loans and are less dependent on the GSEs to purchase the loans they underwrite, hence a lower reliance on the old credit models. The same cannot be said for mortgage bankers and banks who originate loans to be sold to the GSEs.

The innovations in FICO 9 are not new though. VantageScore 3.0, the year-old product from FICO’s main competitor VantageScore, had these same methodologies. What’s more, these newer models incorporate utility and rental payments, information that helps lenders to evaluate younger persons and minorities who might not have a history of credit use (e.g. no car, credit card, or mortgage payments).


Work by the Harvard Joint Center for Housing Studies indicates that borrowers with lower incomes as well as minorities face higher rejection rates on their mortgage applications. [1] NAR analysis of mortgage data from 2007 to 2013 in the HMDA dataset indicate that the share of rejected loans due to credit scores were significantly higher for African Americans and American Indians, ranging from 2.1% to 7.0% higher for African Americans versus Whites over this time frame.


Over the coming decade, minority and first-time buyers are likely to play a more important role in the housing market. These innovative new models that exploit better information could help to usher in their participation.


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