Populist rhetoric on housing has devolved into nonsensical policy suggestions. Nowhere is this more evident than in FHFA director William Pulte’s move to open the floodgates to millions of unworthy borrowers to finance homes.
In a series of promotional and exaggerated over–the-top tweets, the housing director announced lenders could now underwrite mortgages backed by Government Sponsored Enterprises (GSEs) using an alternative credit-scoring algorithm known as VantageScore 4.0. The main difference between the two models is that VantageScore aggregates unconventional benchmarks for creditworthiness, such as payment histories for rent and utilities. The intended effect is to stimulate mortgage applications among thin-line borrowers with less extensive credit profiles. FICO’s 10T model, which is the industry standard for mortgage underwriting, cannot generate reports for people with minimal credit histories.
The FHFA director identified a boogeyman in FICO’s dominance of the credit scoring market and sought to stimulate market competition by sanctioning VantageScore. The company currently charges an underwhelming $4.95 for credit bureaus to pull credit scores. To put that into perspective, closing costs typically amount to thousands of dollars. Suffice to say that any resulting savings, if any, will amount to a drop in the ocean for prospective borrowers.
Pulte and his proponents argue puzzlingly that if borrowers can make timely payments for rent, electricity, and cable, they can surely assume the responsibility of a 30-year mortgage. Except that rental leases and utility bills are short-lived compared to a mortgage. Renters can exit lease agreements after settling exit fees, and utility consumption can be scaled back to cut personal expenditures if necessary. By contrast, mortgages are legally binding contracts designed to provide financial institutions steady cash flow in exchange for the prospect of property ownership. That decision should be solely reserved for mature, responsible borrowers. The stakes are far higher for all involved parties, from the homeowner to the bank.
Instead of micromanaging minor fees, the federal government should focus on shrinking more apparent drivers of exorbitant housing prices. Homebuilding activity has steadily declined since 2022, for one. Developers also face onerous regulatory hurdles and permitting requirements that disqualify projects from even starting.
The rollout of the new change is also irresponsible and reckless. The directive debuted devoid of any empirical justification, cost-benefit analysis, or stakeholder input. The FHFA’s order does not guarantee lower costs for mortgage applicants, but heightens the risk of unworthy borrowers being matched with mortgages they can't afford.
GSEs such as Fannie Mae and Freddie Mac remain in conservatorship to this day because of the severity of the housing market shock in 2008. Taxpayers ultimately wound up footing the bill. While no statutory obligation exists to backstop GSEs, the precedent of a taxpayer bailout remains a haunting specter, one which the FHFA is obligated to avoid reviving.
If the FHFA is serious about expanding homeownership, it should avoid crafting overly simplistic policies tailored to generate feel-good headlines without undertaking any diligence to safeguard the integrity of the housing market. Targeting miscellaneous fees is a gimmick move that will fail to induce affordable housing. A stern approach to cutting building regulations and wasteful red tape would prove far more efficacious.
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