New TransUnion Analysis Examines Repercussions of FHFA’s Proposed Move from Tri-Merge to Bi-Merge
Analysis shows significant impacts on consumers, mortgage lenders and the broader economy from the Federal Housing Finance Agency’s proposed change
The Federal Housing Finance Agency’s (FHFA) proposed change to utilize two instead of three credit reports during the mortgage application process could result in unintended consequences for consumers while doing little to achieve the organization’s stated goal of reducing mortgage borrower costs. TransUnion (NYSE: TRU) released these findings today at the Mortgage Bankers Association’s MBA Annual Convention & Expo.
TransUnion’s analysis found that moving to a bi-merge (using only two credit reports in the mortgage underwriting process) could result in two million consumers becoming ineligible for a government-sponsored enterprises (GSEs) mortgage. Their ineligibility would be due to gaps that can exist among lenders when it comes to reporting. Using only two credit scores will often result in an incomplete and inaccurate picture being painted of a potential borrower – particularly if a consumer’s most favorable set of credit data is the one that gets excluded.
Additionally, 600,000 new mortgage borrowers per year could end up paying more in interest under the bi-merge than they would have if all the tri-merge information were used. This could cost consumers $6,600 in additional interest over the life of the mortgages.
Consumers most likely to be affected – those with credit scores hovering around 620, the edge of GSE mortgage qualification – are disproportionately Black, Hispanic, low-to-moderate income (LMI) and first-time homebuyers. These groups of potential homeowners are 50% over-represented in that range. As a result, they will likely disproportionately bear the negative consequences of moving to a bi-merge.
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. 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.
Credit Ecosystem Will Take on More Risk with Lower Risk Borrowers and Taxpayers Potentially Bearing the Greatest Burden
In addition to holding creditworthy borrowers out of the market, a bi-merge could have the reverse effect on otherwise ineligible borrowers, potentially increasing default risk. An estimated 200,000 consumers ineligible for an agency mortgage under the tri-merge will borrow a GSE mortgage. They may find themselves in homes they cannot afford in an economic downturn. Incomplete information could also lead to some consumers paying less interest than their true risk merits. GSEs may annually lose out on $4 billion in risk-based interest fees due to such loans. If that risk premium is to be made whole, those costs will likely have to be passed on to taxpayers or subsidized through increased pricing for lower-risk borrowers.
“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.”
Mortgage lenders that TransUnion surveyed cited concerns relating to compliance with fair lending laws and the risk of potential gaming of the system for the two highest scores by lenders and consumers. They also questioned the value of moving to a bi-merge standard, given the significant expense the industry will incur to make the move.
While an important goal in making this potential change is to provide cost savings to consumers throughout the mortgage process, the analysis shows that this change may cost consumers much more. While there is a potential for consumers to see a $10 to $20 savings through the pulling of one less credit report, the aforementioned added implementation, legal and compliance, added risk costs and potential for higher interest rates would likely dwarf the savings – and could ultimately be passed back to consumers in fees outsizing any one-time data savings.
“Not only will consumers save less than one fifth of one percent of mortgage origination costs by not paying for complete data, 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,” concluded Mellman.
About TransUnion (NYSE: TRU)
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