Recently, FICO introduced a new scoring model that could potentially make a big impact on housing—if mortgage lenders ever use it.
The FICO 9 score would limit the impact of paid medical collections on a consumer’s credit score, potentially lifting scores by 25 points on average, the company says.
That’s good news to anyone who’s wrestled with their health insurance over a bill that eventually went into collections before the charges were resolved, or accidentally missed their paper statements and didn’t realize they were behind until collections came calling. As long as the bills are settled, they shouldn’t influence your credit score.
The company also boasts that FICO 9 is more accurate and predictive of consumer lending behaviors. All told, this should make mortgage lending easier for the lender and the buyer, especially first-time buyers.
But despite these benefits, it’s unlikely that the model will get integrated into lender’s systems anytime soon. Although the scoring model was released this fall and will be fully available to implement by the end of this year, few companies will jump at the chance.
They have to test and validate the score through their portfolios, to see how it performs, and conduct a cost-benefit analysis to see ifs worth overhauling their underwriting systems to include.
As with any new technology, there will be early adopters who jump at the chance to use the latest systems and others that are more conservative, says Anthony Sprauve, a spokesman for FICO.
And you can guess that the largest lenders, Fannie Mae and Freddie Mac, will not be joining the early adopters. Although it’s up for discussion between Fannie, Freddie and the Federal Housing Finance Authority that oversees the pair, nobody’s moving anywhere quickly.
“Until Freddie and Fannie adopt the newest score, it really isn’t going to have a huge impact on the mortgage marketplace,” Sprauve says. “That being said, as we are doing with all lenders, we’re talking with Freddie and Fannie to show them the benefits of the new score and encourage them to test and validate the new score in order to make it work for them.”
Unless the cost-benefit analysis that these lenders undertake reveals that FICO 9 offers a substantial benefit to their business model by doing a better job weeding out the riskiest borrowers, chances are slim the mortgage giants will be rushing to get the new model into their underwriting process. That is, of course, unless the FHFA tells them they have to. In fact, Fannie and Freddie aren’t even up-to-date on FICO 8, released in 2008.
But maybe FICO 9 has enough benefit to get them fired up enough to act.
At the very least, borrowers who fit in this category—that have paid medical collections—should start to ask lenders what FICO model they’re using as it could seriously benefit them to go with a lender who is using the updated model.