A Boost for Alternative Credit Data in Housing Finance

Catching up to the alternative-data trend across other consumer loan categories, government-sponsored enterprises Fannie Mae and Freddie Mac are allowing more flexibility in credit scoring by participating mortgage lenders.

The Federal Housing Finance Agency, the GSEs’ overseer, cleared the way last July for “lender choice” between the Classic FICO model, previously the only option, and VantageScore 4.0 (VS4). The new approach “will introduce more robust competition in credit scoring while the enterprises continue to work towards full implementation of modernized credit scoring and credit reporting,” the FHFA said.

By November, both Fannie Mae and Freddie Mac had moved to loosen their minimum FICO 620 credit score requirement. Fannie’s Desktop Underwriter (DU), for one, “will use our proprietary credit risk assessment to determine a minimum credit risk threshold when evaluating loan eligibility for sale to Fannie Mae.” Replacing the credit score minimum “does not affect our ability to assess credit risk and ensures that the DU risk recommendation is agnostic of third-party credit scores.”

The secondary mortgage market agencies,...