Lender choice relies on the myth of adverse selection

"The false underlying premise is that lenders will freely game credit scores because mortgage lenders now have a choice between using the outdated FICO Classic credit score and the newer, more predictive VantageScore 4.0 credit score. That false conclusion rests on the premise that there are no governing rules implemented by the FHFA, Fannie Mae and Freddie Mac."

"Mortgage lender credit score choice is here to stay because it is mandated by the 2018 Credit Score Competition Act. Neither lenders nor other market participants believe in the myth of adverse selection. Lenders already operate under internal controls designed to avoid it, and the GSEs will impose their own rules through automated underwriting, monitoring, and enforcement."

"It is also important to note that the status quo, which led to Fannie Mae and Freddie Mac entering conservatorship, relied on a single credit score. That model was FICO Classic. That model was the only one being used for mortgages during the 2008 financial and it failed to predict the mortgage crisis."

The mortgage industry's adoption of dual credit scoring options—FICO Classic and VantageScore 4.0—does not create adverse selection risk as critics claim. Lenders lack the discretion to freely choose scores to originate more mortgages because the FHFA, Fannie Mae, and Freddie Mac have implemented governing rules. VantageScore 4.0 demonstrates superior predictive capability compared to the legacy FICO Classic score. Lenders already maintain internal controls preventing adverse selection, and GSEs enforce additional oversight through automated underwriting and monitoring. The 2018 Credit Score Competition Act mandates this choice. Historical precedent shows that relying solely on FICO Classic during the 2008 financial crisis failed to predict mortgage market collapse, making the current dual-score approach preferable to returning to that failed model.

Read at www.housingwire.com