Social media has been discussing Fannie Mae’s announcement that the organization will no longer require a minimum credit score of 620 for mortgages. Is this a big deal?
Likely not. Freddie Mac has already dropped its minimum credit score requirement. These requirements applied to the automated underwriting process for mortgages. (Underwriting is the process that determines whether someone is eligible for a loan and under what terms.) The government-supported enterprises (GSEs) also offer a manual underwriting process for more complex cases.
Credit scores will still matter for both forms of underwriting, but abandoning a hard minimum means that someone with a credit score just below the prior minimum will now be able to get a mortgage so long as they are reducing credit risk in other ways, such as by offering a large down payment. Some borrowers with credit scores below 620 may in fact be good risks, at least at the rate offered by the lender.
The GSEs have an immense amount of data at their disposal to develop models to predict the risk that any particular borrower will default. If they are doing good actuarial work to predict those risks and price mortgage loans appropriately, there is no need for them to maintain an arbitrary minimum credit score.
I’ve been critical of counterproductive proposals to try to make housing more affordable and available by subsidizing demand. The 50-year mortgage proposal floated by Bill Pulte, the Federal Housing Finance Agency director, deservedly faced a lot of questions and now appears dead. (His new proposal to allow “portable” mortgages in which homebuyers can keep the terms, especially the interest rates, of mortgages on the houses they are leaving could be a better idea, depending on implementation. It could reduce mortgage lock-in and free up new homes for sale.)
But the new Fannie Mae rule seems to be a technical adjustment rather than a result of political pressure to make more loans. Private mortgage lenders will still be able to apply their own credit score minimums, and credit scores will still play a big role in the mortgage guarantees that Fannie Mae and Freddie Mac offer. The social media outrage cycle seems to have jumped the gun on this one.
