In an analysis released Monday at the Mortgage Bankers Association’s MBA Annual Convention & Expo, TransUnion raised concerns over the Federal Housing Finance Agency's (FHFA) proposed shift from tri-merge to bi-merge credit reporting in the mortgage application process. The change, intended to reduce borrower costs, could have detrimental consequences for potential homeowners.
TransUnion's study reveals that this move might render two million consumers ineligible for government-sponsored enterprises (GSEs) mortgages. The shift to using two credit reports can produce an incomplete view of a borrower, particularly when the most favorable data set gets omitted.
Furthermore, the move, according to TransUnion, could lead to 600,000 new mortgage borrowers annually incurring higher interest rates, costing them an extra $6,600 across their mortgage lifetimes.
Vulnerable groups like Black, Hispanic, low-to-moderate income (LMI) individuals, and first-time homebuyers, who often have credit scores around the 620 mark—the GSE mortgage qualification threshold—are likely to be disproportionately affected. “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,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion.
The transition also poses risks to the credit ecosystem. For example, 200,000 consumers, considered ineligible under the tri-merge system, might receive mortgages they can't sustain during economic downturns. This change could potentially cost GSEs an annual $4 billion in risk-based interest fees, a burden that could fall onto taxpayers or be offset by charging lower-risk borrowers more.
Jason Laky, executive vice president of TransUnion, pointed out the devastating consequences of awarding unaffordable mortgages, drawing parallels to the Great Recession.
“By intentionally bypassing vital consumer credit information from the third credit bureau, the proposed changes could result in miscalculated consumer affordability and risk,” said Laky.
In other credit reporting news, according to a white paper released Monday by VantageScore at the MBA convention, a huge pool of 2.7 million potential home buyers await lenders who adopt the new scoring models in 2025 as required by regulators. The paper, which urged lenders to “move swiftly” in incorporating the latest 4.0 version of the VantageScore model, said the untapped group of possible borrowers represents as much as $1 trillion in new business.
TransUnion said lenders also expressed concerns about fair lending law compliance and potential system exploitation. Given the significant expenses involved in adopting the bi-merge standard, they are skeptical about the supposed savings.
Despite intentions to save consumers money, TransUnion's analysis suggests that added risks, increased interest rates, and implementation costs might outweigh potential savings from pulling one less credit report.
"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.
