Research Warns Against Ditching Tri-Merge Mortgage Standard
New research from Andrew Davidson & Co. demonstrates that moving away from the tri-merge credit report standard in mortgage underwriting could harm consumers and investors. The study suggests that using a bi-merge or single-report standard could lead to less accurate mortgage pricing and qualification. This uncertainty might increase costs for borrowers and risk for lenders.
- The push to evaluate the tri-merge standard is part of a broader modernization effort by the Federal Housing Finance Agency (FHFA), which also includes the approval of new credit score models like FICO 10T and VantageScore 4.0. These newer models can incorporate data such as rent and utility payments, which are not always included in traditional FICO scores. - A study by Andrew Davidson & Co., Inc. found that for consumers with credit scores in the 640–779 range, 35% had at least one single-bureau score that differed from the tri-merge median by at least 10 points. For a $350,000 loan with a 90% loan-to-value ratio, a 20-point difference could change the cost of borrowing and mortgage insurance by $3,000 to $5,000 over the life of the loan. - The Mortgage Bankers Association (MBA) has advocated for the option of a single-file report, arguing that the current tri-merge requirement has led to a 400% increase in credit report costs over four years. They also point to the significant expense for lenders, estimated at $100 million to $250 million annually, for credit reports on the 1.9 million mortgage applications that do not close. - In October 2022, the FHFA announced that Fannie Mae and Freddie Mac would move from a tri-merge to a bi-merge credit report requirement, a change initially anticipated for the first quarter of 2024 but now expected later. - TransUnion has argued against moving to a single-bureau model, with a simulation suggesting that such a change could deny 4.4 million consumers access to agency-backed mortgages and lead to consumers paying an extra $6.5 billion in interest due to credit tier downgrades. - Proponents of maintaining the tri-merge standard argue that it provides the most comprehensive assessment of a borrower's credit risk, which is crucial for the stability of the mortgage market. This is because not all creditors report to all three major credit bureaus, and a tri-merge report can fill in potential gaps in a consumer's credit history. - Historically, Fannie Mae and Freddie Mac have required the "Classic FICO" credit score for loans they purchase. However, the FHFA now allows lenders to use VantageScore 4.0, and there are plans to implement FICO 10T in the future. - While Fannie Mae and Freddie Mac have removed their minimum credit score requirements, a borrower's credit history remains a significant factor in the underwriting process. Lenders are still able to set their own minimum credit score requirements.
