Research Warns on Mortgage Underwriting Changes
New research from Andrew Davidson & Co. demonstrates that moving away from a tri-merge credit report standard in mortgage underwriting could lead to less accurate pricing. The analysis suggests that using a bi-merge or single-report standard introduces uncertainty that may negatively impact both consumers and investors. This finding has implications for risk modeling in the mortgage industry.
- The analysis by Andrew Davidson & Co. was based on a unique dataset of VantageScore 4.0 credit scores from Equifax, Experian, and TransUnion, covering 245 million consumers. It found that 18% of consumers had at least one score that differed from the tri-merge median by 20 points or more, a significant variance in mortgage pricing. - For a $350,000 government-sponsored enterprise (GSE) loan with a 90% loan-to-value ratio, a 20-point score difference can change the combined cost of the loan and mortgage insurance by $3,000 to $5,000 in present value. - The Federal Housing Finance Agency (FHFA) has aligned the implementation of a bi-merge credit report standard with the transition away from the Classic FICO model, targeting the fourth quarter of 2025 for the shift. - A TransUnion analysis projected that a move to a bi-merge standard could make two million consumers ineligible for a GSE-backed mortgage. Their separate analysis on a single-report standard suggested over 4.4 million prospective homebuyers could lose mortgage eligibility. - This underwriting shift is happening alongside the approval of newer credit scoring models, FICO 10T and VantageScore 4.0, which incorporate "trended data"—a 24-month history of a borrower's payment patterns, balances, and credit utilization. - For data and analytics teams, this requires significant updates to data pipelines and risk models. The Mortgage Industry Standards Maintenance Organization (MISMO) has released a "Credit Score Implementation Guide" to help organizations integrate the new scoring models into their systems using the MISMO v3.x reference model. - The move introduces complexity for mortgage insurers, who will need to adapt their own underwriting and pricing models to account for the new credit scores and the potential for increased risk from less comprehensive credit data. - Proponents, like the Mortgage Bankers Association, argue that moving away from the tri-merge requirement will inject competition into the credit reporting market and could lower closing costs for consumers.
