It’s no secret that homebuyers are in a tough spot today. Low housing supply, higher interest rates and competition from other buyers all stand in their way. Consumers need every opportunity to put their best financial foot forward if they want to compete.
That’s why we were surprised to read a recent opinion piece from the National Consumer Law Center praising the Federal Housing Finance Administration’s move to reduce the number of credit reports required for a conventional mortgage from three to two.
There’s an argument that a move from a tri-merge to a bi-merge would save a mortgage applicant money, and that’s potentially true. What isn’t noted is how much, and at what cost.
Some estimates put the savings at approximately $10 to $20, which isn’t much for a 30-year mortgage. In fact, it’s less than one-fifth of one percent of the cost to originate a loan. The potential for higher interest rates resulting from the bi-merge would far outweigh the meager savings from one less credit report.
In research we shared with FHFA, we estimated over half a million new mortgages would pay higher interest rates under a bi-merge, costing those consumers thousands of dollars — a cost that would hit consumers every single month for the life of the loan.
Additionally, 2 million consumers who would have qualified for a government-sponsored enterprise mortgage under a tri-merge will no longer qualify. Some think this is okay because a large number of consumers who would not qualify for a mortgage under a tri-merge would actually qualify under a bi-merge.
That last part is true. Approximately 1.8 million consumers who would be ineligible for a mortgage today might become eligible for a mortgage if one of their credit scores is ignored. That does not alleviate the threats to the system. In fact, it compounds them, as creditworthy borrowers are displaced by consumers who could find themselves in homes they cannot afford.
There is also the notion of increased competition under a bi-merge, but that argument asks the wrong question. Instead, we should ask what lenders would do under the new regime.
Today, lenders have no choice but to pull all three credit reports. That makes it much harder to game the system. Lenders we’ve spoken to are concerned about how they would compete with less scrupulous actors who will shop around to meet their desired outcome.
Remember, lenders get paid only if they successfully close the loan. All they would have to do is initiate a separate “soft pull” at each bureau when a consumer applies for a mortgage to determine which offers the greatest chance of approval for a particular consumer.
That’s not a system based on price or good information. It would, however, inflate the mortgage market and put consumers — as well as the taxpayers who backstop the enterprises — at risk.
The bi-merge will cause the most harm to first-time homebuyers who have diligently worked their way up to qualify for a mortgage. These consumers see more variation in their credit reports across the bureaus than established consumers, and they face the greatest risk of getting left out in a bi-merge if they are unlucky with the lender they chose to provide their mortgage.
Unfortunately, this population is also over-represented with Black, Hispanic, and low-to-moderate income consumers, all of whom will be disproportionately affected by the shift away from the tri-merge.
Critics note that there are programs at the Enterprises that can help consumers with thin files by utilizing rent reporting data. We agree and will continue to advocate for a more inclusive credit reporting system that utilizes this information, but it isn’t sufficient to undo the harm that a bi-merge presents.
We are hardly alone in our concerns. A bipartisan collection of lawmakers and other thought leaders have warned that a tri-merge to bi-merge shift would put consumers at risk. FHFA should reconsider the decision, while everyone involved in the system – from industry to advocates to lawmakers and more – should pull out all the stops to help prospective, creditworthy homebuyers reach their goals.
Joe Mellman is senior vice president and mortgage business leader for TransUnion