For this post, we are simply quoting from other media sources to help our readers understand the new FICO 9 credit scoring model. In spite of what you may have read, the FICO 9 credit scoring model will not help significantly, if at all, with home mortgages. At least not anytime soon. FICO 9 will be utilized sooner by vehicle and credit card lenders.
On August 23, 2014, The Motley Fool published Why New FICO Score Rules Could Be a ‘Game-Changer’ In Helping You Obtain a Loan stating, in part, the following: “According to FICO, the median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.
FICO’s new more lenient model should also benefit collection agencies. Consumers with unpaid medical debts now have an incentive to settle, knowing that FICO will stop including in its calculations any record of a consumer failing to pay a bill, if the bill has been paid or settled with a collection agency.
Auto and Credit Card Lenders Will Be First to use FICO 9
“This is great news for collection agencies,” Rood said. “It provides laggards with an incentive to pay up. Before these changes, you were incentivized not to pay off your debt. The last thing you wanted to do was trigger a new ‘date of last activity’ report for an old debt, say, a debt from 2008. Again, you were just better off not paying it because older debts weighed less heavily against you on your credit report than new debt. The new scoring model will likely be implemented by credit card and auto lenders first. Mortgages typically lag in adopting new scoring models.”
Mortgage Lenders Will Be Last to use FICO 9
The New York Times in their article of August 7, 2014 titled: Credit Scores Could Rise With FICO’s New Model explained it very well. “For consumers to see any benefit, however, lenders have to adopt the new scoring techniques. FICO last introduced a new model, called FICO 8, in 2008. Since then, FICO said that about half of its customers had started using that model.
Mortgage lenders have been slower to adopt new scores, and most are using even older versions, experts said, because Fannie Mae and Freddie Mac are still using them in their own underwriting software. Fannie and Freddie did not say whether they had plans to switch to the updated FICO score that weighs medical collections less heavily. But they both said they were confident in the tools they use.”
Finally, law professor and author James Kwak, states the facts very simply: “…the financial district of the Western societies, Wall Street, and outdated software may very well be the norm not an exception.”
The Take Away
The take away on all this, according to Ted Rood of the Mortgage News Daily is that “(home and mortgage) buyers should keep paying those medical bills and avoid collections to ensure their loan approvals!” This statement was excerpted from the article titled: New Credit Score Model Would be Great for Housing! Too Bad it Won’t be Used.
Our regular readers already know of our thoughts on FAKO credit scores and the release of FICO 9 adds yet a new dimension. Consumers purchasing their scores from the myFICO site will get real FICO scores but they are likely not going to be the scores which mortgage lenders use. So what can you do? You can write or call elected officials and ask that they help Fannie Mae and Freddie Mac catch up with the times.
UPDATE: 09/22/15 | GSEs Struggle to Update Credit Scoring ModelsFinancially Speaking™ James Spray, RMLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 |September 23, 2014 | Updated September 22, 2015 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.