The many standards by which we navigate our daily lives are never established by caprice or whim, but out of practicality and necessity. Whether you drive a 10-year-old Camry, a new Tesla, or a vintage Beetle, you do so knowing your accelerator pedal is always to the right of the brake. Were a carmaker to suddenly alter this arrangement, our driving instincts would go haywire, with results both predictable and dire. Similarly, rearranging the letters on a computer keyboard, the layout of which can be traced back to the telegraph, would produce throbbing headaches of frustration for billions of people around the globe whose fingers have spent a lifetime knowing precisely where each letter is located.
From the placement of keys or strings on musical instruments to the shape, colors, and lettering of road signs, standards surround us, protect us, and ease our lives. They provide practicality, accessibility, and stability.
Yet at a time when our economy is facing countless challenges and continues to send loud signals of instability not seen since the financial crisis of 2008, a federal agency charged with the specific mission of ensuring stability and policing risk in the housing industry is considering a proposal that would abolish the proven standard upon which the mortgage industry relies to determine creditworthiness.
If you are befuddled as to why the Federal Housing Finance Agency (FHFA) is contemplating whether to tinker with lending standards during a time of elevated financial insecurity and housing market volatility, then you are not alone. It is further astonishing to wonder how the lessons of the ’08 crash have seemingly been so easily forgotten. As everyone is well aware, the underlying cause of that disastrous economic meltdown was the collapse of the housing and mortgage industries brought about by a previous “innovation:” subprime lending.
Despite this historically recent example of the havoc that can be wrought by altering the standards of a $10 trillion industry, the FHFA is still weighing whether to allow an unproven scoring model owned by credit bureaus to be used in mortgages underwritten by Fannie Mae and Freddie Mac. The answer is overwhelmingly clear that it should not.
While there is never a good time to abandon a proven standard, it would be difficult to imagine a worse time for doing so. Inflation is at a 40-year high. The supply chain hasn’t just been disrupted, it’s downright broken and getting worse. Consumer confidence – or, more precisely, lack thereof – is descending to levels not seen since the dark days of the 2008 catastrophe, all while housing prices are skyrocketing across the country and raising property taxes. Changing the single credit scoring model now in place is a precarious proposition at best, and could only serve to exacerbate an already perilous economic climate by opening the door to additional and unnecessary risk.
Having received feedback from industry stakeholders and public policy advocates, FHFA already has the information necessary to end the uncertainty. It has tested and reviewed alternative scoring models, and yet has never identified any that would improve upon the existing single-scoring method — a method that has demonstrated with crystal clarity to provide stability, predictability, and overall security in mortgage lending. The issue further has broad consensus across the political spectrum, with vocal advocates on both the left and right urging FHFA to leave the stable and reliable single scoring model untouched.
As this decision hangs in the balance, we can only hope that the causes and failures of the past are seared into the consciousness of key decision-makers. They, of all people, should know the dangers of toying with a stable and standardized credit-scoring model that serves as a key pillar of home lending.
Protections put in place after 2008 were established to ensure the circumstances that led to that financial crisis would never be repeated, yet less than a generation later we stand on the precipice of considering whether to permit the use of unproven and substandard models to determine the creditworthiness of potential borrowers. Worse, the models under consideration are being offered by inherently conflicted credit bureaus, the same companies collecting and hoarding our most private financial data.
In any economic environment, unnecessary risk is both counter-productive and dangerous. Uncertainty undermines confidence and instability can lead only to calamity. In the single credit-scoring model, we have an existing standard that works extraordinarily well, with tremendous precision and reliability, as designed. It has the confidence of consumers and lenders alike, and should not be trifled with, especially when doing so provides no identifiable benefits.
If the FHFA is considering any road that leads to the use of unproven credit-scoring models, they need to hit the brakes, which are reliably exactly where they are supposed to be.
Gerard Scimeca is an attorney and serves as chairman and co-founder of CASE, Consumer Action for a Strong Economy, a free-market-oriented consumer advocacy organization.