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Mortgages Go #Trending

Twitter? Facebook? Nope. Fannie Mae is jumping on the trending bandwagon. Starting June 25th, 2016 Fannie Mae will REQUIRE the use of "trending credit data" as the format for credit reports (Mum is the word with Freddie Mac but I am sure they will follow in big brother's footsteps considering they have been altering their guidelines to mirror Fannie Mae lately). TransUnion and Equifax are currently ready to go but Experian will not make the switch until 2017. Fannie Mae states the trending credit will " allow a smarter, more thorough analysis of the borrower's credit history." Uhhh-huh.

So what is trending credit? Right now, when a lender pulls your credit report it gives them a snapshot in time of how you utilize credit. It shows current balances and minimum REQUIRED payments on accounts as of the date pulled (aka the last information provided by the creditors to the bureaus at that point in time). It gives the lender your scores from each bureau and that's it. Late or not late, that is the question. The higher the score, the less of a credit risk you are. Well, with trending credit, the bureaus will now give the lender a detailed 30 month (TU) and 24 month (EQ) history on revolving accounts (credit cards). The lender will be able to see your account balances and ACTUAL payments being made over the 30 or 24 mo period.

Okay, so now what. How will this impact us?

One theory is that if the borrower is just making the minimum required payments on accounts and their balances are increasing (meaning relying more on credit cards----higher credit card balances=grasping for straws or living above your means) then the less residual (leftover) income the borrower has. This would be a higher risk borrower since they are "barely scraping by" or so it seems with this new credit model. At the same time, those borrowers that pay MORE than the required minimum payments will appear to be better off. Fannie's Oct 19, 2015 News Release states that the new credit requirements "...will allow lenders to determine if the borrower tends to pay off revolving credit lines such as credit cards each month, or if the borrower tends to carry a a balance from month-to month while making minimum or other payments".

Who knows for sure right now how this will impact the mortgage industry. TransUnion released this credit model more than 5 years ago and has been using CreditVision internationally since 2013. Many financial institutions have already adopted this type of credit model and are reporting all good in the hood. But this is the United States. Our society THRIVES on having things we can't afford. We pay for our Big Macs on credit cards! I am really going to be interested in seeing how this plays out. Fannie is not expecting an increase in refer or ineligible loans. I am actually reading that people thing there will be more approvals due to the ability to base their credit decision on predictive behavior based on historical trends in your payment history. Here's a link to the TranUnion CreditVision trended credit data report where they show an increase in the number of "prime" credit due to the additional data: http://transunioninsights.com/CreditVisionStudy/

Sounds good but I am dying to know how the new scoring model works. Right now, most of us in the industry know what will impact your credit score and can coach borrowers on things that should be done to get their score up (i.e.- pay down credit cards that are currently maxed out). I wonder how this new model will work, how the underwriters will look at the report and what new conditions there will be due to the increased information. If a borrower pays down a credit card by $30,000 6 months before we pull credit, we never know. Now, will the underwriter make us source the funds used to make the large payment to the account even though it was prior to application date? Makes you wonder. I guess we will just have to stay tuned for more info. 

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