As of January 1, the notice said, the joint (for a married couple) credit report on FICO increases to $74.53 from $39.01. That’s a 91% price increase, or almost double the price. say what?
But wait, it gets worse.
Terry Clemens, executive director of the National Consumer Reporting Agency, sent me a letter confirming that the vast majority of the mortgage lending industry will likely endure a “massive increase in mortgage credit report rates in 2023.”
“This is a paradigm shift in the pricing structure of credit scores and is being dictated to the mortgage credit reporting industry by all three national credit bureaus and/or FICO,” the letter states.
The rate, which will be tiered, includes wholesale rate increases of less than 10% for the top tier of approximately 46 lenders, about 200% for six middle tier lenders, and more than 400% for all other mortgage lenders in the nation,” the NCRA letter continues. None of the lenders are named.
In the bigger picture, this is a disastrous omen for anyone who buys, sells, or refinances a property.
The sudden jump in rates is an unspoken green light from mortgage regulators and policy writers for every other mortgage settlement provider to consider a similar tactic. In other words, if credit rating companies can raise fees, what’s stopping others, such as insurance companies, from taking this approach?
How does the FICO credit scoring system work?
Front and center in the mortgage loan approval process is the credit report pulled by the mortgage loan originator. The report will come from all three credit bureaus (Experian, Equifax, and TransUnion) and include an accompanying FICO credit score.
Lenders typically use the lowest average FICO score to approve or deny loan and loan pricing. The higher the FICO average, the better the price and/or the lower the cost of origination point. The industry calls this a triple blended credit report. If you don’t have a built-in credit report, you don’t have a chance at real estate financing.
FICO, also known as Fair Isaac Corp., has a monopoly. , the three credit companies these three combined credit reports; No other options – yet.
The Federal Housing Finance Agency (the regulator and maintainer of Fannie Mae and Freddie Mac) recently approved Vantage Score as another credit scoring system for mortgage lenders. The FHFA has indicated that it will take years to get a Vantage Score.
Vantage Score is jointly owned by the three major credit bureaus and will be a “competitor” to FICO, something you haven’t seen in ages.
Consumer credit reporting companies such as Kroll, CoreLogic Credco, and even a separate division of Equifax (Equifax Mortgage Services) buy credit and credit information, raise the cost, and then sell the borrowers’ combined triplex credit report to the mortgage company from which the borrowers apply for mortgage credit.
Federal law prohibits mortgage lenders and mortgage loan originators from raising the price of a credit report. It is a direct consumer fee.
I’ve reached out to FICO with some price hike questions. This is the company’s response, in part.
Starting in December, FICO has adopted a class-based ownership structure for mortgages, which will be based on the volume of FICO scores delivered to lenders. With this increase in royalty, FICO collects approximately $2 to $8 for all three scores of a report amounting to a combined $50 triple, according to Jim Wehmann, executive vice president of Scores-FICO.
Wehmann declined to provide the number of mortgage scores FICO offers each year. He also refused to name 46 Tier 1 lenders and 6 Tier 2 lenders. FICO also didn’t explain how much royalties will go up for credit reports over $50. Nor did they explain why the rate was 91% higher to some mortgage brokers (like me).
Who pays for the reports?
Mortgage lenders and mortgage brokers have largely paid upfront credit reports for mortgage applicants as a cost of doing business. They would lend the bill to the borrowers at closing. Federal law allows mortgage lenders/brokers to charge applicants an advance fee for a credit report.
Lenders usually absorb the cost of credit reports for both canceled loan applications and declined loans.
In my real estate brokerage experience, we finance mortgages for approximately one in three borrowers that we run credit on. The borrower’s cold feet, a competitor’s faltering, the borrower said or the loan being refused are usually the reasons for the downfall of the loan. I’m probably typical of the industry.
I asked by offering tiered pricing FICO if the company picks winners and losers as the higher volume stores will get a huge price advantage. And did FICO estimate how many mortgage companies would be at risk of going out of business due to the rate disparity? Fico declined to comment.
Representatives for FHFA, TransUnion and Experian declined to comment. Equifax, however, has responded.
In addition to explaining tiered pricing and acknowledging the rate increase letter my mortgage company received, an Equifax spokesperson said the FICO rate increase is “unprecedented in the scale of the increase, with many customers receiving over 400% increases.”
What about the legality of this?
“This increase is puzzling because brokers have to pass it on to their resident clients,” said attorney Mike Hensley. “Forget about regulatory concerns, it may raise antitrust concerns of monopoly, price fixing, and pegging as well as potential unscrupulous claims.”
Freddie Mac rate news
The average 30-year fixed interest rate was 6.58%, 3 basis points lower than last week. The average 15-year fixed interest rate was 5.9%, 8 basis points lower than last week.
The Mortgage Bankers Association announced that mortgage applications increased by 2.2% compared to the previous week.
Bottom line: Assuming a 30-year average fixed rate borrower on a matching loan of $647,200, last year’s payment was $1,361 less than this week’s payment of $4,125.
What I See: Locally, well-qualified borrowers can get the following 1-point fixed-rate mortgages: 30-Year FHA at 5.5%, 15-Year Conventional at 5.375%, 30-Year Conventional at 5.875%, and High Credit 15-year traditional ($647,201 to $970,800), 15-year traditional high balance at 5.75, 30-year traditional high at 6.375% and jumbo buy 30-year flat at 6.25%.
Note: The 30-year FHA matching loan is limited to loans of $562,350 in Inland Empire and $647,200 in Los Angeles and Orange counties.
Al Ain Loan Program of the Week: 30-year mega purchase mortgage secured at 6.25% for the first seven years at interest only without points.
Jeff Lazerson Mortgage Broker. He can be contacted at 949-334-2424 or [email protected]