Issuers Fret Over New FICO Score

Issuers Fret Over New FICO Score

 ABA Alert

     The reluctance of Fannie Mae and Freddie Mac to adopt an updated FICO-scoring system further dampens the prospects for a revival of subprime-mortgage securitizations.

     Fair Isaac Corp. unveiled a new version of its credit-scoring program, dubbed "FICO 9," in August. But the mortgage agencies have made it clear they plan to stick with an older formula that dates back to 2003. The concern appears to be that using the updated version would result in lower FICO scores for many borrowers, rendering them ineligible for prime-quality mortgages.

     Fannie and Freddie "feel there is no reason to rock that boat, even if the data they are using are based on pre-financial-crisis conditions," one mortgage banker said. "But the new FICO supposedly gives a better indication of a borrower's creditworthiness in a post- crisis world, which is a strong argument for them to use it."

     The agencies' stance means that, for now at least, they will continue to account for some 90% of the U.S. mortgage market--- leaving little room for subprime-mortgage origination. From a securitization standpoint, it means subprime-loan deals likely will remain stuck in the doldrums for the foreseeable future. 

     From 2010 to 2013, U.S. issuers produced 3-4 subprime deals per year on average, though not a single transaction has come to the market so far this year, according to the Asset-Backed Alert's ABS Database. In 2007, just before the credit crisis exploded, issuers produced a total of $202 billion of subprime- mortgage paper.

     The new FICO- scoring program has become an issue in other asset classes as well, including auto loans, credit cards and student loans. Not only lenders but also rating agencies are wary of adopting the new formula for fear that it could muddy the waters both for issuers and investors.

     "It's being talked about but there's a general ambivalence," said one rating-agency executive. "Everyone wants to see how it actually affects a portfolio, but no one is stepping forward to use it, so it remains an unknown."

     Issuers of bonds backed by consumer receivables currently rely on a FICO program formulated by the San Jose company in 2008.

     FICO scores are only one measure rating agencies rely on in determining the creditworthiness of a collateral pool. They also take into account rations including loan-to-income and loan-to-asset value. But the FICO score is the only metric they use that's based on pre-crisis data.