Secondary mortgage market waits for data, creates workarounds amid shift to alternative credit scores

Mortgage lenders are rolling out new “We would be able to rate the transaction if they did include VantageScore or FICO 10T, if the concentration was 10% or less,” Hosterman said. “The majority of loans would have to be classic FICO scores and the non-FICO scores, unfortunately, would be treated as not having a FICO score, so the losses would be a good potential.”

But the calculus changes significantly if the alternative-score bucket grows.

“If we were to see a pool with a higher than 10% concentration, we may be able to rate it, but there may be a rate where we have a single A, triple B, just because we don’t know the full extent of the rest, because no one is releasing the data,” Hosterman added. “So that’s where we’re at right now.”

Hosterman delivered the remarks during a panel at the Information Management Network’s (IMN) Residential Mortgage Securitization conference in New York on Wednesday.

The FICO 10T will also serve as an approved alternative to the FICO Classic model. The Department of Housing and Urban Development (HUD) signaled that Federal Housing Administration (“From my standpoint, competition, innovation in this space is only going to expand the qualifying borrower base,” said Barath Sankaran, portfolio manager for mortgages at Loomis Sayles. “On the other hand, we’ll see how ultimately this is implemented. The one statistic we most care about is the recidivism rate — is that improving or getting worse? — and time will allow investors to parse through the data.”

While risk is the main topic in the secondary market, originators are concerned with costs.

“This is an issue of massive interest to the origination community, where there’s just a long-standing history of frustration with legacy credit scoring cost, so that’s made this a very political issue in Washington,” said