Can We Families With Bad Credit Buy Homes?

I wrote an editorial at the Washington Times about the upcoming changes to the way some fees are calculated for some mortgages. The original news and buzz about the changes didn’t really make the history behind the proposal very clear; in fact it is hard to understand exactly what’s going on. Simply put, some fees will go up for people with higher credit scores and down for people with lower ones. The changes are the result of Congressional efforts to even the playing field for families, especially Black Americans, who are struggling to become homeowners. The point of my editorial was that penalizing people with good credit isn’t the way to address this problem.

Here’s the history I laid out for the post:

“The coming changes were prompted by the passage almost 5 years ago of Senate Bill 2155, legislation aimed at ‘improving consumer access to mortgage credit.’ Section 310 of the bill directs the Federal Housing Finance Agency (FHFA) to ‘establish standards and criteria for processes used by Fannie Mae
FNMA
and Freddie Mac to validate and approve credit-scoring models in accordance with the bill.’ That means that the Government Sponsored Enterprises (GSEs) that back most American mortgage debt, Freddie Mae and Freddie Mac will, ‘when determining whether to purchase a residential mortgage . . .consider a borrower’s credit score only if certain procedural requirements are met with respect to the validation and approval of credit-scoring models.’”

The point behind the changes FHFA has been working on over the last few years is to find ways to address problems with traditional FICO credit scoring; FICO stands for Fair, Isaac and Company a business founded by Earl Isaac and Bill Fair to measure the risk of consumer loans. I was on a segment on Fox 5’s The Final 5 where I discussed this with host Jim Lokay. I threw out a bunch of data all at once and I worry that the point might not have come across.

Most of the data I cited was from the National Association of Realtors in a closer look at patterns of homeownership. Homeownerships have been climbing among the general population, especially over the last decade, so that 65% of American’s are homeowners or paying a mortgage. However, among Black people, the number hasn’t moved over that period, staying stuck at 44% while 72% of White people are homeowners. Why is?

There are many explanations that are offered, but the most obvious one is in poverty statistics — 19.5% of Blacks are in poverty while the overall poverty rate is 11.6% — and credit scores, which 54% of Blacks report a FICO score of 680 or less. My point in the editorial and on the media appearance is this is indeed a problem that needs to be addressed. I’ve mentioned before that we need a discussion about homeownership. And I’ve also posted about ways to improve credit scores that don’t involve fiats from the government. One company, Pinata, is trying to do just that by reporting rent payments to credit bureaus, something not commonly done. Broadening the data set used to calculate risk is a much better way to increase opportunity along with downpayment assistance, credit repair, and expansion of community land trusts.

Whatever the outcome of a discussion of the upsides and downsides of homeownership, there is no doubt it creates generational wealth, something that breaks the cycle of generational poverty. But giving out more loans by blurring or obscuring risk can lead to defaults and make that problem worse. It might be tempting to force the issue with credit scores, giving people with lower scores advantages and subsidies, but this is a recipe for tighter lending policies, more expensive loans, and ultimately foreclosure.