OPINION:
The American dream of homeownership feels increasingly out of reach for younger Americans.
A recent Morning Consult/Neighborworks America survey found that nearly 4 in 10 Gen Zers and roughly one-third of millennials believe they may never own a home. Instead of addressing the primary drivers of housing price inflation, some are seeking to juice demand by forcing many mortgages to be underwritten based on just a single credit pull.
Lending based on deliberately opaque information echoes the subprime lending heyday when borrowers could obtain “lo-doc” or “no-doc” mortgages based on incomplete information with little documentation. This helped trigger the worst financial crisis since the Great Depression.
Today, when you apply for a mortgage, lenders pull your credit report from all three national credit bureaus (Equifax, Experian and TransUnion) and merge them into a single comprehensive report. This “tri-merge” approach provides the most complete picture of your credit history because each bureau may contain different information.
Not all lenders report to all three bureaus, and buy now, pay later services, rent payments and alternative data that helps thin-file borrowers establish credit appear inconsistently across bureaus.
The tri-merge report provides a balanced assessment of creditworthiness by capturing all this data. Lenders, in turn, use the middle of these three credit scores when underwriting a mortgage. This industry practice minimizes the risk that a borrower will be wrongly denied access to capital or wrongly approved for a loan they can’t afford because of missing data.
In 2022, when Federal Housing Finance Agency Director Sandra Thompson proposed a shift from tri-merge to “bi-merge” credit reports (using only two of the three scores), economists, industry groups, lawmakers and even some officials within the FHFA expressed concern about approving mortgages with less data.
The Trump administration has put that decision on hold, but proponents of the change continue to argue that multiple credit reports are no longer needed. They say credit data gaps have closed and eliminating tri-merge would spur innovation and competition in the credit reporting space.
Credit scores still vary by an average of 29 points across bureaus, and even these seemingly “small” variations have massive consequences. A 20-point score difference triggers loan-level price adjustments of up to 0.625%, translating to thousands of dollars in additional costs and up to $6.5 billion in annual additional interest costs. Meanwhile, some Americans who now qualify for mortgages would become ineligible because of missing data.
For many creditworthy Americans, particularly first-time buyers and young adults building credit, a single bureau report could systematically exclude them should they happen to live on the “wrong” bureau.
The stakes extend beyond individual borrowers. Loan-level price adjustments are designed not only to reflect risk but also to contain it and protect taxpayers who provide a backstop to government-sponsored enterprises from additional risk.
New research from TransUnion reveals the scope of the problem. Under a single-bureau system, 300,000 consumers would be approved for mortgages they can’t afford because a single report would miss crucial debt information.
This is a recipe for foreclosures and taxpayer bailouts. With Fannie and Freddie backing $7 trillion in mortgages, any increase in defaults flows to taxpayers. The 2008 crisis taught us that lesson in a painful way.
FHFA Director Bill Pulte’s clarified position gets it right. Instead of reducing the number of credit reports used to determine a borrower’s credit risk, he supports spurring innovation through credit score competition. This allows VantageScore and FICO to compete while maintaining the tri-merge credit report standard.
This distinction is crucial. True innovation spurring competition requires multiple scoring models analyzing the same comprehensive dataset. This kind of competition protects consumers and preserves the integrity of the data underlying the underwriting process.
On the other hand, reducing the number of credit reports used in underwriting eliminates the comprehensive data that makes those scores meaningful. Single-bureau reports create score shopping rather than competition. Lenders seeking to sell mortgages to the government-sponsored enterprises would pull from whichever bureau yields the most favorable score, as they often sell a mortgage loan within days of a deal being closed.
Their profits are secure even if the borrower later defaults. The cost of exaggerated credit quality and mispriced risk ultimately falls on taxpayers.
Don’t force America’s homebuyers, the government-sponsored enterprises and taxpayers who backstop the government-sponsored enterprises to embark on financial decisions with incomplete information. Responsible mortgage lending requires complete information, prudent risk assessment and underwriting decisions based on the fullest picture available. Maintaining tri-merge helps safeguard against another financial crisis.
• Joel Griffith is the senior fellow for economic prosperity at Advancing American Freedom.
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