Written by Jeff Lazerson
This past Monday morning I choked on my coffee after reading a price increase notification letter from Equifax Mortgage Services, my firm’s former mortgage credit reporting vendor.
Starting Jan. 1, the notice said, a FICO-scored joint (spouses) credit report is rising to $74.53 from $39.01. That’s a 91% price increase or nearly double the price. Say what?
But wait, it gets worse.
Terry Clemans, executive director of the National Consumer Reporting Agency, sent me a letter confirming the vast majority of the mortgage lending industry will most likely incur “a massive mortgage credit report price increase in 2023.”
“This is a paradigm shift in the pricing structure for credit scores and is being dictated to the mortgage credit reporting industry from all three national credit bureaus and/or FICO,” the letter states.
The pricing, which will be tiered, includes a wholesale price increase of less than 10% for the top tier of roughly 46 lenders, about 200% for six lenders in the middle tier, and more than 400% for all other mortgage lenders in the nation,” NCRA’s letter continues. None of the lenders were named.
In the bigger picture, this is a disastrous omen for anybody buying, selling or refinancing a property.
The sudden jump in prices is an unspoken green light from mortgage regulators and policy writers for every other real estate settlement provider to consider a similar tactic. In other words, if credit-score companies can hike fees, then what’s to stop others, like underwriters, from following suit?
How FICO’s credit scoring system works
Front and center in the mortgage loan approval process is a credit report pulled by a mortgage loan originator. The report will come from all three credit bureaus (Experian, Equifax and TransUnion) and include their accompanying FICO credit scores.
Lenders typically use the lowest middle FICO score to either approve or deny a loan and loan pricing. The higher the middle FICO the better the rate and/or lower origination point cost. The industry calls this a tri-merged credit report. If you don’t have a tri-merged credit report, you’ve got no chance at mortgage financing.
FICO, also known as Fair Isaac Corp., and these three credit companies hold the monopoly on tri-merged credit reporting; there are no other options — yet.
The Federal Housing Finance Agency (regulator and conservator for Fannie Mae and Freddie Mac) recently approved Vantage Score as another credit scoring system for mortgage lenders. FHFA indicated it would take years to onboard Vantage Score.
Vantage Score is jointly owned by the three main credit bureaus and will be a “competitor” to FICO, something it hasn’t seen in ages.
Consumer credit reporting companies such as Kroll, CoreLogic Credco and even a separate division of Equifax (Equifax Mortgage Services) buy the credit and credit score information, markup the cost, and then sell the borrowers’ tri-merged credit report to the mortgage firm from which borrowers apply for mortgage credit.
Mortgage lenders and mortgage loan originators are prohibited by federal law from marking up the price of the credit report. It’s a straight pass-through consumer charge.
I reached out to FICO with some questions regarding the price hikes. Here is the company’s response, in part.
Beginning in December, FICO adopted a tier-based royalty structure for mortgages, which will be based on the volume of FICO scores delivered to lenders. With this royalty increase, FICO collects approximately $2-$8 total for all three scores out of an up to $50 tri-merged report, according to Jim Wehmann, executive vice president of Scores-FICO.
Wehmann declined to provide the number of mortgage FICO scores it provides each year. He also declined to name the 46 lenders in tier one and the six lenders in tier two. FICO also would not explain how much the royalties would rise for credit reports of more than $50. Nor would they explain why the price is going up 91% for some mortgage brokers (like me).
Who pays for the reports?
Mortgage lenders and mortgage brokers have largely paid upfront for the mortgage applicants’ credit reports as a cost of doing business. They would bill the borrowers at closing. Federal law allows mortgage lenders/brokers to charge applicants upfront for the credit report.
The lenders would typically absorb the cost of the credit reports on both canceled loan applications and denied loans.
In my mortgage brokerage experience, we fund one borrower’s mortgage out of approximately every three applicants we run credit on. A borrower’s cold feet, a competitor snagging said borrower or a loan denial typically are the reasons for a loan fallout. I’m probably typical for the industry.
By providing tiered pricing, I asked FICO if the company is picking winners and losers as higher volume shops will get a huge price advantage. And has FICO estimated how many mortgage companies will be in jeopardy of going out of business due to the pricing disparities? FICO declined to comment.
Representatives with FHFA, TransUnion and Experian declined to comment. Equifax, however, did respond.
In addition to explaining tiered pricing and acknowledging the pricing increase letter my mortgage firm received, an Equifax spokesperson said the FICO price increase “is unprecedented in the size of the increase, with many customers receiving more than 400% increases.”
What about the legality of this?
“This increase is mystifying because it has to be passed on by the brokers to their residential clients,” said attorney Mike Hensley. “Forgetting regulatory concerns, it may well raise antitrust concerns of monopolization, price fixing, and tying as well as possible unconscionability claims.”
Freddie Mac rate news
The 30-year fixed rate averaged 6.58%, 3 basis points lower than last week. The 15-year fixed rate averaged 5.9%, 8 basis points lower than last week.
The Mortgage Bankers Association reported a 2.2% mortgage application increase from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $1,361 less than this week’s payment of $4,125. Related Articles
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.5%, a 15-year conventional at 5.375%, a 30-year conventional at 5.875%, a 15-year conventional high balance ($647,201 to $970,800) a 15-year high balance conventional at 5.75, a 30-year high balance conventional at 6.375% and a jumbo 30-year purchase, fixed at 6.25%.
Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year jumbo purchase mortgage locked at 6.25% for the first seven years interest-only without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com.
Shared from OC Register