Validation and Approval of Credit Score Models
Summary
SIFMA provided comments to the FHFA’s March 1, 2022 “Listening Session” on the use of new credit scores by the Enterprises. SIFMA has previously submitted our views on this topic to FHFA in various letters and meetings with FHFA staff. We are sending this brief letter today to summarize the points we raised at the listening session, which are consistent with our previous submissions on this topic.
Excerpt
Submitted electronically
Sandra L. Thompson
Acting Director
Federal Housing Finance Agency
400 7th St SW
Washington, DC 20024
Re: Validation and Approval of Credit Score Models
Dear Ms. Thompson,
SIFMA1 writes as a follow up to our participation in FHFA’s March 1, 2022 “Listening Session” on the use of new credit scores by the Enterprises. SIFMA has previously submitted our views on this topic to FHFA in various letters and meetings with FHFA staff.2 We are sending this brief letter today to summarize the points we raised at the listening session, which are consistent with our previous submissions on this topic.
SIFMA’s focus is on the continuation of liquidity in the Enterprises’ MBS markets, and in particular, the To-Be-Announced (TBA) market.3 Our primary concern with respect to this topic is the risk of disruption of market participants’ ability to model credit risk and prepayments, which could impact liquidity in the TBA market, and thus have knock-on effects back into the markets for primary mortgage credit. As you know, the TBA market’s vast liquidity is enabled by the stability and homogeneity that underpins the MBS, and hundreds of billions of dollars of contracts for securities trade on a daily basis. As with any other initiative, such as UMBS, change in this market must be managed thoughtfully and carefully given its importance and the real-world consequences of mistakes.
The current generation of credit scores and how they relate to prepayments and defaults is well understood, but the new generation is less well understood. In our previous communications, we laid out a few key points that we believe remain true today, and should be reflected in the ultimate decisions made by the GSEs and FHFA with respect to changes in the use of credit scoring models.
First, the Enterprises and FHFA must ensure that secondary market participants have enough data and other information to understand and model the new scores, including with respect to how they relate to existing scores on loans, and to understand how they will impact current Enterprise practices, before changes are
1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).
2 See, e.g., SIFMA letter dated March 29, 2018 available here: https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=957. SIFMA submitted a similar follow up letter on March 21, 2019.
3 Our members are also very focused on CRT markets, and the points made herein are applicable to those markets as well.