Lenders will soon be able to use either FICO or VantageScore credit models when analyzing mortgage applications, helping more prospective homebuyers be approved.
The Federal Housing Finance Agency (FHFA), which oversees mortgage giants Fannie Mae and Freddie Mac, has enacted a rule change allowing both companies to approve loans using the VantageScore 4.0 credit scoring model.
Until the July 8 change, Fannie and Freddie (known collectively as government-sponsored entities or GSEs) were required to use only the Classic FICO model (version 10 T). Now, they are free to choose between FICO and VantageScore, aligning their practices with those already in place at the Department of Veterans Affairs.
Although consumers don’t receive mortgages directly from Fannie or Freddie, most lenders originate loans with the intention of selling them to the GSEs. Doing so shields lenders from certain financial risks, enabling them to approve more borrowers than they might otherwise.
When Can Lender Start Using the New Model?
Lenders are not able to use VantageScore just yet. Computerized underwriting systems, which lenders use for most GSE-bound loan files, must be updated to accept the new model.
FHFA has promised to update the public on implementation progress.
Soon, homebuyers who have been denied under the FICO model may get another chance.
Why the Change?
The change has been planned since 2018 and was due to be put in place later this year. All that's happened now is that it will be implemented right away.
The approach is deemed "lender choice" because the lender will determine which credit model it uses on each loan it sends to Fannie Mae and Freddie Mac.
For example, an applicant applies for a loan, but doesn't qualify using the traditional FICO model. The lender re-runs the scenario using VantageScore and the borrower is approved. The lender may deliver the loan to the GSE with the VantageScore.
The FHFA says, "This 'lender choice' approach will introduce more robust competition in credit scoring while the Enterprises [Fannie and Freddie] continue to work towards full implementation of modernized credit scoring and credit reporting."
And, understandably, VantageScore is jubilant. In a statement, its CEO extended his "thanks [to FHFA] Director Pulte for his resolute focus on enacting credit-score competition as required by the law, and promoting efficiency and affordability for creditworthy Americans.”
VantageScore argues that the rule change will open opportunities for borrowers.
"According to a recent VantageScore analysis, credit score competition could enable up to $1 trillion in high-quality mortgage loans," the statement says. "While older credit models routinely excluded millions of eligible borrowers, VantageScore 4.0 eliminates the requirement for recent credit activity, which prevented many Americans, including active and recently retired members of the armed services, from obtaining a mortgage."
VantageScore emphasizes the benefit to those new to credit. "Additionally, VantageScore 4.0 eliminates the requirement for the consumer credit file to be older than 6 months, which provides previously underserved, young-to-credit Americans with newfound access to financial products."
Equally understandably, FICO is less impressed. After all, it had a virtual monopoly on mortgage credit scoring until now, which helped boost its stock price by over 400% since 2021.
In its July 16 statement, it said, "The Federal Housing Finance Agency’s interim 'lender choice' policy introduces a dangerous precedent that increases adverse selection risk that will raise prices for consumers. Further, it inexplicably favors a less predictive credit score that will undermine the safety and soundness of the enterprises and their counterparties, and damage liquidity in the $12 trillion mortgage industry. The GSEs previously conducted a thorough analysis of FICO® Score 10 T and VantageScore 4.0 and found FICO Score 10 T significantly outperforms VantageScore 4.0 in mortgage predictiveness and accuracy."
What This Means for Homebuyers
So, what might the credit score war mean for homebuyers? Well, VantageScore expects it to make the system fairer for borrowers whose lenders choose its technologies. It has long accepted data that FICO didn't use, such as payments for rent, utilities and telecoms. FICO does consider those now.
And VantageScore's lighter focus on the recency of information may mean more borrowers get approved who previously would not have.
And the FHFA explains, "Providing lender choice among multiple approved credit score models should help consumers, lenders, and other market participants realize the benefits of robust competition, such as lowering closing costs. The introduction of newer credit score models will improve risk management throughout the market as well, because these new models are more predictive of default risk."
However, FICO says, "Lender choice sounds consumer-friendly. It is not."
It continues, "VantageScore’s model is more 'inclusive' because it lowers critical and time-tested credit scoring criteria — including by assigning scores to individuals with as little as one month of credit history, sacrificing the rigor and reliability the mortgage industry demands. And unlike VantageScore 4.0, which considers specific factors like whether a prospective borrower currently owns or ever owned a home and therefore penalizes first-time home buyers that don’t, FICO Score 10 T does not, and therefore does not penalize individuals who have never owned a home."
In the ongoing credit scoring battle, some homebuyers are likely to be the winners.
