Fannie Mae and Freddie Mac can’t accept loans evaluated using the new VantageScore 4.0 credit scoring model until they update their selling guides — massive documents that spell out the detailed procedures lenders must follow if they want to do business with the mortgage giants.
That’s according to an FAQ published Tuesday by Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency (FHFA).
FHFA Director Bill Pulte threw the mortgage lending industry for a loop on July 8, when he announced on the social media platform X that Fannie and Freddie would allow lenders to use VantageScore 4.0 “effective today.”
The FHFA had been working for several years on a plan to require mortgage lenders to use both VantageScore 4.0 and the new FICO Score 10 T algorithms, which are intended to be more inclusive than the Classic FICO scoring model that’s been in use for nearly three decades.
VantageScore 4.0 and FICO Score 10 T both consider trended credit data and additional inputs such as rent, utility, and telecom payments, which their backers say will help more people qualify for loans. Many mortgage lenders are already using the scoring models to evaluate borrowers for loans not backed by Fannie and Freddie.
The plan was to require lenders who work with Fannie and Fredie to start using both of the new credit scoring algorithms to evaluate borrowers by the fourth quarter of this year, which begins Oct. 1. But the FHFA suspended that timeline in January, without explanation.
Pulte’s announcement that he had ordered Fannie and Freddie to start accepting VantageScore 4.0 left lenders with many questions, including:
- Would lenders be allowed to submit loans reviewed using only VantageScore 4.0, or would Fannie and Freddie also require scores generated using the FICO Classic algorithm currently in use?
- Were there still plans to allow Fannie and Freddie to accept loans scored by the new FICO Score 10 T algorithm?
In this week’s FAQ, the FHFA clarified that once Fannie and Freddie have updated their selling guides, lenders will have the option of using either VantageScore 4.0 or the Classic FICO scoring model.
“To promote robust competition and provide further flexibility for consumers and lenders, [Fannie and Freddie] will allow lenders to determine which credit score model to use on each loan they deliver,” the FHFA said — without providing any hints about when that might happen.
For now, Fannie and Freddie will continue to require that lenders submit credit scores generated by the Classic FICO scoring model. FHFA has also backed down from plans to move from tri-merge to bi-merge credit reporting, which would have allowed lenders to pull credit scores from two credit bureaus instead of three.
Fannie and Freddie will eventually be permitted to accept scores generated by the FICO Score 10 T algorithm. But before that can happen, lenders still need access to historical data that will help them fine-tune their underwriting processes, FHFA said.
Trade associations representing mortgage lenders last week noted in a joint statement that credit score standards are “embedded throughout the mortgage ecosystem.”
Lenders, investors, and other market participants were waiting for “critical implementation guidance” from Fannie and Freddie on using VantageScore 4.0 to evaluate borrowers, the groups said in a joint statement.
One of those groups, the Mortgage Bankers Association, said in a statement to Inman that Tuesday’s FAQ “provides the first round of necessary details, highlighting the initiative is a work in progress, and that additional details will be provided in the weeks ahead.”
The MBA said it’s still seeking resolution for “many operational questions” including minimum credit score eligibility and loan level price adjustment grids (fees charged by Fannie and Freddie according to borrower risk).
Questions also remain “on the implications for mortgage insurance pricing and investor acceptance of VantageScore 4.0,” the MBA said.
Can Fair Isaac compete?
During an upcoming “interim phase” outlined by FHFA, lenders submitting loans to Fannie and Freddie will be able to use either Classic FICO or VantageScore 4.0 to evaluate borrowers.
“This ‘lender choice’ approach will introduce more robust competition in credit scoring while the [Fannie and Freddie] continue to work towards full implementation of modernized credit scoring and credit reporting,” the FHFA maintains.
But once Fannie and Freddie start accepting VantageScore 4.0, FICO score developer Fair Isaac Corp. may find itself at a competitive disadvantage, because lenders may prefer the more inclusive VantageScore 4.0 over Classic FICO.
VantageScore — a joint venture of the big three credit bureaus, Equifax, Experian, and TransUnion — claimed on July 8 that implementation of VantageScore 4.0 will boost the eligible pool of mortgage applicants by 5 million borrowers.
Fair Isaac countered Wednesday with a study claiming that FICO Score 10 T “outperforms VantageScore 4.0 in mortgage origination predictive power,” meaning that it’s better at predicting whether borrowers will default.
The FICO score developer also claimed that “VantageScore 4.0’s improvement over Classic FICO was shown to be so minor that … it should be questioned if VantageScore 4.0 even beats Classic FICO at all.”
For years, the FHFA had planned to require lenders to use both VantageScore 4.0 and FICO Score 10 in order to make the transition away from Classic FICO.
Last year Fannie and Freddie released historical VantageScore 4.0 credit score data for millions of loans the mortgage giants have acquired over the last decade, aimed at smoothing the adoption of the new score. The mortgage giants said at the time they were planning to release historical data on Fair Isaac’s improved mortgage scoring model “as soon as possible.”
FHFA said Tuesday that Fannie and Freddie won’t be allowed to accept borrowers evaluated using the FICO Score 10 T algorithm until they publish similar historical data.
A spokesperson for Fair Isaac said in a statement to Inman Wednesday that the company had been waiting for nine months to hear from Fannie Mae, Freddie Mac and FHFA regarding the terms and conditions for releasing the historical data.
“Coincidentally, they just reached out again this week,” the spokesperson said.
An FHFA spokesperson said in a statement to Inman that when Fannie Mae, Freddie Mac, and FHFA first engaged Fair Isaac “over 20 months ago,” the company’s proposed terms “were criticized by a wide range of industry stakeholders.”
“VantageScore’s proposed terms, on the other hand, were welcomed by those same industry stakeholders and the data has been in use for over a year,” the FHFA spokesperson said. Fannie and Freddie “have engaged with [Fair Isaac] on updated terms that will allow for a smooth transition,” and FHFA, Fannie and Freddie “await a substantive response.”
In his latest X post on the topic, Pulte said Wednesday that he is “glad to see FICO and Vantage Score competing today.”
“Today, FICO released a white paper arguing theirs is more predictive than Vantage,” Pulte wrote. “This is good. We need COMPETITION. I believe there will be more than 2 credit scores, with high predictability, and low costs.”
Editor’s note: This story has been updated to include a statement by the Federal Housing Finance Agency.
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