The companies behind the new credit scores that will someday be used by most mortgage lenders are engaged in a public relations battle following a surprise policy announcement by Fannie Mae and Freddie Mac’s federal regulator.
In one corner is credit score giant Fair Isaac Corp. — developer of the FICO Classic scoring model that’s been in use by mortgage lenders for nearly three decades. In the other corner is VantageScore — a joint venture of the big three credit bureaus, Equifax, Experian and TransUnion, which has developed a rival credit score algorithm to take on the FICO score.
Both companies have developed what mortgage giants Fannie Mae and Freddie Mac consider the next generation of scoring models, employing trended credit data and evaluating data like rent, utility and telecom payments to help more people qualify for loans.
The new credit score algorithms — FICO Score 10 T and VantageScore 4.0 — were validated for future use by Fannie and Freddie under the Biden administration in 2022.
Under a timeline published in 2023, lenders were told they could expect FICO Classic would be phased out during the fourth quarter of this year and that they would be required to use both of the new, more inclusive scoring models when submitting loans to Fannie and Freddie.
But that timeline was suspended in January, as the head of Fannie and Freddie’s federal regulator during the Biden administration, Sandra Thompson, made way for President-elect Donald Trump’s nominee, housing scion and private equity CEO Bill Pulte.
Pulte’s boldest move yet?
Days after being confirmed as director of the Federal Housing Finance Agency (FHFA), Pulte fired 14 board members at Fannie and Freddie and made himself the chair of both companies.
While Pulte was expected to lead the charge to privatize Fannie and Freddie, the Trump administration has signaled it intends to maintain control over the mortgage giants, restructure them and take them public again.
In addition to eliminating Fannie and Freddie programs and practices intended to boost lending in minority communities, protect borrowers from unfair or deceptive practices, and assess risks associated with climate change, Pulte has been at the forefront of the Trump administration’s pressure campaign to force Federal Reserve Chair Jerome Powell to resign.
As FHFA director, Pulte has also sent criminal referrals to the U.S. Department of Justice alleging that Trump political opponents Letitia James and Adam Schiff committed mortgage fraud (both deny the allegations, characterizing them as political retribution).
But from the real estate and mortgage industry’s point of view, Pulte’s boldest move to date may have been his July 8 announcement on the social media platform X that Fannie Mae and Freddie Mac would allow lenders to use VantageScore 4.0 “effective today.”
Let the PR war begin
VantageScore promptly issued a press release the same day (“VantageScore 4.0 Allowed for Use on All Fannie Mae and Freddie Mac Mortgages Effective Immediately“) hailing the “historic decision … ending a decades-long lack of credit score competition in the U.S. mortgage market.”
Allowing lenders to use VantageScore 4.0 instead of FICO Classic when submitting loans to Fannie and Freddie would allow lenders to qualify five million more borrowers and boost lending by $1 trillion, the company said.
But mortgage lenders — who had been making plans for years to make the switch from FICO Classic in favor of VantageScore 4.0 and FICO Score 10 T — had many questions about how Pulte’s order would work.
Did Pulte mean they could now use either VantageScore 4.0 or FICO Classic, or would they have to use both? Were there still plans to accept FICO Score 10 T down the road?
With nothing to go on but Pulte’s social media post, lenders weren’t about to start submitting loans to Fannie and Freddie using VantageScore 4.0.
Credit score standards are “embedded throughout the mortgage ecosystem,” trade associations representing mortgage lenders pointed out.
Not only lenders, but investors who fund most U.S. mortgages, were waiting for “critical implementation guidance” from Fannie and Freddie on how to use VantageScore 4.0 to evaluate borrowers.
On July 15, the FHFA published some additional details about Pulte’s announcement on its website. Fannie and Freddie, they said, were not actually accepting mortgages scored by VantageScore 4.0.
The mortgage giants were still “completing the final steps for delivery of loans scored using VantageScore 4.0,” and working on updating their selling guide policies — massive documents that spell out the particulars of delivering loans to Fannie and Freddie.
Once that happens — the FHFA did not say when — lenders will be able to choose whether to use VantageScore 4.0 or the older FICO Classic score when working with Fannie and Freddie.
“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.
As for FICO Score 10 T, the mortgage giants still need to publish historical data to help lenders fine-tune their underwriting processes before Fannie and Freddie can accept them, their regulator said.
Faced with the prospect that its older scoring model, FICO Classic, would soon go head-to-head with the newer VantageScore 4.0, Fair Isaac published a study the next day touting FICO Score 10 T as a superior solution for predicting whether borrowers will default.
“FICO Score 10 T’s improvement over Classic FICO was shown to be 5 times better than VantageScore 4.0’s improvement, detecting 18 percent more defaulters,” Fair Isaac claimed in a press release.
“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,” the company maintained.
Not to be outdone, VantageScore cranked out another press release on July 17 defending the predictive power of VantageScore 4.0. The new score predicts 11.2 percent more defaults than the “incumbent monopoly” Classic FICO Score, VantageScore claimed.
That claim is based on “10 years’ worth of VantageScore credit scores and includes 45 million VantageScore 4.0 credit scores,” VantageScore said, pointing out Fair Isaac has yet to release FICO 10T data to allow for public comparisons.
Waiting on FICO 10T historical data
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 lender 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.”
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.
The FHFA claims that terms that Fair Isaac has proposed for releasing that data “were criticized by a wide range of industry stakeholders.”
Fannie and Freddie “have engaged with [Fair Isaac] on updated terms that will allow for a smooth transition,” and “await a substantive response,” an FHFA spokesperson told Inman.
New scores are already in use
Both VantageScore 4.0 and FICO Score 10 T are already used by lenders to evaluate loans that they don’t intend to submit to Fannie and Freddie — often because they don’t meet the mortgage giants’ underwriting standards or the loans exceed their $806,500 conforming loan limit.
The Veterans Administration and the majority of the Federal Home Loan Banks, including San Francisco, New York, Chicago, Cincinnati and Dallas will accept mortgages scored by VantageScore 4.0.
In December, Fair Isaac announced that Cardinal Financial had sold the first batch of government-issued mortgage-backed securities to include VA loans qualified using the FICO Score 10 T. More than 21 mortgage lenders use FICO Score 10 T for non-Fannie and Freddie loans, the company said at the time.
But for now, lenders submitting loans to Fannie Mae and Freddie Mac must continue to score borrowers using the FICO Classic scoring model — and pulling credit from all three credit bureaus.
In ordering Fannie and Freddie to accept loans scored using VantageScore 4.0, Pulte said the current “tri-merge” credit reporting process will remain in place.
The Biden administration’s plans to allow “bi-merge” credit reporting was opposed by TransUnion, which claimed pulling credit from only two credit bureaus could result in an incomplete and inaccurate picture being painted of a potential borrower, “particularly if a consumer’s most favorable set of credit data is the one that gets excluded.”
The Mortgage Bankers Association has studied the feasibility of using a single credit report to score government-guaranteed loans, as is the current practice with home equity loans and auto loans.
MBA President Bob Broeksmit has characterized tri-merge reporting as “an anachronism from the days when there were significant disparities in coverage by the credit bureaus.”
More competition, or trouble for Pulte?
Pulte has said in the past he was “not happy” about price increases levied by Fair Isaac, which an industry trade group claims total 700 percent over the past three years. He expects the new direction he’s given Fannie and Freddie on credit scores will lead to more competition.
After Fair Isaac released its analysis touting the predictive capabilities of FICO Score 10 T, Pulte said 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 on the social media platform X. “This is good. We need COMPETITION. I believe there will be more than 2 credit scores, with high predictability, and low costs.”
But in addition to leaving lenders confused and sparking a public relations war between credit score providers, the lack of communication on Fannie and Freddie’s new direction has reportedly flustered some Trump administration officials.
Mortgage industry insider Christopher Whalen, who has connections at Fannie and Freddie, has said the mortgage giants weren’t informed in advance of Pulte’s decision to let lenders use VantageScore 4.0.
An industry trade publication, Asset-Backed Alert, reported on July 11 that “the sudden announcement of the policy change was especially irksome from an internal standpoint because Pulte acted on his own, without consulting with some of his own senior staff or with his counterparts in other federal agencies including the U.S. Department of the Treasury and HUD.”
The story, “FHFA’s Pulte Falls Out of Trump’s In-Crowd,” quoted several anonymous sources, including a private equity executive who claimed Pulte is “on thin ice” with Trump administration colleagues and has “largely been cut out” of planning Fannie and Freddie’s future.
Pulte posted a statement from FHFA spokesperson Tallman Johnson, who said the FHFA and its director “will not be intimidated by lobbyists, who may or may not be registered and who seek to cover for monopolistic corporations who have been ripping off Americans for decades.”
A White House spokesperson told Asset Backed Alert that “The White House is appreciative of Mr. Pulte’s efforts.”
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