FHFA's Vantagescore move changes math on mortgage insurance

Even if conforming mortgage lenders were ready to adopt VantageScore 4.0 tomorrow, several industry players warn that infrastructure and policy alignment are still lacking — and that the road to implementation could be longer and bumpier than it seems.

For example, they need to be certain the private mortgage insurers are capable of providing coverage for loans that use both this metric and eventually FICO 10T as well.

Statements from the Mortgage Bankers Association and the Structured Finance Association, among others, indicate that while the industry is supportive of Federal Housing Finance Agency Director Bill Pulte's call for Fannie Mae and Freddie Mac to begin using Vantagescore immediately, they remain concerned that switching to either model from Classic FICO has "a number of implementation questions and concerns."

The Community Home Lenders of America sent a letter to Director Pulte, calling his decision "an excellent first step," and then reiterated prior complaints about FICO's pricing of credit scores.

"The Fair Isaac management team — and no one else — sets the credit-pull price based on whatever number appeals to them," CHLA claimed. "No one else had a say until you made this change."

The letter goes on to make the claim that FICO is planning to raise prices again this fall, in part because it would take time for Vantagescore to gain traction.

FICO has not made any decisions regarding pricing, a company spokeswoman said.

In a recent interview with National Mortgage News, Julie May, FICO's vice president and general manager of B2B scores, said if anyone has the potential for monopoly pricing power, it is Vantagescore, which is jointly owned by Equifax, Experian and TransUnion.

CHLA recommends Fannie and Freddie create credit subsidiaries

The CHLA also again recommended that Fannie Mae and Freddie Mac "be directed to use their massive data and analytics to each establish their own business subsidiaries to evaluate the creditworthiness of borrowers. Such companies, once established and proven to be reliable, could then be sold off by each GSE into the open market to ensure these de novo companies serve as independent umpires that also provide more competition generally."

This idea may align with the recent announcements regarding the parent company of the common securitization platform.

Mortgage insurers are one of the keys to viability

Meanwhile, the analysts at Bank of America Global Research, and even some commenting on social media, have raised questions about private mortgage insurers' capabilities to underwrite for coverage loans approved using algorithms from Vantagescore or FICO 10T.

The U.S. Mortgage Insurers association noted that over 800,000 borrowers required MI as a credit enhancement to equate a 20% down payment in 2023, amounting to $300 billion in loan volume — about 17% of all originations. Any delay in MI adoption of new scoring models could limit access for low-down-payment and first-time homebuyers.

The six active mortgage insurers deferred comment to USMI, which issued a broad statement of support for FHFA's modernization goals.

"USMI and its members are committed to working with FHFA, the GSEs, and other industry partners to navigate the credit and operational considerations necessary to implement the recently announced changes," the organization said.

Radian added that it "stands ready to support customers and qualified borrowers," but declined further comment.

The future for FICO 10T

BofA, in a separate research report, also flagged the FHFA's silence on FICO 10T in its recent guidance, calling it an "imprecise omission" that leaves lenders guessing about the score's future role. 

"There was also no mention of using FICO's 10T (trended data) credit model which also incorporates rental payment history as an option in underwriting and thus could similarly expand the eligibility set," the report said. "Instead, Vantage 4.0 here is presented as the sole alternative."

FHFA did clarify in a July 15 update that FICO 10T "remains an approved credit score model and is planned for future use." For now, however, it said lenders selling to the GSEs may only choose between Classic FICO and VantageScore 4.0.

Where does FHA stand on Vantagescore?

FHA is actively evaluating the adoption of modern credit score models, a Department of Housing and Urban Development spokesperson said in a statement.

"We are conducting thorough assessments to understand the potential impacts on access to credit, risk management, and market dynamics," the spokesperson said. 

The MI companies have to accept Vantagescore 4.0 and even FHA would have to adopt; "if not uniform across products, lenders may be more inclined to stick with classic FICO," a parenthetical comment in the B of A agency MBS report said.

Title insurance premium pricing, for which a lender's policy is required on every transaction (a borrower policy is optional), is not impacted by the change, the American Land Title Association noted.

Underwriters look at the purchase price of the property, determined by the value of the land plus any improvements. So they do not take the borrower's credit into account.