The political conversation in Washington about credit scores has reached a new level of absurdity. This is hardly a surprise, however, since the Trump Administration has targeted housing affordability as a national priority. But the conversation about housing in the nation's capital is rarely connected to the actual business of making and selling residential mortgages, no matter who is in the White House.
Going back to the early years of the Biden Administration, the Federal Housing Finance Agency had been doing the bidding of Experian PLC and the other credit data repositories to foster artificial "competition" in credit scores. Their goal: Attack and destroy Fair Isaac Corporation, publisher of the industry standard Classic FICO score, and take FICO's market share for their own.
The credit bureaus told the Biden Administration that Classic FICO was "racist by design" and only competition in credit scores – including the Experian-financed Vantagescore – would enable people of color and low-income borrowers with little credit history to get a fair shake. There are a couple of problems with this narrative.
LOANTHINK COLUMNS ON CREDIT SCORING
First, when we talk about the use of credit scores for mortgage lending, we are talking about the conventional and jumbo loan markets. Since the FHA, VA and USDA do not assess loans based upon risk factors like FICO scores or loan-to-value ratios (LTV), borrower scores are irrelevant. Right?
Would any lender with the best interests of a low-income borrower at heart go to the conventional market? In general, they would not. The whole concept of "mission" for the GSEs is political farce. Why do we even talk about credit scores in the context of low-income borrowers? Politics. FHA borrowers don't need credit scores.
Back in July, FHFA Director William Pulte declared on X: "Effective today, to increase competition to the Credit Score Ecosystem and consistent with President Trump's landslide mandate to lower costs, Fannie and Freddie will ALLOW lenders to use Vantage 4.0 Score with no current requirement to build new infrastructure."
Director Pulte said that
In fact, the conversation about credit scores is irrelevant to most low-income borrowers. The "mission" of the GSEs, after all, is to subsidize home ownership for middle-class Americans. Yet these hard facts do not prevent members of Congress and Washington policy community from encouraging the chaotic idea of "competition" in credit scores, one of the more inane notions to emerge from Washington in decades.
The Community Home Lenders of America, for example, believes that FICO's unfair "monopoly" leads to anti-competitive practices, causing excessive price hikes that harm small lenders and consumers, ultimately hindering access to homeownership and contributing to rising costs. Sounds good, doesn't it? Only problem is that competition in credit scores is pretty nigh impossible technically and unlikely in the cutthroat secondary loan market.
The secondary market perspective on FICO, Vantagescore
The Washington discussion about credit scores is mostly about the cost of home ownership for middle-class borrowers. But there are several important constituencies that are not included in the Washington credit score conversation: banks and nonbank buyers of mortgage loans and securities, wholesale lender banks, rating agencies and global bank regulators, just for starters.
In order to believe in the idea of "competition" in credit scores, people like FHFA Director Pulte and the rest of the Washington housing community must believe that banks, insurers, REITs and other large institutional investors who buy whole loans and mortgage-backed securities are really, really dumb. But that is not the case.
JPMorgan, PIMCO, Black Rock, PennyMac and many others are quite astute when it comes to pricing credit risk. So if one pool of mortgage loans is underwritten with Classic FICO and another pool is underwritten with Vantage 4.0 or FICO 10T, odds are pretty good that the latter pools will get lower bids, all other things being equal.
The lack of a significant credit history is the negative factor both for Vantage 4.0 or FICO 10T , compared to decades of actual data for Classic FICO and rating agency models based on this data. More default risk means a lower price, so counting rent or utility payments toward a score may not impress professional investors.
In order to believe that having more credit scores will somehow help low income borrowers access home ownership, you must believe that these borrowers will get superior execution from the GSEs vs. the FHA. Clearly, looking at the GSE pricing grids, this is not true. In fact, loan coupons on FHA, VA and USDA mortgages are almost always significantly lower than the monthly payment on conventional loans.
Moreover, in order to believe in the idea of "competition" in credit scores, you must believe that a mortgage loan approved with a credit assessment that allows payment of rent and utilities will get a higher price than a loan using Classic FICO. Again, this is clearly untrue. Classic FICO is a much harsher score methodology than Vantage 4.0 or FICO 10T.
Many low income consumers who need to use rent or utility payments to get a new score and qualify for a mortgage could not even get a Classic FICO score at all. They don't have sufficient credit utilization, which is 30% of the score calculation and impacts the other factors.
Another aspect of the Washington conversation about credit scores that seems completely nonsensical is the idea that the major rating agencies and bank regulatory agencies will not be able to differentiate between a harsher score like Classic FICO vs. a more liberal score such as Vantage 4.0 or the new FICO 10T.
There is so little data on the newer scores and no data whatsoever through a full credit cycle, including a serious recession. Why would a lender be reluctant to use Vantage 4.0 or FICO 10T to underwrite conventional loans? Because they do not want to face a repurchase demand from the GSEs in the event that such a loan goes delinquent.
The fact that FHFA Director Pulte advocates for lenders to use Vantage 4.0 is more than a little incongruous given his responsibility to safeguard the GSEs. His policy may result in higher credit losses and more repurchase claims on conventional lenders. After all, Bill Pulte is in the loan insurance business and offers no safe harbor for issuers using the newer credit scores.
Now
Yet despite what you may hear in Washington about "competition" in credit scores, in fact the downstream buyers of mortgage loans and MBS, and the rating agencies and bank regulators, are making no changes at all. If you are a buyer of conventional or private mortgage loans for investment or sale into MBS, which one of the new scores are you going to use? Probably neither.
