Most of the mortgage industry, including the staff of the FHFA and the GSEs, was caught by surprise following Pulte's announcement. Even if conforming mortgage lenders were ready to adopt Vantagescore 4.0 tomorrow, as Brad Finkelstein reported last week, the infrastructure and policy alignment are still lacking to actually make loans. 

READ MORE: FHFA's Vantagescore move changes math on mortgage insurance

The road to implementation could be longer and bumpier than it seems, especially since Director Pulte made his announcement about Vantagescore 4.0 without troubling with the details. The same goes for using FICO 10T in lending. Classic FICO is the foundation of mortgage credit and is used by the vast majority of lenders, but nobody is really using FICO 10T at present.

Back in May 2023, we described the chaotic process begun by Pulte's predecessor, Sandra Thompson, ("The FHFA should nix its credit score plan, too") to require lenders to use two credit scores in the lending process, something that is arithmetically impossible and operationally problematic. In 2024, the FHFA allowed the use of VantageScore but required lenders to pay for two scores.

The progressive policy effort by the Biden Administration to push Vantagescore was more about press releases than substance. It failed miserably. Such were the obstacles to implementation that the two-score regime was not ever close to being adopted. Now the Trump Administration – or at least Director Pulte – wants to revisit the question of progressive reform of credit scores. But isn't Director Bill Pulte a Republican?

READ MORE: FICO challenges FHFA's VantageScore decision

The first obvious problem facing the GSEs is that neither Vantage 4.0 nor FICO 10T, which both include new data for rent and utilities, have a substantial track record in terms of loan or bond default ratings. The current default model in the industry is Classic FICO, which excludes the new consumer data and is used by banks, regulators, rating agencies and institutional investors around the world to price default risk. 

Use of Vantagescore in private mortgage originations increased significantly in 2024, but usage by Fannie Mae and Freddie Mac fell. Specifically, Vantagescore saw a 166% surge in private mortgage market use, but this was countered by a 42% overall decline in total Vantagescore usage for mortgages.  

The GSEs, which heavily rely on FICO scores, actually reduced use of Vantagescore despite the 2024 FHFA decision by Director Thompson to allow its use. What gives?

One industry CEO says using two credit scores is "like having two social security numbers." He tells NMN that two scores should not have been necessary, although "the threat of Vantagescore did compel FICO to update their model." 

If you follow the progressive logic of using two scores, Vantagescore and FICO will compete by giving out higher scores, defaults will go up, spreads will adjust, and we are back to where we started after spending millions on implementation of a new score regime.  No matter how hard progressives try, they cannot dictate market outcomes. 

"Right now the rating agencies are nowhere close to an ability to model Vantangescore loans for private label securities," says the CEO. "We can't include Vantagescore loans in private label MBS even if we wanted to…" And the truth is that, ratings issues side, many buyers of MBS would not accept the new score.

Another big operational hurdle is that the GSEs do not have credible pricing grids for loans underwritten with Vantagescore 4.0 or FICO 10T.  How do you create a loan level price adjustment (LLPA) grid that looks at the borrower's credit score and the loan-to-value (LTV) ratio of the loan? You look at the historical data. But we got no actual historical default data. Director Pulte and his staff will need to make up a transition table for the two ratings.

In order for lenders to use either Vantagescore or FICO 10T internally, they must arbitrarily decide how to equate a rating on Classic FICO to one of the new rating scores. The entire world of residential loans and credit is governed by Classic FICO and the rules, regulations and ratings methodologies that depend upon them. Some 70% of all residential loans are owned by bond investors, who all use Classic FICO.

READ MORE: Fannie, Freddie add VantageScore, keep tri-merge

The American Bankers Association, along with other industry groups like the Mortgage Bankers Association, the Housing Policy Council, and the Structured Finance Association, issued a joint statement politely acknowledging the potential "benefits" of FHFA Director Bill Pulte's announcement.

But they also highlighted the need for further clarity on "a number of implementation questions and concerns." The GSEs need to address these concerns before lenders can effectively utilize the new scoring models. Translated into blunt English, this is not going to happen during the second Trump Administration.

The various trade associations repeated the progressive newspeak, that the use of Vantagescore can foster "competition in the credit scoring market, potentially leading to lower costs for consumers." Nonsense. A race to the bottom in consumer lending can also lead to higher costs for taxpayers and lenders by enabling loans to consumers unable to shoulder the burden of home ownership.

Inflation in home prices and other living expenses has pushed home ownership out of reach for many Americans, but the response by policy makers in often worse than the problem. How does it help a low income family to be put into a mortgage and home purchase by diluting credit scores, with all of the attendant upfront costs, only to lose the home to foreclosure?

The real issue with consumer ratings is not with the models but the income of prospective borrowers. While including rent and utilities can boost some attributes of a scoring model, ultimately it comes down to the income and assets of the borrower, and the LTV of the loan. The property, not the borrower, is the security on the loan, which is why LTV is the chief factor in most default probability models.

READ MORE: Vantagescore use in mortgage origination jumps 166%

FICO scores are generally seen as a slightly more reliable predictor of overall mortgage default risk, according to the Urban Institute. "We find, on average, Vantagescore 4.0 scores are higher than Classic FICO scores, especially for refinance loans and for investor properties and second homes," note Laurie Goodman of Urban Institute and Jun Zhu of Indiana University. 

"Both credit scoring models effectively distinguish between high-risk and low-risk borrowers," they conclude. Notice that the researchers are comparing Vantagescore 4.0 to FICO Classic. There is little or no data for FICO 10T because few lenders are using it. But how will the difference in models affect defaults?

Ultimately the credit experience of lenders and mortgage insurers, not consumers, will be the true competition in credit scores.  If, say, private jumbo mortgages underwritten with Vantagescore 4.0 experience higher credit expenses than loans underwritten with FICO 10T, then lenders will stop using the inferior, more costly score. The market will prevail.