Lenders are drawing up new game plans, or preparing to, now that Fannie Mae, Freddie Mac and the Housing and Urban Development have committed to adding modernized credit scoresas alternatives to Classic FICO.
NewRez, a division of Rithm Capital, completed a test sale of $10 million in loans to Freddie Mac using VantageScore 4.0 credit scores. A coalition of major lenders is working to expand the practice to Fannie Mae, and industry observers are watching closely to determine whether they'll need to follow suit to remain competitive.
NMN spoke to a broad range of mortgage market stakeholders to get their views on what the gains and risks involved in adopting alternative credit scores are at this stage in the game. Some excerpts from their insights on these topics follow.
What the test drive was like
Collaborative discussions in the course of doing business with Freddie Mac led to an agreement where NewRez would work with a select group of loan officers to sell a limited number of VantageScore loans with pricing based on standard grids, President Baron Silverstein said.
NewRez had the option to submit loans only with VantageScore 4.0 but chose also to look at FICO Classic data because the mortgages were sold on a servicing-retained basis and it had responsibility for standard representations and warranties.
"We want to make sure that the consumer has the ability to repay, and we want the credit to basically be measured in a way we think is appropriate," Silverstein said. "We have that responsibility to make sure that we're doing things properly, and we felt it was appropriate to do that. It was not a requirement from Freddie."
Because loan pricing is likely to evolve over time, Silverstein suggested not drawing any conclusions about what it will be like for different VantageScore tiers as opposed to Classic FICO equivalents from the test run.
"This is likely going to be an evolution when it comes to where the GSEs land from a price perspective, how they're going to drive what they want us to do from a credit bureau perspective, and how they want us to handle any kind of adverse selection," Silverstein said.
Other big players' plans
Rocket Mortgage and Pennymac, which are the other two named members in the group of 21 lenders next in line to sell loans with VantageScore to the government-sponsored enterprises, both confirmed they're starting the process. Silverstein said NewRez also is in this group.
Rocket Chief Business Officer Bill Banfield said in an emailed statement that the company plans to involve its third-party loan channel in the process at some point.
"The model provides a differentiated view of every buyer's credit by including more data types, making it possible for Rocket to offer the dream of homeownership to more clients, as well as the clients of our broker partners," he said.
Rocket's chief rival, United Wholesale Mortgage, announced late Wednesday that it's offering both Classic FICO and VantageScore for conventional loans with a maximum loan-to-value of 80%. VantageScores used to determine pricing and eligibility will be reduced 20 points
The company issued a statement indicating borrowers "with a limited credit history or recent financial improvements" could particularly benefit from VantageScore. It's running both scores for loans in a program where it covers hard-pull costs for credit reports under certain conditions.
Meanwhile, Pennymac is gearing up as quickly as practicable in response to the recent announcement from Federal Housing Finance Agency Director Bill Pulte, indicating that the enterprises will be "immediately" able to buy the loans from approved large lenders.
"We are in full swing with our vendors, our tech partners and the GSEs trying to roll this out as soon as possible," said Isaac Boltansky, managing director and head of public policy, in an interview.
VantageScore 4.0 is in Fannie and Freddie's selling guides have high-level mentions of allowing "approved lenders" to accept VantageScore, but the larger market is awaiting both approval and further details around procedures such as how the metric will be incorporated into pricing grids.
"We're still in the early innings, but we're farther in this game than we've ever been before," Boltansky said.
The Pennymac policy expert said he couldn't quantify VantageScore's impact yet, but he does anticipate that it will likely put more pressure on credit metric providers to offer more to the mortgage industry at competitive rates.
"As a foundational matter, we think competition in this corner of the market will put downward reporting costs and foster innovation," Boltansky said.
Potential benefits other lenders see
Other mortgage lenders expressed hope VantageScore addition could deter FICO, and possibly the three major credit bureaus, from engaging in further broad price hikes for their products.
This could build on competition that's already picked up in certain circumstances.
FICO's direct license program, which TransUnion recently said
The latest FICO offer has lowered its Classic price to 99 cents if it's paid for through the direct program. That comes with a $65 funding fee. FICOs advanced 10T score that is set to eventually be added at the GSEs can be obtained free with Classic.
FICO CEO William Lansing said in an earnings call Wednesday that the company "anticipates no loss of volume in VantageScore in this fiscal year."
While FICO's stock has experienced some declines around rumors related to VantageScore's first-mover adoption at the GSEs in the past month, at the time of this writing it was continuing to trend higher as it has for the past five days. Credit bureau stocks also have seen mixed performance recently. VantageScore is not publicly traded.
The net result for lenders is that they remain concerned about across-the-board price credit score and report prices.
"We're looking for more competitive mortgages and to not have the price for the credit piece be a moving target," said Greg Sher, director of business development at NFM Lending, when asked about what hopes lenders will gain from score competition.
Sher said he likes the progress Pulte has made to this end, culminating in making the legislative mandate in the Credit Score Competition Act from 2018 a reality in just over a year from his swearing-in last March.
"I'm very impressed with the progress the FHFA director has made in very short order," Sher said.
Besides potentially adding cost-lowering competition, score modernization also has been aimed at opening up more homeowner opportunities by qualifying borrowers lacking traditional credit records sooner while improving loan performance predictions in ways that could lower rates.
"If it works the way they say it's going to work, then what we'll see is a better ability to predict when somebody is going to be delinquent. So hopefully it creates better risk-based pricing," said Hector Amendola, president of Panorama Mortgage Group.
If any modernized scoring method lives up to that promise and expands the universe of mortgage borrowers that can be safely underwritten with it, Amendola said adoption could be a strategy lenders will likely need to have in place to be competitive
Silverstein said he anticipates the use of more modern credit scoring will likely spread beyond the enterprises and FHA to other government-related entities that back loans in Ginnie Mae securitizations such as the Department of Veterans Affairs and the Rural Housing Service.
Private loan aggregators might also follow the GSEs' lead but they hadn't at the time of this writing, Neil Merritt, senior vice president, head of product strategy and development at Cornerstone Home Lending. CHL is a division of Cornerstone Capital Bank.
"I've only seen one investor publish anything official, and they're basically going to wait and hold before they make any sort of changes," Merritt said. "We do a lot of agency business, but due to the amount of nonagency that we also do, we're going to just take a little bit more of a cautious approach and see what that market's adoption is like."
Panorama plans to take a measured approach at first, monitoring developments closely so it can move quickly if VantageScore adoption becomes an industry standard, Amendola said.
"If there is going to be an increase in people that qualify, I don't think you're going to find a lender that doesn't want to implement it right away," Amendola said. "The last thing you want to do is get that phone call where someone says, 'Hey, this other company qualified me using that score. Can you guys do that?' And then respond by saying, 'No, we can't.'"
FHA ramifications
While Panorama is not among lenders currently being onboarded, Amendola said he's preparing by studying modernized credit scores broadly at both the GSEs and the Federal Housing Administration.
Both the enterprises and FHA are set to adopt VantageScore 4.0 and FICO's advanced 10T model. Negotiations involved in releasing historical data for GSE stakeholder analysis for 10T are taking longer than for 4.0. FHA plans to adopt both scores sooner than the enterprises.
FHA has long made it possible for payment records like rent to be considered through manual underwriting, and the GSEs also have incorporated some of this information into their process on an ad hoc basis too. But using scores with it regularly could be more of a game changer.
Having a GSE option is particularly helpful to affordability borrowers that otherwise may not qualify or get a good price due to their relatively low FICO Classic scores. Enterprise loans generally can offer a more attractive rate to consumers.
"I have dealt a lot with a lot of borrowers that don't have a credit score or trade lines, and FHA is always a little bit friendlier toward that, but it comes with things that can challenge a borrower, like mortgage insurance for the life of the loan if you can't put 10% down " Amendola said.
A differentiator for high DTIs?
Shawn King, co-founder at downpayment assistance facilitator Arrive Home, said his hope is that modernized scores may prove helpful to loan applicants who have rising debt-to-income ratios and credit utilization rates due to inflation but still make solid rent payments.
A favorable score can help offset high credit use and put a borrower in a better position to qualify for a lower rate. But how much advanced score may allow positive rent records to counterbalance other factors varies, according to co-founders of rent reporting fintech Esusu
"Positive rental data generally benefits all borrowers who have this data incorporated; however, the scale of the impact depends on the individual's credit profile and other activities," Samir Goel and Wemimo Abbey, said in a statement. Esusu has worked with the GSEs and credit bureaus.
If the advanced scores live up to their promise to expand the number of loans with lower rates because nontraditional data like rent does provide a better measure of ability to repay, borrowers with affordability constraints will benefit, according to King.
"If being more modern means we can identify who's going to be defaulting more often, I think that it's a big win for the industry," he said.
Potential risks
As previously noted, loan performance, adverse selection or other gaming of the system, and repurchase risks are all considerations for lenders when it comes to moving to a new credit score regime.
In some scenarios where the system can be gamed by picking the highest score option available, loan-level price adjustments the GSE could fall 10% to 30% or $1.3 billion to $1.7 billion, the American Enterprise Institute found in
Whether all parties in the mortgage market will be comfortable with new scores, and how much cost is involved in making operational changes that accommodate them, have long been concerns that account for some of the deliberation in making them a reality.
Now that Fannie and Freddie are moving ahead with new scores, one of the things that will be a key determinant of their effectiveness in addition to how well they predict loan performance is whether they are really efficient and do lower the cost of credit metrics, Sher said.
"That's the hope, and that's the assumption. Otherwise, why are we going through all of this?" Sher said. "All of the work that has to be done to change the wiring of the loan journey is a tremendous heavy lift. So if we're doing all of this only to end up in the same place, but to add work, it will all have been for naught."
