Stocks of Fair Isaac plummet following FHFA's decision to permit Fannie Mae and Freddie Mac to utilize VantageScore instead.
In a significant shift for the mortgage industry, Fannie Mae and Freddie Mac, two of the largest mortgage finance giants, have announced that they will now use VantageScore 4.0 for assessing borrowers' creditworthiness. This decision, effective immediately, marks a departure from the previous reliance on FICO scores.
The change was announced by Federal Housing Finance Agency (FHFA) Director Bill Pulte. The FHFA, the regulatory body overseeing Fannie Mae and Freddie Mac, has mandated the use of VantageScore 4.0 in mortgage assessments, following the 2018 Credit Score Competition Act. This act aimed to increase competition in the credit scoring market by allowing alternative models like VantageScore to be used alongside traditional models like FICO.
VantageScore 4.0 is a credit scoring model developed by VantageScore, a joint venture between the three major credit reporting agencies: Equifax, Experian, and TransUnion. The new model's approval could potentially facilitate up to $1 trillion in new mortgage originations, benefiting up to five million new homebuyers by making homeownership more accessible.
The immediate impact of this change on the mortgage industry is uncertain. However, it is expected to lead to increased competition and cost reduction, promoting efficiency and affordability in the sector. The introduction of VantageScore 4.0 could reduce FICO's market share, as evident from the significant drop in Fair Isaac Corporation's stock price following the announcement.
Tri-merge reporting, which involves the use of reports from all three major credit bureaus to assess creditworthiness, will remain in place. This ensures a comprehensive view of borrowers' credit history. By providing an alternative to traditional credit scoring models, VantageScore 4.0 may offer more accurate assessments for certain borrowers, particularly those who may not be well-represented by traditional scoring methods.
The decision aligns with the 2018 Credit Score Competition Act, which requires the use of more modern and competitive credit scoring models to enhance consumer access to credit. As the mortgage industry adapts to this change, the long-term implications for FICO and the credit reporting industry remain to be seen.
The FHFA Director Bill Pulte mandated that VantageScore 4.0, developed by Equifax, Experian, and TransUnion, will be used in mortgage assessments, following the 2018 Credit Score Competition Act. This change could potentially lead to increased competition in investing and business in the mortgage industry, potentially benefiting up to five million new homebuyers by making homeownership more accessible.
