Home loan providers are set to receive a new method for evaluating applicants seeking federally guaranteed mortgages. This development caused shares of the nation’s leading credit scoring firm to drop sharply on Tuesday.
The head of the Federal Housing Finance Agency, Bill Pulte, stated that banks could begin utilizing VantageScore, an alternative to the Fair Isaac Corporation, which develops the well-known FICO score, when evaluating credit reliability for mortgages backed by Fannie Mae or Freddie Mac.
“Starting today, in an effort to boost competition within the credit score system and in line with President Trump’s decisive victory to reduce expenses, Fannie Mae and Freddie Mac will permit lenders to utilize the Vantage 4.0 Score without needing to develop new systems,” Pulte stated on Twitter on Tuesday.
post
.
Pulte stated that Tuesday’s release would increase lending opportunities and
bring down closing costs
.
The statement follows reports that FICO’s credit inquiry charges have significantly increased over the past few years. Shares of FICO (
FICO
) The largest competitor of VantageScore, fell over 17% during Tuesday afternoon after the announcement.
For many years, FICO held a strong position in the mortgage industry, with Fannie Mae and Freddie Mac exclusively using FICO scores. However, in recent times, VantageScore—developed in 2006 by the three main credit reporting agencies (Equifax, Experian, and TransUnion) as an alternative to FICO—has started to gain popularity.
Prior to Tuesday’s statement, mortgage lenders had already started implementing VantageScore. In 2022, under President Joe Biden’s leadership, the
FHFA announced
Following an extended transition phase, creditors would be obligated to provide mortgage loans accompanied by credit scores from both FICO and VantageScore to guarantee thorough evaluation of an individual’s financial reliability.
Last year, the Consumer Financial Protection Bureau released a
public inquiry
to “junk fees” that raise mortgage closing expenses, with particular emphasis on the latest surge in the price of acquiring a credit report.
“The credit scoring market has traditionally been controlled by a single company’s algorithm: the Fair Isaac Corporation, known for selling the FICO score,” said former CFPB chair Rohit Chopra.
said
Last year, during a speech addressed to the Mortgage Bankers Association, it was stated, “Mortgage providers have mentioned that expenses related to credit reports and scores have gone up, occasionally by as much as 400% compared to 2022.”
In May, Pulte initially shared on social media regarding the rise in credit report fees, stating: “Why do certain credit reports now cost twice as much (under Biden’s administration) compared to when President Trump was in his first term?”
Both FICO and VantageScore provide a credit rating ranging from 300 to 850 for individuals seeking loans, aiming to forecast the chance that someone might default on their loan payments. A better score indicates a lower probability of missing a payment; however, the two organizations use different approaches to calculate this score.
In a separate
social media post
Pulte stated that Tuesday’s guidance will allow Americans to use their rental payments as qualification for a home loan, instead of depending only on credit history derived from credit card and loan activity.
In contrast to FICO, VantageScore considers rental payments when they are submitted to Equifax, Experian, and TransUnion, as stated on VantageScore’s official site.
Although FICO’s stock declined on Tuesday, the risk to FICO’s position as a leading player in the market could be minimal, according to Jaret Seiberg, a housing policy specialist with TD Cowen.
We face challenges in envisioning lenders discarding FICO simply because they can now utilize Vantage Score,” Seiberg stated in a message to clients on Tuesday. “This is due to the fact that lenders possess limited familiarity with employing Vantage Score for home loans.
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