Lenders should weigh risks vs. cost in credit options

Now that the Federal Housing Finance Agency has put VantageScore on a level playing field with FICO classic and may greenlight alternatives to the traditional tri-merge credit report, lenders' options appear to be growing and they have decisions to make.

Processing Content

"Now that you finally have a choice, you can lower costs for borrowers, and not a moment too soon," Mortgage Bankers Association President Bob Broeksmit told attendees at the group's conference in Chicago, where lenders discussed affordability challenges related to higher rates.

Also, although FHFA Director Bill Pulte canceled his plans to appear in person or virtually at the event due to other matters in Washington in the social media posts he favors, Broeksmit said he has had assurances the FHFA is also interested in moving forward with tri-merge alternatives.

"Credit scores matter, but as we all know, credit reports matter even more," he said. "For years, we have led the charge to create more competition there as well, so lenders and borrowers have more choices and more savings, without compromising credit quality. I'm pleased to report that FHFA is very receptive to this idea."

While MBA and several large players are comfortable with such options, all lenders will need to decide whether the benefits are worth the risk.

Mixed views on VantageScore

So far, the number of lenders reporting uptake of VantageScore in conjunction with loans in the market the FHFA oversees has been small, but the players involved have been influential, including industry giants Rocket, United Wholesale Mortgage, which could raise questions about how necessary it is to compete.

Fairway Home Mortgage is the latest to join that group of large players. The company is using VantageScore as a "tool to understand borrowers' financial profiles and recognize creditworthiness that traditional scoring methods may overlook," Stacey Sprain, senior vice president of credit support and vendor relations said in a press release.

Eight Federal Home Loan Banks now use VantageScore, with the most recent additions being Topeka and Boston. Others include the Federal Home Loan Bank of San Francisco, which first added it in 2024, followed by counterparts in Chicago, Cincinnati, Dallas, Des Moines and New York.

However other companies have been less comfortable with immediate adoption, and the percentage of loans in the FHFA's market with VantageScore has been in the 5-6% range, according to industry data Keefe, Bruyette & Woods has analyzed.

"I know that, as a company, we have been skeptical about using it, and until we're forced to use it, we will stick to the FICO model, which is more conservative," said Melissa Cohn, regional vice president of William Raveis Mortgage, in an email.

Also, while VantageScore has been given pricing parity with FICO classic for loans sold into the market the FHFA oversees, some risk experts have said they are wary of this move because it equates the risk of a using a new credit metric with less of a track record with a time-tested one.

While some mortgage companies have done business with VantageScore outside the market the FHFA oversees, Cohn said she has not seen interest on the part of portfolio lenders her company works with so far.

"Many lenders are skeptical about the difference between the FICO scoring and the VantageScore, whether it will be better and if it'll really do anything to improve lending," she said.

Standard & Poor's is preparing for use of new credit metrics like VantageScore in the private securitized market but may not be viewing or ultimately pricing loans that rely on them the same way the government-sponsored enterprises that the FHFA oversees do.

Ultimately, Cohn said lenders are going to have to decide for themselves whether the historical data FHFA has released to support new scoring options the GSEs are offering is compelling to experiment or fully dive into usage, then see if these models live up to their promises.

"Theoretically, it will create more access to borrowing," she said.

If alternatives to the tri-merge move forward, lenders may have to engage in a somewhat similar decision-making process but one more focused on whether there is risk in using fewer than three bureaus' reports.

Both new credit reporting and scoring options have raised concerns about the impact of cherry picking on risk assessments, which S&P has said could mean negative ratings adjustments in private-label securitizations where the latter are concerned.

Choice in credit reports could create more competition for the bureaus that could help counterbalance the fact FHFA has handed them additional power by greenlighting the VantageScore measure they back as FICO, but the balance will shift in the future.

FICO, which currently provides the score the mortgage industry has traditionally used, also has an advanced metric called 10T, is on track to compete with the bureaus' in the market the FHFA oversees down the road.

Considerations for tri-merge alternatives

While the FHFA's current opinion of tri-merge alternatives was still pending at the time of this writing, during the Biden administration it determined that two reports would be acceptable but a single report was less predictive, according to a recent Freedom of Information Act response.

Other research has been mixed. Standard & Poor's found scores were similar whether from two or three bureaus. 

However, the Consumer Data Industry Association found differences between reports priced around $151 each could cost the average borrower $3,000-$5,000 if less than three were used. Reports represent a small share of mortgage closing costs which typically total $18,000, CDIA said.

Mortgage Bankers Association research shows that if a single-report option were limited to use for borrowers with scores above a certain level, price variations would be within acceptable limits, but the CDIA has said this will not do enough to manage the risk in different sets of data.

Choice in all these metrics serves to further competition between providers of scores and reports, as traditional ones soar in overall pricing and newer ones sometimes more frequently come with some discounts and additional innovations. Most recently, Experian and Equifax respectively released new tools aimed at streamlining the underwriting process.