Mortgages Sold to Fannie, Freddie Should Use More Than FICO Scores, Regulator Says

Until now, mortgage lenders had to gauge most borrowers using only FICO scores if they wanted to sell a loan to

Fannie Mae

FNMA 1.31%

or

Freddie Mac.

FMCC 0.99%

That requirement helped cement FICO’s dominant position as the go-to credit score for lenders for a variety of loans. Since lenders had to use FICO scores for many mortgages, they also made them the favored third-party credit score when underwriting car loans, credit cards and other consumer loans. This also helped secure FICO scores as the main credit score used in the securitization market.

The FHFA, Fannie Mae and Freddie Mac began a review of whether to change credit score requirements in 2014.

Consumer advocates, VantageScore and some mortgage lenders had pushed for the change, saying it would allow more people to get approved for mortgages.

The FHFA said in a statement that it expects the change “will be a multiyear effort.”

FHFA director

Sandra Thompson,

announcing the change Monday, said that an older version of the FICO score that had been required will be replaced by a more recent FICO score, called the 10 T, and VantageScore’s latest credit score, referred to as VantageScore 4.0.

The scores incorporate information about borrowers’ rent payments, utilities bills and phone bills when those accounts are added on credit reports, rather than just information about bank loans and other financing that scores have historically reflected, the FHFA said. This information is likely to increase approvals for people with a limited history of borrowing, the agency said.

Ms. Thompson, speaking at a Mortgage Bankers Association conference in Nashville, Tenn., said requiring both credit scores will result in more borrowers who can be evaluated by Fannie and Freddie, which will improve the management of credit risk at the mortgage-finance giants. She also said two scores would safely expand access to credit for borrowers “with less robust credit histories.”

“Our goal is to maximize accuracy and inclusivity while ensuring a smooth transition and avoiding unnecessary complexity and implementation burden,” she said.

For years, FICO has vied to hold on to its position as the dominant credit score in mortgages, and VantageScore has tried to break in.

VantageScore, which is owned by the credit-reporting firms

Equifax Inc.,

Experian

PLC and

TransUnion,

launched in 2006 but its scores were largely unused in consumer-loan underwriting decisions until recent years. The company viewed its inability to be used for Fannie or Freddie mortgages as a big reason for that. VantageScore’s former chief executive

Barrett Burns

pushed for many years for the FHFA’s approval.

VantageScore said it can assign a credit score to about 37 million more consumers than the FICO score that has been required until now. Roughly 10 million of those consumers would potentially be eligible for a Fannie or Freddie mortgage, VantageScore said. About 4 million of the 10 million are minorities, the company said.

“This action today will enable millions more Americans to have access to mortgages because of VantageScore’s more predictive credit score…and it will correct some historical imbalances we’ve had for conforming mortgages,” said the company’s current CEO,

Silvio Tavares,

citing the small share of Fannie and Freddie mortgages that Black consumers account for.

Fannie and Freddie don’t make loans but instead buy them from lenders and package them into securities that are sold to other investors. Their promise to make investors whole in case of default underpins the popular 30-year fixed-rate mortgage.

Policy changes to Fannie and Freddie are important because their role in backstopping roughly half of the $13 trillion mortgage market helps determine who gets access to mortgage credit and on what terms. The FHFA oversees Fannie and Freddie.

If borrowers don’t have two scores when the change goes into effect, Fannie and Freddie could still underwrite the loans manually, instead of through their automated systems, FHFA staff told reporters. The manual process, which involves the review of the loan application by a human instead of a computer, is how companies assess the risk of loans for people who don’t have a traditional credit score.

FICO said in a statement that it was pleased that its score will continue to be required in Fannie and Freddie mortgages. FICO 10 T will offer “continuity and stability for lenders, investors and consumers,” the company said.

In another statement late Monday, FICO added that FICO 10 T “can enable an increase in mortgage originations of up to 5% without taking on additional credit risk.”

Fannie Mae and Freddie Mac notified VantageScore last year that its newest credit score passed their credit-score assessments, meaning it met a minimum accuracy threshold, The Wall Street Journal previously reported.

The FHFA on Monday also said that it would change the requirement that mortgage lenders use credit reports from all three main credit-reporting firms, Equifax, Experian and TransUnion, for Fannie and Freddie mortgages, and will instead require just two of the three. The agency expects that the change will “reduce costs and further promote innovation.”

The move could increase competition between the three credit-reporting firms that until now had this big piece of the mortgage market locked in.

Write to AnnaMaria Andriotis at [email protected] and Andrew Ackerman at [email protected]

Until now, mortgage lenders had to gauge most borrowers using only FICO scores if they wanted to sell a loan to

Fannie Mae

FNMA 1.31%

or

Freddie Mac.

FMCC 0.99%

That requirement helped cement FICO’s dominant position as the go-to credit score for lenders for a variety of loans. Since lenders had to use FICO scores for many mortgages, they also made them the favored third-party credit score when underwriting car loans, credit cards and other consumer loans. This also helped secure FICO scores as the main credit score used in the securitization market.

The FHFA, Fannie Mae and Freddie Mac began a review of whether to change credit score requirements in 2014.

Consumer advocates, VantageScore and some mortgage lenders had pushed for the change, saying it would allow more people to get approved for mortgages.

The FHFA said in a statement that it expects the change “will be a multiyear effort.”

FHFA director

Sandra Thompson,

announcing the change Monday, said that an older version of the FICO score that had been required will be replaced by a more recent FICO score, called the 10 T, and VantageScore’s latest credit score, referred to as VantageScore 4.0.

The scores incorporate information about borrowers’ rent payments, utilities bills and phone bills when those accounts are added on credit reports, rather than just information about bank loans and other financing that scores have historically reflected, the FHFA said. This information is likely to increase approvals for people with a limited history of borrowing, the agency said.

Ms. Thompson, speaking at a Mortgage Bankers Association conference in Nashville, Tenn., said requiring both credit scores will result in more borrowers who can be evaluated by Fannie and Freddie, which will improve the management of credit risk at the mortgage-finance giants. She also said two scores would safely expand access to credit for borrowers “with less robust credit histories.”

“Our goal is to maximize accuracy and inclusivity while ensuring a smooth transition and avoiding unnecessary complexity and implementation burden,” she said.

For years, FICO has vied to hold on to its position as the dominant credit score in mortgages, and VantageScore has tried to break in.

VantageScore, which is owned by the credit-reporting firms

Equifax Inc.,

Experian

PLC and

TransUnion,

launched in 2006 but its scores were largely unused in consumer-loan underwriting decisions until recent years. The company viewed its inability to be used for Fannie or Freddie mortgages as a big reason for that. VantageScore’s former chief executive

Barrett Burns

pushed for many years for the FHFA’s approval.

VantageScore said it can assign a credit score to about 37 million more consumers than the FICO score that has been required until now. Roughly 10 million of those consumers would potentially be eligible for a Fannie or Freddie mortgage, VantageScore said. About 4 million of the 10 million are minorities, the company said.

“This action today will enable millions more Americans to have access to mortgages because of VantageScore’s more predictive credit score…and it will correct some historical imbalances we’ve had for conforming mortgages,” said the company’s current CEO,

Silvio Tavares,

citing the small share of Fannie and Freddie mortgages that Black consumers account for.

Fannie and Freddie don’t make loans but instead buy them from lenders and package them into securities that are sold to other investors. Their promise to make investors whole in case of default underpins the popular 30-year fixed-rate mortgage.

Policy changes to Fannie and Freddie are important because their role in backstopping roughly half of the $13 trillion mortgage market helps determine who gets access to mortgage credit and on what terms. The FHFA oversees Fannie and Freddie.

If borrowers don’t have two scores when the change goes into effect, Fannie and Freddie could still underwrite the loans manually, instead of through their automated systems, FHFA staff told reporters. The manual process, which involves the review of the loan application by a human instead of a computer, is how companies assess the risk of loans for people who don’t have a traditional credit score.

FICO said in a statement that it was pleased that its score will continue to be required in Fannie and Freddie mortgages. FICO 10 T will offer “continuity and stability for lenders, investors and consumers,” the company said.

In another statement late Monday, FICO added that FICO 10 T “can enable an increase in mortgage originations of up to 5% without taking on additional credit risk.”

Fannie Mae and Freddie Mac notified VantageScore last year that its newest credit score passed their credit-score assessments, meaning it met a minimum accuracy threshold, The Wall Street Journal previously reported.

The FHFA on Monday also said that it would change the requirement that mortgage lenders use credit reports from all three main credit-reporting firms, Equifax, Experian and TransUnion, for Fannie and Freddie mortgages, and will instead require just two of the three. The agency expects that the change will “reduce costs and further promote innovation.”

The move could increase competition between the three credit-reporting firms that until now had this big piece of the mortgage market locked in.

Write to AnnaMaria Andriotis at [email protected] and Andrew Ackerman at [email protected]