Are Fannie Mae, Freddie Mac preparing to accept VantageScore?

Mortgage lender choice among credit scoring model alternatives reportedly took a step closer to reality, as both Fannie Mae and Freddie Mac supposedly completed the validation phase for VantageScore, a note from Compass Point said.

"The next steps involve working with originators to implement VantageScore into the underwriting systems," said the report from Compass Point analyst Ed Groshans. If accurate, a roll out would then be expected in the first quarter of next year, based on a 2019 timeline published by VantageScore, Groshans continued.

However, VantageScore, the government-sponsored enterprises and their regulator, the Federal Housing Finance Agency, all declined to verify or comment on this report.

"Prior to going live, we anticipate that FHFA will issue a press release stating that the validation and approval of VantageScore for use by Fannie Mae and Freddie Mac," Groshans said. "We expect the Federal Housing Administration will also include VantageScore into its underwriting system, but this will occur after the GSEs complete their system rollout."

VantageScore, a joint venture between the three largest repositories, Equifax, Experian and TransUnion, has a minimal share in the mortgage market because it is not approved for use in Freddie and Fannie's automated underwriting systems.

In 2017, the FHFA began seeking input on whether the GSEs should upgrade their models to use a newer version of FICO and/or alternative products. Currently, Desktop Underwriter and Loan Product Advisor use the older FICO 5 scorecard.

The May 2018 regulatory reform act required the FHFA to define the standards and criteria Fannie Mae and Freddie Mac will use to validate credit scoring models through rulemaking.

In August 2019, the FHFA reversed course from a previous proposal that locked out VantageScore and put out a rule that allowed all credit score modelers the opportunity to compete with FICO.

A March FHFA virtual hearing discussed four options: Option 1, maintaining the single score requirement for each borrower on every loan; Option 2, requiring multiple scores; Option 3, allowing lenders to deliver loans with any approved score; and Option 4, the "waterfall" approach allowing a primary and secondary score.

"While it is our understanding that the GSEs are working to implement VantageScore into the underwriting process, it is unclear which, if any, if these options were selected," Groshans said, adding that after the hearing, it was apparent many parties were pushing for the third option, also known as lender choice.

"In our view, lender choice would be aligned with the administration's goals of increasing access to affordable housing and affordable credit, but we will have to wait for the FHFA's announcement to know the outcome," Groshans said.

VantageScore has marketed its product as allowing more consumers with little or no information in their file — typically minorities — to be scored and thus obtain credit.

"CHLA has consistently supported FHFA efforts to encourage Fannie and Freddie to utilize alternative and appropriate credit scoring options," Scott Olson, executive director of the Community Home Lenders of America, said in a statement. "Reports that the GSEs may soon be at the phase of reaching to originators to make this a reality would mean that our members would be able to help more underserved but qualified homebuyers who previously were excluded by unduly rigid credit score parameters."

The Mortgage Bankers Association said any decision about credit scoring models has to be data driven and transparent and expand access to those difficult to evaluate in older versions, in its March 2022 letter to Sandra Thompson, now the full-time FHFA director, on the agency's four year plan.

"FHFA should take a conservative approach with respect to the timelines by which use of a new model or models is made mandatory," the MBA letter said. "It also is imperative that FHFA and the Enterprises continue to engage with the industry and relevant stakeholders as this process unfolds to provide guidance and resources, where necessary, to address any implementation hurdles."