Investors are gradually adopting modernized credit scores from both FICO and VantageScore Solutions as part of their ongoing risk evaluation processes, according to participants at the Mortgage Bankers Association Secondary and Capital Markets Conference held this week in Manhattan.
During a panel on modernized credit scores and securitization, experts compared these new scoring models to traditional FICO scores, highlighting key differences.
Ethan Dornhelm, vice president at FICO, explained that advanced models like FICO Score 10T and VantageScore 4.0 use trended data—a historical record of consumers' balances and limits over time—rather than just a snapshot of their most recent debt levels. He also noted that, unlike classic FICO, these models can incorporate rental data if available. However, as with utility payment data, there is currently limited rental information in most borrower files.
GSEs co-sign the move
On April 22, the Federal Housing Administration announced that it joined Fannie Mae and Freddie Mac in implementing VantageScore 4.0 and FICO 10T, an event that VantageScore Chief Strategy Officer and Chief Economist Rikard Bandelo said at an earlier talk would "usher in a new era of sounder mortgage markets and at long last genuine competition in mortgage credit scoring."
However, implementing these new credit scores presents challenges. David Battany, executive vice president at Guild Mortgage Company, highlighted operational hurdles, noting that most lender systems are designed to handle only one credit score field. Adding a second field will require operational adjustments.
Battany also said the accuracy and quality of those scores are important. "We look at both of these new models, and they are very much worth evaluating," he said. This is done by collecting data and comparing how the same loan was scored under classic FICO, FICO 10T, and VantageScore 4.0.
"We are in the very early stages of collecting this data," he explained, saying that having months' worth of data, they can now make meaningful comparisons. He added that sometimes there is a delta of 40 or 80 points between two models; juxtapose that with the fact that, with classic FICO, every 40 points of score equals a doubling of the default rate.
"As lenders, that should be very concerning," because according to one model, the likelihood of default could be twice or four times. Whether it's origination, buyback, or servicing, "understanding the data is critical for us," Battany said.
Optimism despite challenges
Despite the operational setbacks, the use of these modernized credit scores is making headway in the industry. Mortgage lender and servicer Newrez said in April that it partnered with Freddie Mac on a loan delivery limited engagement, which it said: "helped validate the operational readiness of modernized credit scoring models, including VantageScore 4.0, within the GSE framework."
"Whether you are going to go with VantageScore 4 or FICO 10 T or another that would come down the road, I would say changes are obviously coming to the industry, and that's a good thing," Bob Johnson, Jr., head of originations at Newrez said at the MBA panel. "The lenders that prepare for it, even if they are not part of the limited rollout, can begin doing the work … I think it's important."
In April, Freddie Mac began a limited rollout, allowing approved lenders to use VantageScore 4.0 alongside traditional FICO scores through a tri-merge credit report for originating new mortgages and submitting loans to its automated underwriting system.
FICO 10T-assessed loans have also been used in securitizations. In December 2024, Cardinal Financial, a direct mortgage lender based in Charlotte, North Carolina, originated and traded the first government-issued mortgage-backed security using these scores.
More deals similar to the Cardinal Financial transaction are expected
to come to market, said industry professionals.
"We expect additional securitizations in non-QM and HELOC later this year [using FICO 10T-assessed loans]," FICO's Dornhelm said.
