Pennymac is rolling out VantageScore 4.0 across its consumer direct, broker direct and correspondent channels, making all three of the nation's largest originators users of the model, alongside Rocket and United Wholesale Mortgage.
The move gives brokers and correspondents another major outlet for VS4 loans just as the score gains a pricing edge. The Federal Housing Finance Agency recently equalized loan-level pricing adjustments for VantageScore 4.0 and Classic FICO, and analysts expect VS4 usage to climb sharply.
It also comes as the industry braces for a second fight, over whether the government-sponsored enterprises will move from tri-merge to bi-merge credit reports, a change FHFA Director Bill Pulte could announce at the Mortgage Bankers Association annual convention.
What is the risk with bi-merge reports?
Bi-merge credit reports are likely to give higher scores to borrowers than the current method tri-merge pull, a Bank of America Securities report said.
The credit reporting industry is fighting back after speculation arose that Federal Housing Finance Agency Director Bill Pulte will announce the government-sponsored enterprises could use bi-merge credit reports at the upcoming Mortgage Bankers Association annual convention.
"More data, not less, produces better outcomes, and keeps borrowing costs down," Dan Smith, president and CEO of the Consumer Data Industry Association, said in a statement. "Lenders and borrowers benefit from the most complete, accurate picture, which is why maintaining the tri-merge credit report is critical to the safety and soundness of the mortgage industry."
Pennymac joins Rocket and UWM using VantageScore
Pennymac Chairman and CEO David Spector said the company wants to be on the vanguard of credit score modernization because it will lower costs and support homeownership.
"FHFA and FHA moved it from talk to action, put firm dates on the calendar, and released the data the market needed to validate this model independently," Spector said. "That took resolve, and we applaud them for it. Anything worth doing is hard, and this is worth doing."
The MBA is on record advocating for use of a single bureau pull in agency mortgage underwriting. A February paper from Andrew Davidson said dropping the tri-merge to fewer pulls, either bi-merge or single, would increase risk.
"The organizations that power the mortgage market have committed to using more information, not less, and the data continues to produce better outcomes," Smith said. "Consumers, lenders, investors and taxpayers benefit from this robust information, and any change at this time would upset this balance and introduce unintended cost and risk."
His organization wants to work with policymakers to keep the tri-merge in place.
The change comes amid many shifting conditions, including the rising price for credit scores. In addition, those scores are used to set loan level pricing adjustments. Pulte recently equalized the LLPA grid for VantageScore 4.0 and Classic FICO.
FHFA announced the use of bi-merge before
It was at the MBA annual in 2022 that then-FHFA Director Sandra Thompson announced a proposal which would require use of both VantageScore and FICO, but the polls from just two of three credit bureaus.
The following June, Standard & Poor's did a study which found the shift from three to two bureau data would only cause a small variation from the results produced by the current methodology employed.
But as the Trump administration started its second term, credit score modernization was put on hold.
What adopting VantageScore means for Pennymac customers
"Credit scoring has never had a competitive market, and borrowers have paid for that through their closing costs," Pennymac's Spector said.
"Markets with more than one credible option tend to produce better products at a lower cost, and credit scoring should be no different. Each provider now has a reason to improve predictive accuracy, extend coverage, and compete on price, and lenders have a basis for comparison they have not had before."
What share of GSE mortgages uses VantageScore
In September, 5.5% of agency mortgages used VantageScore 4.0, flat with August, according to Keefe, Bruyette & Woods. But this was before the LLPA announcement from Pulte; Rocket subsequently said VantageScore 4.0 would become its default.
"Given the changes and the likely interest rate benefit for loans using VS4, we expect usage of VS4 to increase materially over the coming months," KBW analyst Bose George said in an Oct. 1 note.
In September, Rocket and UWM made up 95% of VantageScore loans, down from 99% one month earlier.
Rocket sold 7,890 loans using VantageScore 4.0 to the GSEs, followed by UWM at 2,567 loans. AmeriSave Mortgage did 343 mortgages, while Pennymac sold 67, the KBW data said. The only other originator with more than one loan sold was CrossCountry at 17.
Why bi-merge produces higher scores than tri-merge
On Oct. 2, the day after the latest rumors about what Pulte will say came out, Bank of America Securities, in its agency MBS weekly report, said bi-merge report methodologies generally produce higher credit scores than the current tri-merge approach.
"Using historical issuance data, even the most conservative bi-merge VantageScore 4.0 (i.e. lowest score among the three possible bi-merge combinations) generates an average score that is approximately 4 points higher than the VantageScore 4.0 Current Method and 18 points higher than classic FICO," B of A said. "The difference is then even larger when using median or highest bi-merge scores."
The pickup is particularly pronounced among borrowers who have lower credit scores, B of A Securities found.
"For borrowers with FICO scores below 680, bi-merge methodologies result in an average score increase of roughly 30-50 points, much higher than the 15-25 points uplift observed under the VantageScore 4.0 Current Method," the report said. "This suggests that the migration to bi-merge could further amplify score inflation, particularly within lower-FICO cohorts."
The report notes that with the lack of details until a formal announcement from the FHFA, it is unclear how a bi-merge framework would be structured and when it would happen.
"One key question is whether the selection of the two bureaus would effectively be random, or whether lenders or borrowers would have a way to identify the bureau combination that produces the most favorable outcome," B of A said.
"If the latter proves possible, score inflation could be even more pronounced, as the effective score would move closer to a 'Bi-Merge Highest' level rather than a 'Bi-Merge Median.'
