Rating agencies and others are secondary market participants increasingly looking more closely at how to handle modernized credit scores for residential mortgage-backed securities now that government-related agencies have committed to the metrics.
Change is likely to be gradual but recent steps government-related agencies have taken to test an alternative score with
"Now we really have to start doing our homework and being at a point where we could rate transactions that have these loans in it. There are originators who are using VantageScore, at least in some capacity, to underwrite loans," she said.
However, market acceptance of modernized scores is still likely to be slow, other analysts said.
"In practice, we do not expect meaningful adoption of VantageScore in the near term," said Quincy Tang, managing director of U.S. RMBS ratings at Morningstar DBRS.
Morningstar DBRS nevertheless has already drawn up a proposed conversion method for VantageScore to classic FICO based on Freddie Mac data. It plans to update this over time.
"As more data becomes available, we will incorporate it into our analysis and continue refining our conversion methodology," she said in an email.
How far use of modernized credit scores goes not only depends on the extent of access to loan performance data but also the availability of alternative consumer payment information.
VantageScore and FICO's advanced 10T model, which government-related agencies plan to add after 4.0, aim to safely underwrite and offer more attractive prices to a broader range of borrowers based on this data and other changes to traditional credit scoring methods.
Assuming current home affordability constraints and uptake by 5% of the adult population, FHN Financial recently estimated that VantageScore would add around $76 billion in new supply to the broader mortgage-backed securities market, unless rent reporting availability grows.
"The impact could be greater if more consumers were to opt into self-reporting services going forward," researchers at the institutional capital markets firm wrote. FHN Financial is a division of First Horizon Bank.
Interim steps
Acceptance of modernized scores like 4.0 and FICO 10T on a standalone basis for private, rated RMBS may be difficult without more availability of information but Fitch theoretically could do it today, Hosterman said.
Fitch would do this by limiting the inclusion of loans made solely based on that metric in a pool to 10%, in line with its rule for mortgages that have no credit score.
The rating agency considers the probability of default for loans without a credit score to be 1.25 times higher than it otherwise would be based on a regression analysis used in Fitch's model, which is based on government-sponsored enterprise data from the financial crisis.
If classic FICO numbers are included alongside VantageScore 4.0 metrics, that penalty can be avoided.
"That would be the most advantageous thing to do now," Hosterman said.
Meanwhile, VantageScore use has been spreading in the government-sponsored enterprise market not only among mortgage originators but also in the Federal Home Loan Bank System.
The Federal Home Loan Bank of Des Moines announced earlier this month that mortgages originated with VantageScore 4.0 can be used as collateral for advances. Multiple Federal Home Loan Banks have made similar announcements, including the one in
