VantageScore 4.0 Implementation Faces Pushback, But Slim-File Consumers See Silver Lining

The recent surprise announcement by the Federal Housing Finance Agency (FHFA) that Fannie Mae and Freddie Mac would now use the VantageScore 4.0 to underwrite mortgage loans has left the mortgage market industry reeling.

Critics maintain the surprise move has created more questions than answers. While the FHFA claims this will lower costs and make credit more widely available, most players aren’t in a position to handle the change.

FHFA Director William J. Pulte announced last week that mortgage lenders who sell loans to Fannie Mae and Freddie Mac can, “effective immediately,” use VantageScore 4.0 credit scoring along with or in place of FICO scores in existing tri-merge systems.

Warehouse lenders, capital market desks, mortgage insurers, and rating firms remain in the dark, with no clear guidance on how to comprehend or price loans in the new system.

“This ill-considered decision by Pulte will force buyers of loans to come up with a ‘transition table’ for Vantage 4 to FICO 10, but such attempts will be imprecise,” posted Christopher Whalen, chairman of Whalen Global Advisors, on X.

Following the announcement, FICO stock dropped between 9% and 15% depending on the source, highlighting how rattled the market was by the news.

Some lenders say they just don’t feel secure about the future. Fannie and Freddie persist in requiring mortgage insurance for those with less than 20% down, but the majority of mortgage insurance firms have not stated whether they’ll back VantageScore 4.0. That’s one fairly big missing piece.

“Roughly 70% of mortgages are sold to Fannie and Freddie. Over 30% require mortgage insurance, yet MI companies haven’t confirmed Vantage acceptance,” noted advisor Eric Lapin. “Warehouse lenders and capital markets still price based on FICO models, and loan delivery platforms aren’t set up to support a switch today.”

So much of the unease here is due to the manner in which the FHFA decided to carry this out. For years, there was a studied approach to gradually phase in the VantageScore 4.0 and the FICO 10T. That was thrown out the window in January with no publicly discernible reason.

Now, under new management, the agency seems to be skipping the formal rulemaking and opting for the shortcut.

Despite all the potholes along the way, the transition may yet be a victory for debtors who have been falling between the cracks in the mainstream scoring system.

VantageScore 4.0 counts rent, utility, and telecom obligations — goodies FICO Classic doesn’t. By itself, this mere fact could boost scores for millions of credit-invisible shoppers.

As mortgage consultant Josh Lewis described it, this would open the door for first-time homebuyers. “Some clients who have no FICO score at all due to inactivity may still show a valid VantageScore. That can absolutely shift the approval path, whether through AUS eligibility or loan pricing tiers,” he told Mortgage Professional America.

The numbers seem to back him. VantageScore reports 33 million consumers now fit in its scoreable population, and more than 12 million of them score over 620 — that’s the range for automated underwriting. That’s some definite shot in the arm for those renter folks, and it might result in some legitimate uptick in home loan approval.

But lenders will not flip overnight. The loan originators need time to see how the loans perform, fine-tune the pricing engines, and recode the systems for underwriting. According to Lewis, “Lenders will still apply their own risk models, but the change gives them a larger pool of applicants to assess.”

It will take time to come. Upgrades to automation, investor confidence, and increased acceptance of data require complex coordination. So don’t expect a gold rush just yet.

But if the numbers weather the storm and the investors feel more comfortable, the tide will change. For those borrowers who have tarried in the wings for altogether too long, the sooner the better.