For decades one number decided who got a mortgage. The FICO score. As of last month, there are two. Fannie Mae and Freddie Mac now let every lender use VantageScore 4.0, a score built by the three credit bureaus, Equifax, Experian and TransUnion. And after a late-September change, a lender can run both and use whichever one is higher. Jasmine Li and AnnaMaria Andriotis laid it out in Tuesday's Journal.
The Federal Housing Finance Agency oversees Fannie and Freddie, which backstop much of the $13 trillion mortgage market and set its rules. FHFA chief Bill Pulte is pushing to break Fair Isaac's (FICO) near-monopoly, and the campaign has cut FICO stock about 60% this year. Lenders moved fast. Rocket Mortgage, the biggest lender, now prefers VantageScore. United Wholesale Mortgage runs both and keeps the higher one. Milliman counts nearly $4 billion of August Fannie and Freddie loans on VantageScore 4.0, up from $8 million in April.
Same grid, different thermometers
Fannie and Freddie's fees come off pricing grids built during the 2008 crisis, keyed to credit score and the loan's size against the home's value. The first version, out in early September, didn't treat the scores as equal. It read a 720 VantageScore as a 700 FICO. At the end of September Pulte erased that gap. John Ulzheimer, who has worked for both companies, says they run on different math and data. “It's like Fahrenheit and Celsius,” he told the Journal. FICO generally sets a tougher bar, including about six months more credit history.
Whether that helps you depends on who you ask. From May through September, Rocket pulled both scores on 1.4 million credit reports, says its chief business officer, Bill Banfield. On the loans Rocket wrote, VantageScore came in 11 to 12 points above FICO Classic on average, by his count. So most borrowers got the same or a slightly better price, he says. The bond market reads it differently. Investors who buy Fannie and Freddie's mortgage bonds aren't sure they're paid for the added risk, says Scott Buchta of Brean Capital. Milliman found a gap in the pilot loans. Borrowers in the same score range paid up to 0.2 percentage point more when the lender used VantageScore. FICO's own math says a borrower 20 points lower on its scale is 40% to 50% more likely to default.
Our read
Housing M6, and the honest verdict is watch, because the evidence runs both ways. A higher number on the application is nice. A lower rate is what you want, and the pilot data says the two don't always move together. The grid now treats a 720 and a 720 the same. The people buying the mortgage bonds don't, and they get a vote through the rate. We don't own Fair Isaac or Rocket in any book. The 30-year mortgage itself sat at 7.40% on Freddie Mac's survey in the same paper, which matters more to your payment than either score.
The connection to your plan is your own credit file, and this week's check takes ten minutes. If a mortgage or a refinance is anywhere in your next year, pull your three credit reports before a lender does. Fix errors first, since errors move both scores. Then ask every lender two questions. Which score do you use, and do you pull both. Get a quote from a lender that uses the higher score and compare it with a FICO-only quote on the same day. A higher score with a higher rate isn't a win. You check the forecast before you need the umbrella, and this fall the forecast comes in two numbers.