By Amy Miller, AFC®
Last week, The Federal Housing Finance Agency (FHFA) announced its approval of both the FICO 10T credit score model and the VantageScore 4.0 credit score model for use by both Fannie Mae & Freddie Mac (the Enterprises). Once implemented, both scores will be required on each conforming mortgage loan delivered to the Enterprises, just as classic FICO® is today.
Fannie Mae & Freddie Mac
Created by Congress, both Fannie Mae & Freddie Mac play important roles in the housing finance system. The Enterprises provide affordable and easily accessible home financing options to banks and lenders, enabling them to grant more mortgages to home buyers across the country.
Both also buy mortgages from lenders and often package and sell them to investors, allowing lenders to then use the sale proceeds to further invest in mortgage lending.
For the past 20+ years, the Enterprises have relied on the classic FICO® (Fair Isaac Corp) score to determine a borrower’s risk and creditworthiness when making and pricing mortgages. FICO scores are based on loan repayment history, amounts owed, length of credit history, new accounts, credit applications or inquiries, and types of credit used.
They do not include payment history on rent, utilities, or cell phones, which is what led the Senate to suggest that other scoring models be considered. They argued that the omission of rent and utility payments leaves millions of Americans with no credit history or with insufficient history to have a credit score, making home ownership almost impossible.
Federal agencies including the FDIC and the Federal Reserve Board of Governors agreed, stating that alternative credit scoring is an “innovative and flexible practice” that will meet the needs of underserved Americans. According to a 2017 VantageScore Solutions study, the change will open access to credit for an estimated 7.6 million consumers who are currently unscored and allow them to earn a score of 620 or better. Americans with traditionally low access to credit will benefit most from this change.
VantageScore 4.0 & FICO 10T
Both Enterprises regularly update their scoring systems. The VantageScore 4.0 was introduced in 2017 as VantageScore Solutions 4th Generation Tri-bureau Scoring Model. This model featured an enhanced ability to score more consumers across the three credit reporting agencies (The Big Three), scoring millions of individuals who could not obtain a score from other models.
FICO updates its scoring model every 5 years and announced two new versions of its model in 2020. Along with an updated version of the classic FICO, which is now FICO 10®, the new FICO 10T® model includes “trended” data that examines a consumer’s credit behavior over a period of time.
Both the VantageScore 4.0 and the FICO 10T versions look back over at least 24 months of credit activity to predict future behavior, giving lenders more flexibility when making lending decisions. Where classic scores have been considered a “snapshot” of creditworthiness, a trending report would be more like a small “video clip”.
In addition to changing its scoring models, the FHFA also announced a change in requiring credit reports from each of The Big Three. Going forward, it is working on a plan that will require reports from only two of The Big Three.
This transition will take some time. The FHFA expects to take multiple years to implement this plan and intends to make the transition as smooth as possible.
FHFA Director Sandra L. Thompson stated, “While implementing the newer credit score models is a significant change that will take time and require close coordination across the industry, the models bring improved accuracy and a more inclusive approach to evaluating borrowers.”
Read the full announcement:
FHFA Announces Validation of FICO 10T and VantageScore 4.0 for Use by Fannie Mae and Freddie Mac | Federal Housing Finance Agency
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