Inside the GSEs
The Federal Housing Finance Agency appears close to deciding which credit scoring model lenders should use when underwriting loans for Fannie Mae and Freddie Mac.
In a process that began in 2019, the choice has come down to either FICO, which has enjoyed a monopoly on GSE business since at least 2004, or VantageScore, a joint venture of the three leading credit reporting bureaus: Equifax, TransUnion and Experian. There are no underdogs in this fight.
Last month, FHFA held a listening session for industry stakeholders. Although well attended, the event didn’t shed much light on which model FHFA preferred or whether lenders will be able to choose between the two. But the session did revisit some of the concerns of participants in both the mortgage and securitization markets.
The key concern was that changing from FICO to VantageScore, or allowing lenders to choose between them, would create market confusion. As Chris Killian, CEO of the Securities Industry and Financial Markets Association, pointed out, the success of the to-be-announced market depends on a certain amount of homogeneity.
“One pool from Fannie is the same as any other pool from Fannie,” he said. “And since the uniform mortgage-backed security went into effect, it’s the same as any pool from Freddie.”
The implication of this argument is that investors will not be receptive to a new credit score model, and still less so for multiple models.
Last week, VantageScore released the results of a survey that found significant industry support for a new model. The survey respondents included 333 institutional investors in MBS and other types of asset-backed securities. Collectively, these firms had an aggregate of $47 trillion in assets under management.
The survey, conducted by FTI Consulting, found that institutional investors with significant exposure to residential MBS support the use of competitive credit scoring models. They also want more transparency in the models used to underwrite the loans that collateralize those securities.
Some 93% of the institutions said they want alternative scoring models to FICO. For those that focus on residential RMBS, that number was 91%.
Investors also said credit scoring models should be more inclusive, with 85% preferring methodologies that enable the inclusion of the majority of the nation’s underserved communities. This is also the direction the enterprises are moving, with programs like Fannie’s interpolation of rental payment history into its Desktop Underwriter platform.
Another 58% of the investors said they want to see more transparency around how credit scores are calculated.
On a different tangent, 76% of these institutions said environmental, social and governance issues play an active role in investor decision-making and that role is likely to grow. This, too, comports neatly with the GSEs’ operations, including their green bond programs and affordable housing agendas.
Any future credit score model — whether FICO or VantageScore — will have to work the ESG considerations of MBS into its structure.