There has been a flurry of activity in the mortgage markets since the 2018 passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act. This act requires the Federal Housing Finance Agency (FHFA, now known as US Federal Housing) to validate and modernize the credit score models used in the housing finance system. It should be noted that so far, the discourse has been around mortgages sold to the Enterprises (Fannie Mae and Freddie Mac). Ginnie Mae has not provided any guidance on their plans to start using new credit score models.

A Timeline of Events

2022

1. FHFA announced that VantageScore 4.0 (VS4) and FICO10T had been validated and approved for loans sold to the Enterprises.
2. Once implemented, lenders would have to send both FICO10T and VS4 for each loan sold.
3. Lenders could use either tri-merge (where credit reports from all three credit reporting agencies are used) or bi-merge credit reporting (where credit reports from any two are used).

2024

1. Historical VS4 data was released for the time period 2013 - 2023.

2025

1.  The FHFA on July 28, 2025, announced that
       i) Both the Classic FICO and VS4 can be used by lenders.
      ii) The tri-merge reporting requirement will be followed.

To prepare investors for this change, the Enterprises will start providing extra data in the MBS (mortgage-backed securities) disclosure files starting in December 2025. The current credit score field will be renamed “Classic FICO” and the VS4 scores will be reported in a separate field.

Other Proposals

Another proposal floated by some stakeholders is to move to a single bureau score instead of a tri-merge score. This will probably not impact consumers or insurers of lower risk loans, but there might be unwanted consequences for consumers and insurers for higher risk loans, i.e., for higher LTVs and consumers having thin files or lower credit scores.

Impact of the changes

There are three main dimensions that this change will affect.

Dimension 1: Data

1. The originator will have to send the score they are pulling downstream to the other market participants.
2. The LOS (loan origination systems) will have to adapt to this change.
3. The Enterprises will have to report that data to the securities holders.

Dimension 2: Mortgage Analytics

1. All mortgage analytical models and applications have historically used Classic FICO. With the addition of VS4, the models will first need an API change so that any new data field(s) can be read into the databases and the models.
2. The analytical models will need to know which score is being fed to the models, and the type of score calculation (for example, tri-merge, bi-merge, median, mean).
3. The models will then need to be calibrated or refit with the new VS4 data.
4. The output would also need to specify the score that was used to generate the model output.

Dimension 3: Gaming

1. Gaming can happen both with (i) choice of credit score model, and (ii) choice of which bureau score is used (if the tri-merge standard goes away).
2. When originators can observe multiple score models from each of the three bureaus and choose any for underwriting and pricing, they can increase their own profits by sending the highest score to credit investors. (Note that this problem will be exacerbated if the tri-merge standard is replaced by a single-report requirement.)
3. This potential for gaming encourages credit investors to raise prices to offset their higher potential risk.
4. This second dimension of credit risk uncertainty makes it more difficult to accurately quantify the true risk of the underlying loans.
5. We will have to quantify the impact of using the highest score on prepayments, delinquencies, and defaults.
6. Lenders might also consider pay-ups in the score they use – the highest or the lowest. Based on the LLPAs, they might decide to use the lowest score as long as the loan gets approved.

Adapting to the Changes

It is an interesting time for those of us who are in the business of quantifying mortgage risk. Credit scores are evolving with new data and new rules about score usage. Adoption by all stakeholders will take time, and we are adapting to the new data and new rules to help our clients prepare as far in advance as possible. Some of these changes are likely to make credit assessment more accurate, but others may raise uncertainty and thus risk.

It’s likely that using a single score lowers the predictive power of delinquency compared with the median of three scores. The GSEs use credit scores to communicate pricing but not to assess risk - they use the full in-file credit reports. They have relied on three full in-file reports for decades and may have to make major changes to their infrastructure if they receive only one.

So how is AD&Co adapting to these changes in the marketplace? First, we are closely following the developments in the markets. Second, as a data-dependent organization, we are actively improving our access to the new data so that we can analyze the changes in risk for our clients. We have already begun testing our prepayment and credit models using the newly available VS4 data to study model fits in various dimensions. We are investigating areas where the fits may have degraded and finding ways to improve model performance. There is a good chance that a new credit score that has different inputs will also lead to model proliferation.

One option that market participants are talking about is that the Enterprises should provide the Classic FICO score in addition to VS4 for a period of time so that model performance with the new score(s) can be observed over that time period. AD&Co is proposing a minimum of two years for the overlap. It should be noted that, at least initially, lenders will not have to report scores from multiple models.

Adopting new scores is a major change in the mortgage market, and loan originators, analytics providers, and secondary market participants are working feverishly to make sure that the transition happens smoothly. We will keep our clients and others updated with the results of our research and any changes to our analytical models (prepayment, credit) because of this adoption.

Reference: Credit Scores | FHFA

FICO 10T and VantageScore 4.0 are trademarks of Fair Issac Corporation and VantageScore Solutions LLC, respectively. 

Andrew Davidson & Co., Inc (AD&Co) proudly sponsored IMN’s 11th Annual Mortgage Servicing Rights (MSR) Forum by Informa at the New York Hilton Midtown. Senior modeler Daniel Swanson joined the “Managing Delinquencies & Forbearance Value” panel in discussing how servicers are adapting to today’s market and the evolving delinquency trends. Rob Landauer, Kevin Lin, and Vivian Li from our Business Development and Financial Engineering teams connected with industry leaders to exchange insights on MSR valuation, risk, hedging, and sensitivity analysis.

Below are some of the themes and takeaways gathered from conversations with attendees and from the AD&Co materials exhibited at the conference.

Rising Delinquency in Recent Vintages

Delinquency was a frequently discussed topic due to increases in delinquency rates in recent vintages. Panelists noted that tax and insurance (T&I) costs continue to increase and along with broader inflation pressures, these factors are driving higher monthly payments; panelists speculated on how much responsibility these higher payments had for the increases in delinquency.

Daniel Swanson shared several slides illustrating this trend, including:

Figure 1. 60+ Days Delinquency Percentage

Figure 2. Roll Rate from Always Current to Delinquent

AD&Co’s LoanDynamics Model (LDM) remains one of our most widely used tools for delivering prepayment and credit analytics. In addition, we recently launched our Climate Impact Suite (CIS), which incorporates climate-related costs — in the form of higher insurance premiums — into borrower behavior (prepayments and delinquencies) and home price appreciation/depreciation projections. First, property-level climate risk data provided by geospatial data vendors is translated into homeowners’ insurance premium forecasts to feed as input to CIS, which then enables users to analyze how these climate-driven payment shocks influence delinquencies, prepayments, and MSR valuations. Homes with substantial equity may see increased prepayment activity in response as cost rises, while lower-equity borrowers may be at higher risk of default.

For more details, see Eknath Belbase, “Introducing Pilot Projects for Climate Impact Suite,” The Pipeline 191 (September 2025).

MSR Valuation and Hedging in the current environment

The relative stability of interest rates over the last few years has created a welcoming environment for new opportunistic MSR investors to enter the market. The increased bid from new investors, along with stable rates, has contributed to strong MSR valuations.

However, a panelist raised an important question: Will these transitory investors remain committed if interest rate volatility increases? Some panelists also highlighted concerns about the politicalization of Federal Reserve monetary policy, with potential rate decisions influenced by political considerations rather than inflation and employment mandates. Rate and political uncertainty could put downward pressure on MSR values.

Some companies leverage MSRs as a natural hedge to their loan origination business. Some companies deploy extensive hedging with 100% of the MSR book hedged to control convexity risk. A new hedge instrument, SOFR Swap Futures from Eris, was discussed as an alternative to TBAs and other current hedge instruments because it more directly tracks SOFR risk and provides more efficient use of capital versus swaps.

AD&Co’s Mortgage Servicing Rights Kinetics (MSRK) platform allows users to value servicing assets, visualize rate-risk dynamics, and evaluate hedge strategies.

During the conference, we set up MSRK demos in our booth, highlighting:

Rate-shock sensitivities from –200 bps to +200 bps on MSRs for note rates from 4% to 7.9% (Figure 3).

• Results emphasized the importance of hedging par and premium MSRs against rising-rate scenarios.

A hedge example applying TBA swap to a 6.7% MSR (Figure 4).

• The TBA swap overlay helped flatten returns across rate paths and stabilize value.

Figure 3. Impact of Interest Rate Shocks on Different MSR Note Rate Prices

Figure 4. GSE 6.7% MSR: Interest Rate Shocks with TBA Swap

Highlighted topics:

Recapture

Recapture remained one of the most prominent themes—continuing the strong focus seen at last year’s forum. Industry participants highlight recapture as a critical component of MSR valuation and bidding, as market participants are assigning up to a 20% value to this factor. AI and related marketing efforts have put customer retention/recapture at a four-year all-time high. Failure to incorporate the value of recapture in an MSR bid will likely lead to failure. Further, high WAC loans can be more valuable MSR as the refinance propensity generates recapture value.

50-year mortgages

Recently, the administration drew national attention to 50-year mortgages, framing them as a pathway for home affordability and lower monthly payments. The general consensus among conference participants was that 50-year mortgages offer little in the way of promoting home affordability as the increase in overall interest paid by borrowers over the life of the loan more than offsets the relatively modest savings in monthly Principal & Interest (P&I). There were concerns regarding the credit profile of borrowers who cannot qualify for 30-year mortgages but could qualify for 50-year terms. Such products may introduce market distortions or unintended consequences for both credit performance and mortgage securitization markets.

Conclusion

This year’s IMN MSR Forum brought together a wide cross-section of the mortgage servicing ecosystem, fostering discussions on delinquency trends, climate impacts, evolving valuation practices, new policy developments, as well as other topics such as technology, credit score, and more. AD&Co was grateful for the opportunity to participate, share our analytics, and engage with clients and partners. We look forward to continuing these conversations in the months ahead.

Tune in to our fourth episode of AD&Conversations with Kevin Lin and Eknath Belbase, our product lead for our Climate model. In this episode, they discuss the new Climate Impact Suite (CIS) pilot project, and Belbase outlines several challenges the team is navigating, including:

• Helping users become familiar with climate-related casualty data

• Identifying the most suitable scenarios to use

• Determining the best way to visualize the results

Tune in to our fourth episode of AD&Conversations with Kevin Lin and Eknath Belbase, our product lead for our Climate model. In this episode, they discuss the new Climate Impact Suite (CIS) pilot project, and Belbase outlines several challenges the team is navigating, including:

• Helping users become familiar with climate-related casualty data

• Identifying the most suitable scenarios to use

• Determining the best way to visualize the results

Andrew Davidson was invited to speak on Equifax's Market Pulse Podcast titled, "Driving Efficiency and Resilience in the Mortgage Industry" live at the 2025 MBA Annual Convention in Las Vegas. 

Andy explains how variations in data files can distort risk assessment, creating a dual risk for lenders: extending credit to borrowers more likely to default while overcharging customers whose risk is overstated. 

Click here to learn more.