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.