Equifax's VantageScore went from $8 million to $4 billion of Fannie and Freddie loans in five months

Eight million dollars in April, nearly four billion by August. That is how fast VantageScore 4.0, the credit score owned jointly by the bureaus Equifax·+1.06% — Equifax, up 1.06 percent as of its last quote, Experian and TransUnion, moved from pilot to pipeline inside Fannie Mae and Freddie Mac, the government-chartered pair that back most American home loans, on consulting firm Milliman's count↗. Roughly 3% of the $400 billion the two sold into mortgage bonds over the six months through September carried the newcomer, up from essentially zero. ¹

The 20-point haircut, erased

Bill Pulte, director of the Federal Housing Finance Agency, which supervises the two companies, did it in two strokes. In early September he ordered them to approve every lender for VantageScore↗, ending a 50-company pilot. ² On September 28 he folded it into the pricing grid reserved for FICO, the Fair Isaac score that has priced American mortgages for decades, and erased the 20-point haircut that had read a 720 VantageScore as a 700 FICO. ^{1 3} Lenders can now pull both scores and keep the higher one.

Lenders grab the higher score, and bond buyers charge for it

Rocket Mortgage, the largest lender, made VantageScore its primary model on October 1 after 1.4 million dual-score tests↗ in which it ran 11 to 12 points above FICO Classic on the loans Rocket originated; borrowers who saved banked $1,600 at closing on average. ^{1 4 5} United Wholesale Mortgage pulls both scores and keeps the higher, and PennyMac has spread VantageScore across every channel. ^{5 6}

More risk, no extra charge

The catch is what one grid no longer charges for. A 20-point softer score lifts the odds of default by 40 to 50% on Fair Isaac's own math, and TD Cowen analyst Jaret Seiberg writes that Fannie and Freddie are "taking on more risk with each VantageScore loan without being compensated." ¹ Milliman found that pilot borrowers scored with VantageScore paid up to 0.2 percentage point more in interest, and expects prices to keep rising as score providers offset adverse selection. ¹ Rocket chief business officer Bill Banfield counters that the vast majority of dual-scored borrowers got the same or a slightly better price. ¹

A tollbooth, repriced

The business under attack was still printing. Fair Isaac booked $674 million of revenue in the quarter ended June 30↗, up 26% year on year, at a 54% operating margin. ⁷ The stock is down nearly 60% this year anyway, and the company is cutting about 15% of staff, with roughly $27 million of severance charges to come. ^{1 8} At $674.60 a share, or 14.5 times forward earnings, one screening service now files Fair Isaac as a value pick. ⁹ The FHFA and the housing companies call the change more predictive, and VantageScore counts nearly $1 billion of borrower savings ahead. ^{1 3}

The next target: two credit pulls instead of three

Next in Pulte's sights is the credit report itself: he is expected to order Fannie and Freddie to accept two credit-bureau pulls instead of three at this month's Mortgage Bankers Association convention. Bank of America Securities estimates that shift would score borrowers roughly 18 points higher than classic FICO↗ even on the most conservative bureau pair, and 30 to 50 points higher for those below 680. ⁶

The tape voted first. On October 12 Fair Isaac rose 9.27% while Fannie Mae fell 5.69% and Freddie Mac fell 9.46%. ¹ Pulte declared the two scores equal on September 28; investors spent October 12 pricing them apart.