Taxpayers have a clear stake in ensuring that financial risks are measured accurately and consistently in the lending programs they ultimately back. Credit scores are central to that effort, serving as a common benchmark for evaluating borrower creditworthiness across the system. Last week, however, housing regulators signaled a break from past practice—raising fresh questions about how these changes could affect the safety and stability of the nation’s housing finance infrastructure.
The Department of Housing and Urban Development announced it will adopt the FICO 10T and VantageScore 4.0 models for Federal Housing Administration (FHA) loans, describing the move as “an important milestone” in credit score modernization. At the same time, the Federal Housing Finance Agency (FHFA) unveiled a pilot program permitting the exclusive use of VantageScore 4.0 for loans sold to Fannie Mae and Freddie Mac, with plans to incorporate FICO 10T and adjust pricing based on the updated models.
It is important for FHFA and FHA to proceed carefully. The Government-Sponsored Enterprises (GSEs) backstop more than half of America’s $15 trillion mortgage market, and even a small degradation in mortgage quality can spell trouble for its balance sheet, and ultimately taxpayers. We’ve often warned that adding multiple scores could lead to rateshopping and a “race to the bottom” effect where firms devalue the actual risk of the score to secure revenue. Should such a course of events take place again, firms would have an incentive to make the most loans instead of striving to provide the highest reliability.
For years, NTU has emphasized that reliable, data-driven tools that consistently and impartially assess lending risk are essential to protecting taxpayers from future bailouts of GSEs like Fannie Mae and Freddie Mac. Through its Risky Road report, public comments on rulemakings, and engagement with Congress, NTU has consistently advocated for maintaining high standards in the credit scoring process. At the core of that process are the predictive models behind the scores themselves, which must be rigorously tested and validated. NTU has repeatedly urged policymakers—including FHFA Director Bill Pulte’s predecessor, Sandra Thompson—to ensure that competition among credit scoring models is driven by demonstrable accuracy and a commitment to safety and soundness, not predetermined policy goals.
FHFA contends that the immediate adoption of Vantage-scored loans from approved lenders is needed to fully comply with the Credit Score Competition Act of 2018. Not so fast.
That law simply required creating a process by which new credit scoring models can be analyzed, validated, and potentially approved for use by the GSEs when they purchase mortgages. That means considering the costs and benefits of expanding to include multiple scores. It did not demand that FHFA accept another score.
At issue here is the process by which FHFA is proceeding with accepting additional scores. In 2022, for example, under former FHFA Director Thompson, Fannie and Freddie were allowed to embark on a massive “Enterprise Credit Score and Credit Reports Initiative.” One major element of this scheme requires lenders to provide two credit scores instead of one—the new FICO 10T and VantageScore 4.0—for each loan that they seek to qualify for underwriting by Fannie and Freddie.
Let’s also not forget FHFA’s own watchdog expressed significant concerns about moving towards a dual score system, with hefty redactions. According to a FOIA from the Housing Policy Council, “information also shows that the ‘improved view of risk’ former FHFA Director Sandra Thompson touted in reaching the dual-score verdict was disputed by key actors, including Fannie and Freddie, neither of which expressed approval for VantageScore 4.0.”
Further, FHFA has yet to clear the release of long-term historical datasets for Classic FICO, FICO 10T, and VantageScore 4.0. It is difficult to show how these different scores match up when the data is not publicly available for stakeholders to fully understand the comparison of reliability.
As we wrote earlier this year:
Taxpayers were already concerned with such an ulterior motive when an Inspector General report on FHFA’s credit score “bakeoff” released nearly two years ago also contained redactions about how the GSEs were giving input for the process. The latest Freedom of Information Act request provides even more clues that safety and soundness were not the only factors driving decisions at FHFA.
HPC’s information also shows that former Director Thompson’s promise to Congress of avoiding “unnecessary costs and complexity” in the transition to a dual-score system was already headed out the window before she even spoke to lawmakers about those issues before a 2023 hearing of the House Financial Services Committee. One section of the documents stated it plainly: “In making this decision, FHFA recognizes that replacing Classic FICO with two new credit score models will be a lengthy and costly undertaking.” Several years after acknowledging this plain fact, FHFA should be held accountable by both the House and Senate for just how lengthy and costly this “undertaking” has been and will continue to be.
NTU is also concerned about the procedural way the system has been upended. Congress should reassert itself in this conversation by updating the Credit Score Competition Act to ensure there is a rulemaking or public comment process for stakeholders to submit concerns or improvements to how FHFA implements new scores.
Taxpayer advocates have raised concerns with the GSEs for several years now. It’s possible to ensure competition while balancing taxpayer interests to ensure a repeat of the 2008 meltdown and taxpayer bailout does not happen again. We again urge FHFA and FHA to proceed with caution.