Key facts
- Mortgage insurers must hold larger safety nets for loans using VantageScore 4.0 compared to Classic FICO.
- Fannie Mae and Freddie Mac issued new guidance on Private Mortgage Insurer Eligibility Requirements (PMIERs).
- The new rules incorporate VantageScore 4.0 credit scores for the first time.
- Required asset factors are generally higher for VantageScore 4.0 loans.
- Pivot Financial estimated higher asset requirements for VantageScore loans, citing shorter credit reporting periods.
- The new grid becomes effective September 30.
Mortgage insurers will be required to maintain larger safety net reserves for mortgages originated using VantageScore 4.0 compared to those using Classic FICO, according to new guidance from Fannie Mae and Freddie Mac. The government-sponsored enterprises (GSEs) published updated Private Mortgage Insurer Eligibility Requirements (PMIERs) that, for the first time, include VantageScore 4.0 credit scores.
The guidance, overseen by the Federal Housing Finance Agency (FHFA), establishes percentage factors for calculating risk-based required asset amounts based on a loan's original loan-to-value (LTV) ratio and credit score. Similar to Classic FICO, higher LTVs and lower credit scores lead to higher required asset factors. However, these factors are generally higher for loans utilizing VantageScore 4.0.
Pivot Financial estimated that for a $300,000 loan with an 85% LTV and a 680 credit score, an insurer would need to hold $4,980 more in required assets for a VantageScore loan ($22,530) than for a Classic FICO loan ($17,550). For a 753 credit score, the difference is $2,640. At a 95.5% LTV, the difference is $7,440 for a 680 credit score and $6,720 for a 753 credit score.
Jennifer McGuiness, CEO of Pivot Financial, stated that the higher reserve requirements for VantageScore are logical due to its generally higher scores and materially shorter credit reporting history compared to FICO. She noted that the market has shown evidence of 'gaming' with VantageScore versus Classic FICO.
Analysts at Keefe, Bruyette & Woods (KBW) reported that the new VantageScore 4.0 grid generally requires higher capital levels, corresponding to FICO loans with scores 20 points lower. This aligns with observations from some mortgage originators, treating a VantageScore roughly equivalent to a FICO score that is 20 points lower.
While some lenders have adopted VantageScore, widespread industry use has been slow. The new reserve rules are not expected to significantly impact overall mortgage activity in the short term. The new grid is set to take effect on September 30. U.S. Mortgage Insurers (USMI) expressed support for credit score modernization to enhance risk management and serve low-down-payment borrowers.