Key facts
- FHFA will apply the same LLPAs for Classic FICO and VantageScore 4.0 loans.
- The change eliminates a prior 20-point calibration for VantageScore 4.0.
- Industry experts believe the move will accelerate VantageScore adoption.
- Concerns exist about how MBS investors will price risk under the new system.
- A borrower with a 700 FICO score and 720 VantageScore would previously pay 1.5% LLPA, now 1.25% with VantageScore.
- Analysis suggests 68.7% of historical VantageScore loans would receive improved pricing under the unified grid.
The Federal Housing Finance Agency (FHFA) has decided to implement a unified loan-level price adjustment (LLPA) grid for both Classic FICO and VantageScore 4.0 credit scores, a move industry participants at HousingWire's Mortgage Banking Summit on Thursday suggested will likely encourage the adoption of VantageScore. Previously, VantageScore 4.0 loans were subject to a 20-point higher calibration for LLPAs compared to FICO scores.
FHFA Director Bill Pulte announced on X that Fannie Mae and Freddie Mac will now use a single pricing matrix, stating that separate grids "makes zero sense" and following feedback from lenders and consumers. This change means that borrowers underwritten with VantageScore 4.0 may now qualify for lower LLPAs without any change in their collateral or profile, as their scores will map directly into the existing FICO grid.
While industry leaders like Bill Killmer, senior vice president for legislative and political affairs at the Mortgage Bankers Association (MBA), acknowledged that this will "increase utilization of Vantage," significant concerns remain regarding how mortgage-backed securities (MBS) investors will react. "Is there going to be some bias in terms of their appetite for Vantage-driven MBS versus FICO?" Killmer questioned.
Other conference attendees echoed these sentiments. Greg Sher, managing director at NFM Lending, expressed concern about the lack of data for the secondary market. Erin Dee, senior vice president and chief information officer at BankSouth Mortgage, highlighted a potential disconnect where her company might price loans differently on the front end than investors do on the back end, questioning the resulting position for lenders.
Analysis from Keefe, Bruyette & Woods (KBW) indicates that the removal of the 20-point haircut effectively acts as a "backdoor LLPA reduction," as most VantageScore borrowers will now face lower LLPAs. For instance, a borrower with a 700 FICO score and a 720 VantageScore would have previously incurred a 1.5% LLPA, but under the new system, they would pay 1.25% using the 720 VantageScore. KBW noted that Rocket Mortgage and United Wholesale Mortgage accounted for 95% of the limited VantageScore volume in September.
Further analysis by Pivot Financial suggests that approximately 68.7% of historical VantageScore loans would receive improved score-based pricing under this unified approach. Pivot CEO Jennifer McGuinness warned that if VantageScore loans become a material part of MBS pools, investors might not receive adequate upfront compensation for the modeled risk differences, potentially impacting bond investments.