Key facts
- Fannie Mae and Freddie Mac have released new pricing grids for mortgages incorporating VantageScore 4.0.
- The new grids suggest potential for higher borrower costs, particularly for lower- to middle-credit score ranges and cash-out refinances.
- A 20-point adjustment is applied to VantageScore 4.0 to align with FICO scores.
- Pivot Financial analysis found that for loans with 75%-80% LTV and credit scores of 700-719, additional LLPA could reach 0.375 percentage points.
- Milliman found that VantageScore 4.0 resulted in a lower LLPA about 25% of the time, the same 36% of the time, and a higher LLPA about 40% of the time compared to Classic FICO.
- VantageScore 4.0 represented 5.6% of originations in August, according to Keefe, Bruyette & Woods.
Fannie Mae and Freddie Mac have released new official pricing grids for single-family mortgages that incorporate the VantageScore 4.0 credit scoring model, alongside the traditional Classic FICO model. The updates, which became effective Wednesday as the Federal Housing Finance Agency (FHFA) allowed all lenders to deliver VantageScore 4.0 loans, suggest that borrowers may face higher costs in many scenarios.
The GSEs are applying a 20-point adjustment to VantageScore 4.0 to align with FICO scores, meaning a FICO score of 780 and above now corresponds to a VantageScore 4.0 bucket of 800-plus. While sources at the GSEs anticipate that competition between VantageScore and FICO could eventually lower credit report and borrowing costs and expand mortgage access to "credit invisible" borrowers by considering rent payments and trended data, early analyses indicate a different immediate impact.
A Pivot Financial analysis found that while lenders might save on credit score costs, loans could become "materially more" expensive for borrowers over the loan's life. This impact is most severe for lower- to middle-credit score ranges and cash-out refinance scenarios. For instance, on a $400,000, 30-year fixed-rate mortgage with 75%-80% loan-to-value and credit scores of 700-719, the additional loan-level price adjustments (LLPAs) could be about 0.375 percentage points, translating to an extra $100.32 monthly payment and approximately $36,114 in additional interest over 30 years. The largest modeled gap, a 1.125 percentage point LLPA difference, was seen in cash-out refinances with 70.01%-75% LTV and 680-699 credit scores, equating to nearly $110,000 in extra interest over the loan's term.
Jennifer McGuinness-Lubbert, CEO of Pivot Financial, noted that the GSEs are uncertain about VantageScore 4.0's performance, stating that a 750 FICO score is not equivalent to a 750 VantageScore. Meanwhile, Milliman, an actuarial firm, analyzed historical mortgage-backed securities data. Their comparison, using the 20-point adjustment, found that VantageScore 4.0 resulted in a lower LLPA about 25% of the time, the same pricing 36% of the time, and a higher LLPA approximately 40% of the time compared to Classic FICO. Jonathan Glowacki, a principal at Milliman, suggested the 20-point adjustment could help mitigate adverse selection risks, where originators might favor the highest score between the two models when delivering loans to the GSEs.