Freddie Mac to accept VantageScore 4.0, challenging FICO's dominance

Freddie Mac will begin accepting VantageScore 4.0 for mortgage underwriting, a significant shift that challenges Fair Isaac Corp.’s long-standing monopoly in the U.S. housing finance market and could expand access to credit for millions of potential homebuyers.

"With today’s announcement, we are accepting a credit score model that incorporates additional data, including on-time rent payment history,” said Sonu Mittal, Freddie Mac’s executive vice president and head of Single-Family Acquisitions. “Freddie Mac remains committed to responsibly driving efficiencies across the housing finance system."

The announcement sent shares of Fair Isaac (FICO) tumbling 5.7% to $978. The move aligns Freddie Mac with the Federal Housing Finance Agency (FHFA) and Fannie Mae, which have also approved the use of alternative scores. The Federal Housing Administration (FHA) is expected to follow suit.

This policy change is expected to increase competition in the credit scoring industry and could make homeownership a reality for more Americans, particularly those with limited traditional credit histories. The inclusion of alternative data like rent payments is designed to create a more inclusive and predictive credit assessment framework.

The transition will begin with a limited rollout to approved lenders, allowing them to choose between VantageScore 4.0 and the classic FICO score through a tri-merge credit report. This initial phase is designed to ensure operational readiness before a broader market implementation. Lenders not part of the limited rollout must continue using the classic FICO model.

This development is the culmination of years of federal efforts to foster competition in the credit scoring market, solidified by the Credit Score Competition Act of 2018. Following extensive testing, the FHFA validated both VantageScore 4.0 and FICO Score 10T in 2022. Implementation efforts for FICO Score 10T are also underway, with historical data publication expected this summer.

VantageScore, a joint venture of the three major credit bureaus—Equifax, TransUnion, and Experian—utilizes trended credit data and alternative data points like rent and utility payments. This allows it to score a wider range of consumers, including those who are "credit invisible" under older FICO models. The newer models are expected to improve the accuracy of default risk prediction, potentially lowering costs for lenders and borrowers over time.

For decades, Fannie Mae and Freddie Mac exclusively used FICO scores for mortgage underwriting, creating a significant barrier to entry for competitors. This latest move by Freddie Mac signals a major step towards a more modernized and competitive credit landscape for the U.S. housing market, which could have long-term implications for both the lending industry and consumers.

This article is for informational purposes only and does not constitute investment advice.