Mortgage insurers face larger safety net rule for VantageScore 4.0

Mortgage insurers will be required to keep a larger safety net for mortgages originated using VantageScore 4.0 than for comparable loans using Classic FICO, according to new guidance from the government-sponsored enterprises (GSEs).

In late July, Fannie Mae and Freddie Mac published a new grid for their Private Mortgage Insurer Eligibility Requirements (PMIERs) that, for the first time, includes VantageScore 4.0 credit scores. The change comes as the mortgage industry transitions away from Classic FICO and toward newer credit-scoring models.

In a statement to HousingWire, a VantageScore spokesperson said that it is not the company’s policy to comment on FHFA/GSE pricing.

“We applaud Director Pulte and Fannie Mae and Freddie Mac Leadership Teams for swiftly and effectively modernizing credit scoring in the conventional-conforming mortgage market to allow competition, delivering significant savings for mortgage lenders while simultaneously improving access to mortgage finance and enhancing safety and soundness of the mortgage finance system,” the spokesperson added.

The guidance, issued under the oversight of the Federal Housing Finance Agency (FHFA), sets percentage factors used to calculate the risk-based required asset amount based on a loan’s original loan-to-value (LTV) ratio and original credit score. 

As with Classic FICO, higher LTVs and lower credit scores result in higher required asset factors. But the factors are generally higher for loans using VantageScore 4.0 than for comparable loans using Classic FICO.

Pivot Financial estimated the difference for a $300,000 loan with an 85% LTV. For a borrower with a 680 credit score, an insurer would need to hold $4,980 more in required assets for a VantageScore loan — $22,530 versus $17,550 for a Classic FICO loan. For a borrower with a 753 credit score, the difference would be $2,640, with $10,830 required for VantageScore versus $8,190 for Classic FICO.

For the same $300,000 loan with a 95.5% LTV, the difference would be $7,440 for a borrower with a 680 credit score, with $50,190 required for a VantageScore loan versus $42,750 for Classic FICO. For a borrower with a 753 credit score, the difference would be $6,720, with $29,520 required for VantageScore versus $22,800 for Classic FICO.

Jennifer McGuiness, CEO of Pivot Financial, said the grid is “clearly indicating” that insurers need to reserve more dollars for loans with VantageScore “based on the fact that their scores are generally higher and the credit reporting required to produce its score is materially shorter — one month for Vantage versus six months for FICO.”

“This makes sense, as the market has proven that ‘gaming’ is happening using the VantageScore versus the FICO Classic score,” McGuiness said.

According to McGuiness, under former FHFA Director Sandra Thompson, the agency planned to require a bi-merge report using both FICO 10T and VantageScore 4.0 alongside Classic FICO. The goal was to allow for a “proper analysis” to be conducted in “real time” and for the models to be calibrated to produce appropriate loan-level price adjustment (LLPA) grids, she said.

“When Director Pulte allowed lender choice, there was no longer a mechanism for the GSEs to analyze this material data,” McGuiness said.

Under the new guidance, if a mortgage insurer receives both FICO and VantageScore 4.0 scores for a loan, the insurer can select either grid to calculate its risk-based required assets.

“The new VS4 grid has a more detailed breakout, and for most buckets the VS4 required capital level is higher and corresponds to the required capital for a FICO loan with a credit score that is 20 points lower,” analysts at Keefe, Bruyette & Woods (KBW) wrote in a report published Tuesday.

According to the analysts, under these new rules, a VantageScore is treated roughly the same as a FICO score that is 20 points lower, consistent with observations from some mortgage originators.

While some major mortgage lenders have started using VantageScore, widespread adoption across the industry has been slow. Analysts don’t expect these new reserve rules to significantly impact overall mortgage activity right now. The new grid takes effect Sept. 30.

U.S. Mortgage Insurers (USMI) said that its members “support credit score modernization to promote prudent risk management while efficiently serving low-down-payment borrowers.”

“USMI members are insuring loans scored with the Classic FICO and VantageScore 4.0 models, working closely with their lender partners and the GSEs throughout the process,” the trade association said in a statement.