The cost of cheaper: Why lower score fees could raise mortgage costs

The debate over FICO versus VantageScore has followed a familiar script: A headline price gets amplified into a savings narrative, that narrative becomes policy and then the secondary market quietly starts doing the math the advocates forgot to run.

In a multi-trillion-dollar mortgage-backed security (MBS) market, the score fee is a rounding error. What is not a rounding error is the uncertainty premium investors attach when they can no longer trust the shared language of underwriting. In fixed income, that premium has a name: spread widening. Spread widening lands on the borrower.

Pricing is the headline. Economics is the story

VantageScore can be delivered for 99 cents per mortgage origination score, sometimes bundled at no charge alongside a FICO pull. FICO’s direct-license structure runs 99 cents per score plus a $65 funded-loan fee, which includes refreshes. On a line-item basis, the savings narrative writes itself. On a capital markets basis, it falls apart immediately.

Capital markets price cash flows under uncertainty, not vendor discounts. The dominant cost drivers in the mortgage system are guarantee costs, credit enhancement, servicing and repurchase risk, and secondary market execution. Milliman’s research is explicit: lender choice affects not just default expectations but prepayment behavior, and prepayment behavior flows directly into MBS valuation and the mortgage rates borrowers actually pay.

There is also a structural tell in how this price war is being prosecuted. Credit bureaus can subsidize VantageScore at origination while keeping their economics intact elsewhere in the data stack. The 99 cents is a tactical price, cross-subsidized today and revisable once market share is secured.

Lender choice is an option. Options are never free.

The Federal Housing Finance Agency (FHFA) policy created something rarely seen at this scale in mortgage finance: a loan-by-loan lender-choice regime. Originators may deliver either Classic FICO or VantageScore 4.0, selecting whichever score optimizes approval and pricing on a given loan. From a capital markets perspective, that is not a vendor competition policy. It is the creation of an embedded option, and embedded options carry a price.

When lenders exercise that option systematically across a portfolio, the result is adverse selection. Borrowers who score higher on one model carry specific risk characteristics that migrate upward into better-looking score buckets without the underlying credit quality following. Milliman’s analysis, drawn from approximately 45 million mortgages across 2013 through 2023 vintages, quantified the effect directly.

30% Within-band default increase under lender choice

Lender choice produced within-band default rates approximately 30% higher on average within a given credit score cohort, even where aggregate model performance appeared broadly similar. The 780 to 850 bucket looks cleaner under score migration. It performs materially worse. That is signal contamination. (Milliman, Oct. 2025)

What the FOIA record reveals

Freedom of Information Act (FOIA) disclosures have indicated that both Fannie Mae and Freddie Mac had reservations about VantageScore’s approval as far back as 2022, that the GSEs did not recommend approving the score and that they warned single-file underwriting carried greater risk than the tri-merge standard.

Reporting on those materials indicates that FHFA itself had earlier concluded that requiring delivery of both scores would prevent adverse selection because lenders would not be able to choose. That is a direct acknowledgment, by the policy body that designed the choice framework, that choice creates exploitable dynamics.

How secondary markets reprice uncertainty

Liquidity in the agency MBS market depends on standardization, transparency and investor confidence. Securities Industry and Financial Markets Association (SIFMA) data reflects issuance in the hundreds of billions year-to-date and comparable average daily trading volume. Large asset managers hold agency MBS in the high single-digit trillions.

At that scale, basis points dominate dollars. Fannie Mae updated its MBS disclosure files ahead of the November 2025 lender choice rollout, adding new VantageScore 4.0 fields. The investor pricing problem is not that a different number appears on the tape. It is that a different relationship now exists between that number and realized performance, compounded by ongoing uncertainty about how lenders will exercise choice going forward.

12.5 bps Estimated mortgage rate increase from lender choice uncertainty

Milliman’s estimate of higher mortgage rates from the uncertainty and risk premium channel alone, before any LLPA changes are considered. Compounded over a 30-year mortgage, this is a material, recurring cost to borrowers that no score-fee differential offsets. (Milliman, Nov. 2025)

Where the competition case holds and where it breaks

Intellectual honesty requires acknowledging where the VantageScore case is genuinely strong. Direct cost reduction is real for high pull-volume lenders, particularly early in the origination funnel. The argument that newer models can expand scorable populations through alternative data such as rent history is legitimate and worth continued examination. Additional scoring models should be welcomed in the market, provided they are introduced responsibly.

That means extensive performance testing across loan pools segmented by credit range band, with results validated across multiple economic cycles before those models are permitted to influence capital market execution at scale.

The argument breaks when cheap input cost is presented as lower total system cost. Milliman’s loan-level price adjustment (LLPA) analysis estimates that restoring actuarial equivalence under lender choice would require aggregate LLPA increases on the order of 15%, concentrated in weaker credit cohorts. A joint trade coalition of lenders, investors and insurers warned FHFA that the initiative was overly complex, potentially costly to consumers and missing key transition safeguards. Secondary markets converted that warning into wider spreads.

A liquidity-first position

The mortgage industry does not need to choose between competition and stability. New scoring models should be welcomed, tested rigorously across loan pools in defined credit range bands and validated through multiple economic cycles before they carry weight in the conforming market. The credit market signal is the bedrock of capital markets. It is what investors, servicers and institutions depend on to keep liquidity flowing into housing finance at scale.

Getting the sequencing right, test first, deploy second, is how the market expands access without compromising the trust that keeps it open.

Without a consistent, validated and trusted signal, capital becomes cautious, spreads widen and access tightens for the borrowers this system is designed to serve. Protecting it is not optional.

Sources

• Milliman (Feb. 2026): The Impact of Lender Choice on Mortgage Pricing   media.milliman.com
• Milliman (Oct. 2025): Lender Choice Introduces a Bias to Default Rates   media.milliman.com
• Milliman (Nov. 2025): Assessing the Impact of Lender Choice on LLPAs   media.milliman.com
• FHFA: Credit Scores Policy   fhfa.gov
• Fannie Mae: November 2025 Disclosure Enhancements for VantageScore 4.0   capitalmarkets.fanniemae.com
• Scotsman Guide: Fannie, Freddie Leaders Resisted VantageScore Approval in 2022   scotsmanguide.com
• National Mortgage News: FOIA Reveals Grow Calls to Rethink FHFA Credit Changes   nationalmortgagenews.com
• SIFMA: US Mortgage Backed Securities Statistics   sifma.org
• SEC / Federal Register: Concept Release on RMBS Disclosures (Oct. 2025)   federalregister.gov
• TransUnion: VantageScore 4.0 Mortgage Pricing Announcement   newsroom.transunion.com

Eric Lapin is Managing Partner at FinFusion Consulting.