Latest FICO Score is a Game Changer for Mortgage Lending (Sponsored by FICO)
Julie May is Vice President and General Manager of B2B Scores with FICO
The mortgage industry is facing significant turbulence. Persistent high mortgage rates have created a drag on market activity, and questions about Fannie Mae’s and Freddie Mac’s (GSEs) future structure have stakeholders across the mortgage lifecycle scrutinizing the political and policy environment. Amid this uncertainty, the industry is rightly looking for creative solutions to reduce risk while identifying more qualified borrowers.
FICO ® Score 10T is the most predictive and inclusive credit scoring model on the market. It builds upon FICO’s decades as a trusted pillar of the mortgage ecosystem, using advanced modeling techniques and comprehensive consumer financial data, including rental payments (a source of data that FICO has included in its credit score models since 2015). In addition, by leveraging trended credit data, FICO Score 10T analyzes borrower behavior over time, which allows lenders using FICO® Score 10T to gain deeper insights into prospective borrowers, helping them make more precise lending decisions.
The benefits of FICO® Score 10T are not hypothetical. In the nonconforming mortgage industry, FICO® Score 10T has already been adopted by more than 35 lenders who account for more than $313 billion in annual originations and more than $1.5 trillion in eligible servicing volume. FICO® Score 10T was also validated and approved for use by Fannie Mae and Freddie Mac, and we look forward to the Federal Housing Finance Agency’s (FHFA) implementation of FICO® Score 10T at the GSEs, enabling industry participants and prospective homebuyers to benefit from the most advanced credit score available.
For mortgage lenders, FICO® Score 10T will change the game – driving more loan originations, enhanced risk management, and stronger portfolio performance.
The most predictive credit scoring standard available
For decades, the FICO® Score has been delivering valuable predictive insights for mortgage lenders and investors, greater access to credit for borrowers, and ultimately better mortgage terms. The fundamental value of any credit scoring model is its ability to assess consumer credit risk — and FICO Score 10T does that better than any other model on the market.
Earlier this year, our team at FICO published a comprehensive white paper demonstrating how FICO® Score 10T offers significant improvement in predictive accuracy over other models, including both VantageScore 4.0 and the current standard in use for more than two decades (Classic FICO®).
Specifically, FICO® Score 10T identified 18% more defaulters than Classic FICO® in the critical score decile commonly used for mortgage originations, while VantageScore 4.0 identified only “marginally more” than Classic FICO. In fact, according to AEI Housing Center’s fully independent analysis, “Classic FICO performs as well as, and in some cases better than, VantageScore 4.0 on several key predictive measures.”
FICO® Score 10T has significantly improved performance in evaluating borrower risk than VantageScore 4.0, and its use by market participants will drive significantly more loan approvals for prospective borrowers. Moreover, our model’s better risk performance will drive benefit for not only mortgage insurers, investors, and other market participants, it will deliver improved mortgage pricing and lower monthly costs for borrowers, benefiting millions of Americans.
Fairer treatment for first-time homebuyers
Mortgage industry stakeholders are rightly focused on inclusiveness and access, particularly for first-time homebuyers and traditionally underserved populations. Identifying the members of these populations who are ready for mortgage credit represents a significant opportunity for mortgage lenders to grow their businesses.
FICO® Scores are developed with inclusiveness and access in mind. Unlike VantageScore 4.0, FICO® Score 10T does not incorporate mortgage-specific variables – variables that disadvantage applicants who don’t have an existing or prior mortgage.
FICO’s scoring approach helps ensure applicants (especially groups traditionally facing more challenges accessing mortgage credit, like young adults, renters, and members of the military) are evaluated on the merits of their full credit profile. Rental data is used in FICO® Score 10T, but just as importantly, it does not disadvantage those same renters because they haven’t previously had a mortgage. For mortgage lenders, using our new score will result in more inclusive lending.
Trusted, time-tested, and transparent
Given the extended duration of most mortgage loans and portfolios, the long-term stability of credit scoring models is a critical consideration for lenders determining which credit scoring model or models to use for originations. FICO® Scores are used by lenders across consumer credit sectors because they are the trusted, reliable, independent, recognized standard around the world, and time-tested through multiple economic cycles.
FICO® Score 10T builds on our decades-long legacy of proven model durability, incorporating new data and analytic techniques without overfitting to recent or anomalous trends, such as patterns seen during the pandemic. It provides mortgage lenders, investors, and the entire industry with a tool that can be trusted through changing economic conditions.
FICO® Score 10T’s development and validation process emphasizes transparency, stability, and regulatory compliance. By contrast, after both FICO and VantageScore submitted their models for FHFA and GSE approval, VantageScore made a post-submission change to VantageScore 4.0 by removing medical debt collection records from score calculation with its model.
While the appropriateness of including medical debt in credit scoring is a subject of ongoing policy debate, changes to a credit scoring model after regulatory review raise significant questions about consistency and the integrity of the validation process. The FICO® Score 10T algorithm has remained the same throughout the approval process, providing clarity and stability for both regulators and users—knowing that with FICO, the same model that was validated and approved will be the same model used in production for lending decisions.
The mortgage market’s future will be powered by FICO® Score 10T
The growing adoption of FICO® Score 10T is a meaningful step forward in credit risk assessment for the mortgage industry. Its significant improvements in predictive accuracy, combined with a focus on fairness and model stability, offer tremendous potential benefits for lenders, investors, and borrowers alike, compared to other alternatives on the market. FICO® Score 10T is already seeing rapid adoption from mortgage lenders and servicers representing hundreds of billions of dollars in nonconforming loans, and we hope to see it made available for simultaneous implementation at the GSEs soon, recognizing the complexity and importance of this transition to the entire industry.
The facts are clear: FICO® Score 10T will deliver better results for mortgage lenders and their customers, expanded credit access, and a stronger, more prosperous housing market.
To read FICO’s white paper, visit: FICO® Score 10T Materially Outperforms VantageScore 4.0
(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)
