By Andrew Ackerman
WASHINGTON -- One firm's dominance over the credit scores used to vet many U.S. mortgages is getting a shake-up.
Fannie Mae and Freddie Mac, two mortgage-finance firms that back nearly half of U.S. mortgages, will have to consider credit-score alternatives to Fair Isaac Corp.'s FICO score when determining a mortgage applicant's creditworthiness, under a new rule issued on Tuesday by the mortgage-finance giants' federal overseer.
The move by the Federal Housing Finance Agency is seen as a win for VantageScore, a credit-score system by VantageScore Solutions LLC, which is owned by the three large credit-reporting firms: Equifax Inc., TransUnion and Experian PLC.
"One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk," FHFA Director Mark Calabria said in a written statement. The new rule "is an important step toward achieving that goal, " he added.
Regulatory rollback legislation signed into law last year required the FHFA to set new standards for Fannie Mae and Freddie Mac to approve credit-score models.
Many nonbank lenders -- who approve mortgages to individuals and initiate the bulk of mortgage dollars issued in the U.S. -- have asked for the ability to use a credit score provided by VantageScore. These lenders say the alternative score would open the mortgage market to a greater number of people and lead to more mortgage approvals, helping to boost home sales and the economy.
Some lenders view FICO scores as an impediment, saying they tend to be more conservative than alternatives.
Tuesday's final rule is a boon to VantageScore because it eliminates language from a December proposal that would have prohibited any credit score models developed by a company related to a credit-reporting firm. The FHFA eliminated that restriction amid pushback from the credit-reporting industry and congressional lawmakers.
"Competition is critical for markets to operate efficiently and we are confident this decision will benefit consumers, lenders and the economy at-large," said Barrett Burns, president and chief executive of VantageScore Solutions, in a written statement.
Credit scores help determine who gets a mortgage and on what terms. They played a role in the last housing boom and bust as lenders lowered credit-score requirements, extending hundreds of billions of dollars of mortgages to subprime borrowers -- creating a crushing number of defaults.
After the financial crisis, lenders tightened requirements for potential home buyers. As part of this, they required higher credit scores that reduced the number of people who qualified for a mortgage.
That led some lenders to seek new kinds of scores that could be used to expand the lending pool.
Since Fannie and Freddie back roughly half of U.S. mortgages, by buying mortgages originated by others, their requirements have huge sway over the mortgage market.
VantageScore has long said its score could help approve more mortgage applicants, in part because it can assign a score to consumers who haven't used credit in more than six months. FICO said that VantageScore's approach, which seeks to give credit scores to people with stale or thin credit files, would lead to less predictive scores and riskier loans.
The measure goes into effect 60 days after its publication in the Federal Register.
AnnaMaria Andriotis contributed to this article.
Write to Andrew Ackerman at firstname.lastname@example.org