The Impact of Credit Score Modernization

The adoption of VantageScore 4.0 has garnered substantial attention as it has the potential to reshape the mortgage landscape. While FICO, the current credit score provider, has made projections about serving more borrowers with their newer 10T score, VantageScore's latest research delves deeper into how many borrowers might realistically qualify using its scoring metric.

According to the study, a vast number of individuals aged 25 to 65 have a qualifying credit score of 620 or higher, totaling approximately 4.9 million potential borrowers. However, this number is narrowed down further by considering median home prices and the average household size, which stands at 1.83 adults.

One important aspect to consider is the current limited availability of resale homes, with new construction playing a significant role in the market, representing almost one-third of inventory. Despite this, existing homes continue to dominate the market.

When the study applies additional filters based on forecasted resale home prices for 2023 and 2024, it estimates that an additional 2.7 million borrowers could join the market, contributing to the potential $1 trillion in additional annual originations.

Inclusivity and Market Reach

A significant portion of the borrowers who would become eligible through the utilization of VantageScore 4.0 are individuals residing in markets targeted by Fannie Mae and Freddie Mac's mandates. These markets often include rural areas and minority communities, making VantageScore's proposition even more attractive for diversifying mortgage lending.

Notably, many of these newly eligible borrowers do not have thin credit files but rather possess debt management histories classified as inactive due to a lack of a reported tradeline within the last six months. This approach to evaluating creditworthiness contrasts with FICO's philosophy, which tends to be more cautious regarding the minimum usage required to establish a reliable credit track record.

Reliability and Predictive Ability

VantageScore's ability to predict a loan's relative default rate has been assessed and ranked on a 100-point scale, with higher numbers indicating better performance. The study rates VantageScore 4.0 at 68.6 for originations and 84.2 for outstanding loans. These scores indicate a strong predictive ability for VantageScore's credit model, underlining its potential for sound risk assessment in the mortgage market.

Conclusion

The potential transition to VantageScore 4.0 presents an exciting opportunity for the mortgage market, offering the promise of increased originations and broader access to homeownership for millions of potential borrowers. While the full implementation of credit score updates may not occur until 2025, VantageScore and FICO are encouraging lenders to experiment with their scoring models in the private market to familiarize themselves with the metrics. This shift could not only stimulate the mortgage market but also help bridge gaps in access to credit for traditionally underserved communities, bringing a positive transformation to the industry.