The Crucial Importance of Precision and Accuracy in Mortgage Lending

As more mortgage lenders adopt FICO's newest and most predictive credit score, FICO® Score 10 T, I would like to reflect on what we have been hearing from mortgage lenders about the value add of using FICO's most powerful credit scoring model yet.

With deep historical experience, the FICO® Score has empowered decisions throughout the mortgage credit ecosystem for decades. So, when the Federal Housing Finance Agency (FHFA) announced that FICO's latest model, FICO® Score 10 T, was validated and approved, and will be required for use when available, as FICO is today, for each conforming mortgage delivered to the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, lenders were excited to learn about this new model, and how it will ultimately benefit consumers seeking home loans. Current timetables say that the GSEs will begin to require the new credit score at the end of 2025.

However, only a portion of all mortgages are actually sold to the GSEs each year. Last year, only 41% of loans in the mortgage market were sold to the GSEs, where lenders must comply with requirements established by FHFA and the GSEs. This means that for about 60 percent of all mortgages (i.e., those not sold to the GSEs), lenders, consumers, and other market participants could benefit now from the enhanced predictive power and reach of FICO® Score 10 T. This is why many mortgage lenders are not waiting until 2025 to adopt FICO Score 10 T. Instead, mortgage lenders nationwide have been actively working with FICO to adopt our newest score for use in their non-GSE book of business. They are applying the superior predictive analytics of FICO Score 10 T to Jumbo Loans, VA Loans, FHA Loans, Non-QM Loans, HELOCs, and other non-GSE loans now- quickly seeing the score's value and realizing its many benefits such as increases in loan approval rates and decreases in loan payment delinquencies.

The 15 early adopters to date are a diverse lot, representing total mortgage loan originations of more than $126 billion and a servicing loan portfolio of $380 billion. They include top ten national retail mortgage lenders such as Cross Country Mortgage and Movement Mortgage, retail banks such Primis Bank, and portfolio giants such as Planet Home Lending and Cardinal Financial-the first lender that will offer a VA mortgage-backed securitization based exclusively on FICO® Score 10 T.

No matter what their market or size, one thing FICO® Score 10 T early adopters have in common is the quest for greater performance and precision. In the complex and high-risk landscape of mortgage lending, with so many interdependencies, the need for a powerful, flexible, and trusted analytic reigns supreme. Here are six pivotal areas where precision and accuracy are paramount, and FICO Score 10 T can help, in mortgage lending:

Modeling Mortgage Loan Losses: Accurate loan predictions are the bedrock of sound financial decisions. Superior estimations help promote solvency, and investor trust.

Hedging Mortgage Servicing Rights (MSR): The stakes are high when safeguarding MSR values. Precision in hedging strategies, mitigating mortgage portfolio risks, and ensuring stability, amidst market fluctuations, is indispensable.

Integrated Trended Data Variables: Trended data variables in the scoring model that capture borrower behavior dynamics and debt history for the previous 24 months can reflect a borrower's credit utilization over time, rather than a snapshot at a single point in time.

Setting Basel 3 Capital: Precise calculation is necessary, particularly when establishing capital allocation and investment strategy. This is essential for compliance, resilience, and sustaining investor confidence.

Considering Supplementary Leverage Ratio: Every basis point matters. Accurate measurement of leverage ratios helps ensure adequate capital reserves, fortifying banks against systemic risks and regulatory penalties.

Valuing Mortgage Loan Portfolios: Accuracy delineates success from failure. Precise portfolio valuation safeguards against overvaluation or undervaluation, fostering a robust financial foundation.

For lenders, investors, and others in the mortgage market, accuracy isn't merely a preference; it's imperative in the mortgage industry. From home loan modeling to asset portfolio valuation, every mortgage loan decision reverberates throughout the credit ecosystem. By embracing precision, lenders better fortify their resilience, uphold regulatory standards, and nurture trust among borrowers, investors, and other stakeholders.

Inaccuracy is not an option-it's a risk too great to bear.  The FICO® Score is the most trusted and proven representation of borrower credit risk. So, given what is at stake, especially considering these six important areas, wouldn't you want to rely on FICO's most predictive credit score yet?  As FICO® Score 10 T early adopters are already finding out, it is easy and a smart decision to migrate to the market-leading credit risk management capabilities of FICO Score 10 T. Want to learn more? See more details here.