Driving Efficiency and Resilience in the Mortgage Industry

Highlights: 

• The shift to two accepted credit scoring models is fundamentally reshaping mortgage risk assessment, requiring investors and lenders to recalibrate models to manage potential 40-50 point score variations that can double underlying credit risk.

• To mitigate adverse selection and data gaps, the industry must integrate alternative data (like rent and utility payments) to create a more comprehensive financial picture, fostering a more stable and inclusive future for housing finance.

The U.S. housing finance industry is undergoing a significant transformation, particularly concerning the foundational pillar of credit scoring. The Federal Housing Finance Agency (FHFA)'s shift to accept multiple credit scores for mortgages is compelling every market participant, from lenders to investors, to fundamentally re-examine how they define and assess risk.  

At the recent MBA Annual conference, I had the pleasure of discussing this topic with Andrew Davidson, President of Andrew Davidson & Co., one of the nation’s foremost experts on mortgage analytics. Our conversation highlighted the critical need for deeper education and the immense opportunity this change presents to create a more inclusive and stable lending environment.

Here are the four key takeaways from our conversation on credit scores and the future of mortgage credit reporting:

1. A Credit Score Is a Model, Not the Absolute Truth

For decades, the market has treated a credit score as a singular, immutable number. As Andrew pointed out, this is a dangerous oversimplification. A credit score is fundamentally a model applied to a credit file, a tool that forecasts the likelihood of a borrower becoming delinquent based on the historical performance of people with similar credit characteristics.

The score, therefore, is a measure of the risk of a group a person has been placed into, not a perfect, singular measure of that individual. This distinction is critical as the industry moves toward accepting a variety of scores based on different data sets and models, requiring a deeper understanding of the score’s actual components.

2. Quantifying Risk: The Impact of Dual Scores  

The FHFA’s decision to accept more than one score (specifically naming VantageScore® in addition to FICO®) is the catalyst for the entire industry to rethink its processes. 

Differing Scores: Just as two different models might use different variables (like weight versus height) to predict athletic ability, FICO and VantageScore group people differently, resulting in meaningful variations. A 50-point difference between a VantageScore and a Classic FICO score is not uncommon—a swing that could potentially double the amount of credit risk if not properly calibrated.

The Power of a Point: Investors, in particular, need to understand the numerical impact of these scores. As Andrew highlighted, a change of approximately 40 points in a credit score can be enough to double the underlying credit risk. This crucial context is necessary for developing a new level of "intuition" with the dual-score system.

3. Investor Readiness and the Challenge of the Unknown

The GSEs' ability to accept new scores immediately does not equate to immediate industry readiness. On the origination side, the challenge is largely operational. However, for the investor community, the transition is a complex process spanning information flow, modeling, and comfort. Investors operate on known risks, and the new environment creates significant "unknowns":

• Adverse Selection: A major concern is lender choice. If a lender can select the higher (more favorable) score for a borrower, investors fear they will be adversely selected against. This means they receive a loan pool where the underlying risk is systematically understated, as the loans were qualified using the most optimistic score available, making the pool riskier than the reported scores imply.

• Data and Modeling Gaps: Investors have not yet seen the new scores flow through their actual decision processes in a live environment. They need time and data to develop new models and establish comfort with the potential volatility and meaning behind differing scores.

To mitigate these unknowns industry leaders must "open up the black box" of credit scoring. This means sharing more information and educating the investment community on the numerical truths of credit scores.

4. Alternative Data and the Future of a Holistic View of Risk 

The shift toward new scoring models coincides with the push for innovative data sources. Equifax is heavily focused on integrating alternative data, such as telco, utility, and rental payment history, to enrich the credit file. 

The economy has changed; not everyone has a traditional, 20-year employment history. Alternative data provides a fuller, more complete picture of a person's financial viability, especially for those with "thin files" or a history of minor financial trouble who are nonetheless responsible.  Davidson suggests that utility or rent payment data is a much better indicator of a borrower’s ability to sustain a mortgage than, for example, a disputed small department store bill.

Ultimately, the confluence of a new scoring model and the rise of alternative data is an invitation to move beyond a single, static measure of credit risk. We should embrace this moment as a genuine opportunity to create a better, more stable, and more inclusive future for housing finance. This means fostering better education across the industry and championing the integration of more comprehensive data to build a fuller financial picture of every potential homeowner.

Listen to the Full Conversation Here.

The podcast was recorded on October 20, 2025, at MBA Annual 2025 in Las Vegas, Nevada. The conversation was hosted by Jennifer Henry of Equifax and featured Andrew Davidson, President of Andrew Davidson & Co.