Looming risk for mortgage credit and MBS investors from “Lender Choice”

Since 1996 when Freddie Mac introduced the industry to the first automated underwriting system (AUS) for GSE-eligible mortgages, a borrower’s credit score has served as one of the most important predictors of mortgage delinquency. For many years thereafter, FICO score was the sole provider of scores to both GSEs’ AUS scorecards. The arrival of VantageScore as a competitor to FICO has turned up the heat on the use of credit scores in mortgage underwriting with FHFA’s decision to allow lenders to choose between FICO and VantageScore in delivering loans to the GSEs. This “lender choice” policy poses risk to both credit and MBS investors.