From Loan Pools To Consumer Wallets: The Ripple Effects Of Credit Score Lender Choice

On January 15, 2026, the FHFA provided documentation to the Housing Policy Council (HPC) in response to a Freedom of Information Act (FOIA) request made in July of 2023.  Those documents, though redacted, clearly indicated that the GSEs did not recommend approving two scores as was directed by the FHFA. Rather, the GSEs only recommended approval of FICO 10T.  And though the analytics to support either the GSEs recommendation or the FHFAs ultimate direction have not yet been shared, it appears safe to assume that the GSE approved score (FICO 10T) must have outperformed the unapproved score (VantageScore 4.0) when subjected to independent testing and validation. So why move to a lender-choice model?

It is with that background that I offer additional thoughts on the potential risks and costs that a two-score, lender-choice system could introduce.

The secondary mortgage market doesn’t usually make headlines, but it plays a huge role in what borrowers ultimately pay for a mortgage. When lenders originate loans, they typically don’t keep them. Instead, those loans are sold to investors—often through Fannie Mae and Freddie Mac—who bundle them into mortgage-backed securities (MBS) and frequently lay off some risk via their Credit Risk Transfer (CRT) programs. The price investors are willing to pay for those loans directly affects mortgage rates and fees for consumers.

That’s why a seemingly technical change—allowing lenders to choose which credit score they use at origination, either FICO or VantageScore—will have meaningful pricing implications throughout the system.

What changed and why it matters

Historically, the mortgage market has relied on a single, standardized credit score: Classic FICO. Nearly everyone, investors, mortgage insurers, rating agencies, etc., has used the same yardstick to measure risk.

Now, the FHFA has indicated that lenders will be able to choose between FICO and VantageScore when underwriting loans they plan to sell into the secondary market. But what nobody is talking about is that by introducing choice, it also introduces uncertainty and, in a market where everything comes down to confidence in forecasts, more uncertainty means risk-takers must increase price.

How lender choice can affect pricing

Different scores, different risk signals

Credit scores help determine how risky a borrower appears. If two different scoring models evaluate the same borrower differently, lenders will, of course, use the score that produces a better economic outcome—such as qualifying more borrowers or offering better rates.

At the loan or pool level, where score choice is an option, it creates uncertainty about how scores are selected to originate each loan. And when the lender selects the higher of two options, it fundamentally changes the meaning of the score being used. For example, a 750 Classic FICO will have a lower expected default rate on a loan where Classic FICO is the only score available, and a higher expected default rate on a loan where the lender has selected or chosen between two scores. The key point is that there is a signal in having multiple scores available for lenders to choose from. And risk takers, including the secondary market, must assume that the highest score has been selected, and they must therefore adjust the price to compensate for the additional risk.  

Secondary market ripple effects

Investor confidence and higher yields

The secondary market runs on confidence in forecasts. Investors want to know that a loan with a certain credit score today has the same relative performance as a loan with the same score five or ten years ago (accepting variation due to changing economic factors).

The impact of lender choice fundamentally changes the math.  And if investors lose some confidence in their forecasts, they will ultimately require higher yields to compensate for incremental risk, which will be passed through to consumers and make housing less affordable.

Mortgage insurance and risk pricing

Mortgage insurers and other risk holders also rely on predictable credit metrics. If score selection and selection process vary by lender, insurers will need to adjust rates for incremental uncertainty, which will mean higher insurance premiums—another cost negatively impacting housing affordability.

What this means for consumers: Potentially lower costs up front, higher costs later

There could be some near-term savings for consumers if lenders use the higher of the two credit scores. However, risk-takers, including MBS investors, mortgage insurers, reinsurers, etc., will very quickly adjust. Their livelihood centers around forecasting, and allowing lender optionality adds uncertainty and will require rates and premiums to adjust upwards e.g., as in the example above – a 750 FICO doesn’t perform in a mixed pool and results in a higher expected default rate when compared to that same cohort without lender choice  – it will have higher losses and therefore require a higher price.

It’s also worth considering that while cost savings are possible, lenders will likely be forced to purchase both scores for each applicant.  If they don’t, there is potential that the unpurchased score may be better, and another lender will win the loan with better pricing. This will only increase costs for consumers. 

The bigger picture

Lender choice might have been pitched as having the potential to create competition leading to reduced mortgage costs—but that’s unlikely to hold when, in fact, all risk-takers will need to adjust prices for lender optionality.  And lenders will likely have to purchase both scores, regardless, to ensure they’re offering the best deal.  Also, worth mentioning, we haven’t yet considered the very meaningful implementation costs of this change.  

In reality, introducing lender choice will very likely translate into higher borrowing costs for consumers, though its intent was to do the opposite. 

Jim Krueger is a 25 year risk executive from the mortgage insurance industry.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.