Rising mortgage rates in the United States have intensified challenges for prospective homebuyers, prompting federal officials to reconsider the dominance of the FICO credit scoring system in mortgage lending decisions. Since 2022, the Federal Reserve’s interest rate increases have pushed 30-year mortgage rates to around 7 percent, causing a significant decline in mortgage lending and worsening housing affordability.

As part of efforts to expand access to home loans, Bill Pulte, a federal housing official, has proposed promoting greater competition among consumer credit scoring agencies. The initiative centers on allowing government-sponsored enterprises Fannie Mae and Freddie Mac to accept credit ratings from VantageScore—the alternative to the widely used FICO score—on equal terms. Currently, mortgage loans evaluated using VantageScore often incur surcharges, limiting their competitiveness.

VantageScore, developed by the three major credit bureaus Experian, Equifax, and TransUnion, employs a different algorithm with distinct weightings for factors such as credit utilization and payment history. Advocates suggest this could better identify so-called “credit invisible” consumers who might otherwise be overlooked by traditional FICO-based assessments, potentially broadening mortgage access and lowering borrowing costs for some applicants.

Mortgage lenders such as Rocket Mortgage have expressed support for this shift, anticipating it could ease barriers for applicants with nontraditional credit profiles. However, some asset managers have voiced concerns that incorporating multiple scoring models might lead to looser underwriting standards overall. Since these investors hold mortgage-backed securities, they caution that a fragmented credit evaluation system could increase the risk of defaults.

There is also worry that borrowers might “shop around” for the most lenient scoring criterion, potentially undermining loan quality. On the other hand, diversifying credit models could reduce the homogeneity in underwriting practices, a factor that contributed to the build-up of risks before the 2008 financial crisis.

Critics further argue that rushing the integration of competing credit scores could hamper the broader adoption of data-driven mortgage evaluations. Concerns persist that if asset managers interpret the government’s push as an attempt to artificially boost mortgage lending volumes, they might respond by discounting the value of mortgage-backed securities tied to any credit scoring system, including those relying on FICO.

The proposal, which has already caused a significant drop in Fair Isaac’s market capitalization, highlights the complexities involved in balancing consumer access to credit with market stability. How the government and private sector manage these trade-offs will likely shape the future of mortgage lending and housing affordability in the United States.