Stock of Fair Isaac plummeted due to decline
The credit scoring landscape is set to undergo a significant shift following Fannie Mae and Freddie Mac's decision to allow lenders to use VantageScore 4.0 for mortgages. This move could potentially erode the dominance of Fair Isaac Corporation (FICO), the company behind the widely used FICO credit scores.
Following the announcement, FICO's stock declined by over 10%, reflecting investors' concerns about increased competition in the market. The retention of the tri-merge credit reporting system, despite the introduction of VantageScore 4.0, might mitigate some of the disruption to FICO's business. However, the increased competition could still lead to strategic adjustments by FICO to maintain its market position.
VantageScore 4.0, which uses advanced technologies like machine learning and trended credit data, is designed to assess borrowers with limited or "thin" credit files more effectively than traditional models. This could lead to a broader range of consumers being eligible for mortgages, potentially reducing FICO's market share.
The decision aligns with the goals of the 2018 Credit Score Competition Act, aimed at increasing competition and reducing costs in the housing finance system. The change in policy by Fannie Mae and Freddie Mac was announced as a means to reduce housing costs.
It's important to note that the potential use of Vantage 4.0 Scores by lenders doesn't necessarily mean they will replace FICO scores. The impact of Vantage 4.0 Scores on Fair Isaac's services and the relevance of FICO scores in the mortgage lending industry remains uncertain.
Fair Isaac Corporation's stock currently trades at more than 80 times earnings. The high price of the stock could be a reason for investors to consider selling, but it's unclear whether the recent drop in the stock price was a direct result of the announcement or other market factors.
The drop in Fair Isaac's stock price was due to a tweet posted by William Pulte, director of the Federal Housing Finance Agency. Pulte's tweet may not be a direct reason to sell FICO stock, but it did spark a significant reaction in the market.
In the mortgage lending industry, Fair Isaac charges $3.50 for providing a FICO score to a lender, which amounts to just 0.2% of typical mortgage closing costs. The potential reduction in the relevance of FICO scores could have implications for investors who currently own Fair Isaac stock.
The development is part of a broader trend towards increased competition in the credit scoring market. As the industry evolves, it will be interesting to see how Fair Isaac Corporation adapts to maintain its position and what impact this will have on the mortgage lending industry as a whole.
Investors' concerns about increased competition in the market might lead to strategic adjustments by FICO to maintain its market position in the finance and investing sectors. The use of VantageScore 4.0, which could potentially reduce FICO's market share, aligns with the goals of the 2018 Credit Score Competition Act, aimed at increasing competition and reducing costs in the housing finance system. The drop in Fair Isaac's stock price, which currently trades at more than 80 times earnings, could be a reason for investors to reconsider their investments in personal-finance related businesses.
