Fitch Seeks Feedback on Rating Loans With Alternative Scores

In a National Mortgage News article published November 6 (subscription required), Fitch Ratings asked for industry feedback on how it should rate residential mortgage backed securities when the underlying loans are scored with an alternative credit model such as VantageScore 4.0. Read the article here.

"You've got a lot of issuers who want to start adopting. The mortgage originators are saying, 'This could be an opportunity,' but not a lot has been done on the investor side."

• Fitch is taking comments through November 16 on three scenarios: an alternative score used in place of FICO classic, as a complement to it, or in cases where a lender chooses to pull fewer than all three bureau reports.
• Fitch already allows up to 10 percent of a securitized loan pool to carry no FICO score at all, so alternative scores can be used on a standalone basis within that existing limit.
• Other rating agencies are taking different approaches in the meantime. Morningstar DBRS built a process to convert VantageScore 4.0 into a FICO equivalent, and S&P Global has already assigned a presale rating to a deal that used VantageScore 4.0 on a standalone basis.

At Informative Research, we see this as the next step in a shift already underway at the loan level. Fannie Mae and Freddie Mac have been pricing loans scored with VantageScore 4.0 and FICO classic equally for months, and now the secondary market is working out how that choice carries through to a bond's rating. Lenders considering more alternative score volume will want to watch where Fitch lands.