“If [the GSEs] are going to distribute them into securities,” said Bose George, a managing director of Keefe, Bruyette & Woods, “I assume there’ll be some sort of pay-up for these loans, because people don’t know the performance yet.”

MBS investors are likely to charge a pay-up for securities backed by mortgages underwritten with VantageScore — at least until they’re confident prepayment speeds won’t accelerate.

New Fed Chair Kevin Warsh has long criticized the size of the Fed’s balance sheet, in particular, its massive holdings of agency MBS.

Early interest in the VantageScore 4.0 pilot has been strong, but participants note that the new score can be up to 100 points different from Classic FICO.

Dave Paulson, CEO of the FHLB of Pittsburgh, pointed out that, prior to the 2023 banking crisis, many FHLBank officials didn’t know who their direct contact was at the Fed.

Both VantageScore and FICO have commissioned research to support their claims of superiority. But the truth probably won’t be known until VantageScore 4.0 and FICO 10T compete head-to-head.

Two main sources for lender liquidity are working to improve communication and simplify collateral exchange.

FICO’s CEO argued that VantageScore isn’t gaining much traction in the MBS and ABS markets, and that the only way the score will take share with GSE mortgages will be if lenders game the system.

Policies put in place during the pandemic prevent many small banks and credit unions from selling small-balance loans to the GSEs, which constrains mortgage lending in rural and low-income communities.

Even with strong earnings the GSEs are making little progress on meeting stringent capital levels set during the first Trump administration.