Why Fair Isaac Corporation Fell This Week

Key Points

• The FICO score inventor continues its war with the new administration's FHFA Director Bill Pulte.

• Pulte said this week that Fannie Mae and Freddie Mac will allow lenders to use a FICO alternative in scoring customers for mortgages.

• Fair Isaac has looked unbeatable in recent years, but it may be unable to raise prices as aggressively going forward.

• 10 stocks we like better than Fair Isaac ›

Shares of Fair Isaac (NYSE: FICO) fell this week, down 13.4% as of 12:10 p.m. ET on Thursday, according to data from S&P Global Market Intelligence.

FICO has had somewhat of a monopoly on credit scoring, which has recently paved the way for large price increases, the most recent of which occurred in January. But this week, current Federal Housing Finance Agency (FHFA) Director Bill Pulte continued his mini-war against the company in the name of lowering costs for homeowners.

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Can VantageScore eat into FICO's market share?

This week, Pulte posted on X, formerly known as Twitter, that the current government-sponsored entities (GSEs) that buy mortgages, Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC), will allow lenders to use something called VantageScore 4.0, a new potential FICO competitor, without having to build new infrastructure.

VantageScore is a new credit score developed by the three major credit bureaus in 2017. It incorporates alternative data and some less stringent traditional data requirements to better score people, say, in rural areas or with less credit history.

Fair Isaac stock fell hard in the wake of Pulte's tweets, as the two big GSEs guarantee about half of all mortgages in the United States. Therefore, if a significant portion of mortgages were now scored using an alternative, FICO could potentially lose market share relative to its current near-100% share.

Image source: Getty Images.

But the threat may not be as dire as all that

Even after this week's decline, Fair Isaac still trades at a whopping 70 times earnings, which means investors aren't exactly expecting huge declines in market share or revenue. This may be for a couple of reasons.

First, VantageScore appears to be an option for a smaller subset of borrowers with limited credit history. It's also unclear how much lenders will want to use it, except in cases where the current FICO score excludes a borrower.

Second, the FHFA had already mandated Fannie Mae and Freddie Mac to use VantageScore back in late 2022, while giving the homebuying market a three-year grace period to implement it. So, this week's news isn't really new information, although Pulte appears to have sped up the acceptance process while also making VantageScore easier to use on existing technology.

Moreover, perhaps the allowance of VantageScore will hold off the threat of federal agencies turning to "bi-merge" scoring -- allowing mortgages to be scored by only two credit bureaus. Currently, the standard for GSEs is a "tri-merge" system for both FICO and VantageScore, which requires all three credit bureaus to run a score. There had been talk of allowing bi-merge to lower costs in recent years, which would also reduce the volume of FICO scores. So, perhaps this new competition will ward off that threat.

Still, it does appear that the large price hikes FICO has implemented over the past few years, and most recently in January, will cease for now. Even though FICO scores cost only $4.95 today, the new FHFA director has previously called FICO's price hikes and seems keen to show how the administration is lowering costs.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.