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00:00Okay, we are live from Dallas. I'm Diego Sanchez, President of HousingWire, and I'm joined today

00:13by Joe Marsocci, Senior Director of Mortgage at FICO. Thanks for joining us today, Joe.

00:20Thank you, Diego. It's great to be here.

00:23First off, congratulations on winning a HousingWire Tech Trendsetter Award. That's awesome.

00:27Thanks, Diego. Yeah, it's really an honor to be recognized by HousingWire for that award,

00:32alongside so many other great contributors to our industry.

00:36So before we dive in, what is your role at FICO?

00:40Our team has 10 team members with experience across different sectors of the mortgage industry,

00:45so capital markets, credit risk, origination servicing, and the tech space. And I was really

00:50excited to join FICO and the MCM team. I spent 20 years of my career at several different

00:56lenders helping consumers, and I love what we do. And now I'm able to help clients utilize

01:00the FICO score more effectively and make it a win-win for lenders, investors, and customers.

01:07And you're going through a little bit of an evolution right now in terms of your scoring

01:13model at FICO. What exactly is FICO Score 10T?

01:2010T is our newest scoring model. Really, it's kind of our continual innovation to address

01:28market and data advancements, and it provides continuity with the other FICO Score versions

01:33now in use. So FICO comes out with new versions every few years. The mortgage industry has

01:38just been on the classic FICO Score since the 90s. And so the 10 in 10T stands for trended

01:45data, and it's really looking at a person's use of credit over a 24-month time period.

01:50So it changes from that single snapshot in time and captures behaviors over a longer

01:55period. And we know with the changes in consumer behaviors, it's a great representation of

01:59where we are today. And the research that we're doing is showing that 10T provides about

02:05a 5% lift in loan approval rates over the classic FICO Score without additional credit

02:10risk. So lenders can better control their default rates. I spent a large portion of

02:15my career focused on credit risk. And so I had the opportunity to manage or play a role

02:21in the entire origination system. And to know that I can get a lift in approvals while maintaining

02:25a strong risk profile was very comforting for me. I just wish it was around when I was

02:30still in lending. But getting both more loans and less risk is really like magic.

02:37Can you tell us a little bit more about how your team is amplifying awareness about FICO

02:44Score 10T?

02:45Of course. Some people don't even realize that FICO is an independent, publicly held

02:50company, not a government organization. So our team is focused on bringing awareness

02:54to new innovative tools like the recently announced FICO Score Mortgage Simulator. That

02:59simulator helps would-be borrowers understand how taking certain actions may impact their

03:03FICO scores. And now we have several lenders that are utilizing it today. But to talk about

03:09the value of the score across the ecosystem, because of the FICO Score, a borrower can

03:13apply for a loan and second later, the loan officer can quote a price up front. That's

03:17pretty significant. So they know which products borrowers are eligible for based on different

03:21FICO Score guidelines for various mortgage products. And for investors, it's a primary

03:26factor in determining a loan's risk profile, cash flow predictability, and liquidity, accurately

03:32identifying charge-offs from prepayment risk or risk of default. And I also want to talk

03:36about how pricing works, because it's very critical. In terms of FICO pricing, we collect

03:41a wholesale royalty of $4.95 for the score used to originate a mortgage loan. It's only

03:47a small percentage of the $80 to well over $100 tri-merge bundle costs. And that score

03:51is used many times more in places like product decisioning, loan and mortgage insurance pricing,

03:56loss modeling, loan pooling, and so much more. However, today FICO generally doesn't collect

04:01any additional amounts beyond the per score amount collected for the initial origination

04:05use. So we are constantly finding ways to make the FICO Score model more powerful,

04:10predictive and useful like with FICO Score 10T.

04:12And huge in this environment where it has been difficult to originate for the past couple

04:17of years. So you mentioned the increase in approval rates. Are there any other benefits

04:22that are involved with FICO Score 10T?

04:27Yeah. I mean, I think there's obviously the lift in approvals that we talked about. There's

04:31also conversely because of that trend of data, a reduction in kind of overall defaults. So

04:38we see about a 17% reduction in default rates, which is also a huge benefit for our lenders.

04:47And so those two things together, there's also different treatments that we could go

04:51kind of deeper into the score on the way medical collections are captured, the way

04:57additional users on your credit cards, so authorized users are treated differently.

05:02So kind of things that we see. So one of the things that I've said before is when we look

05:07at kind of the way that the GSEs that set up their AUS systems, they've been capturing

05:11trended data in their AUS for years. So now with the 10T score, the consumers get that

05:18benefit on the score side of it as well. So certainly a great addition to the industry

05:23when it gets adopted.

05:24And I understand that you're already rolling out this new model with clients.

05:29Yeah, yeah, we are. So currently we have about 25 lenders that are currently utilizing and

05:38pulling the score. Right now, we're encouraging everyone to start utilizing as much as they

05:42possibly can to get the benefits of our early adopters already seeing. And today, lenders

05:48can start getting 10T alongside of their existing credit score. So if they're pulling

05:56the FICO score, we're giving 10T alongside of that. So they can start evaluating the

06:01performance of their own portfolios to see the value that FICO score 10T brings for them.

06:06And today, we're already seeing lenders use it on Jumbo loans, VA loans, DSCR loans, non-QM

06:12loans, so kind of that non-GSE production.

06:16A few of those lenders, just to give you a list, is United Wholesale Mortgages, One Planet

06:20Home, Cross Country, Cardinal Financial, and then several banks, credit unions, and other

06:25lenders. And one of the things I do when I meet with lenders in the industry, I talk

06:30about kind of how I ended up here at FICO. So I spent years doing community reinvestment

06:34or CRA lending, and I also worked in commercial lending and focused on workforce housing.

06:40So for me, providing individuals with a roof over their head has always been a driving

06:44factor. So coming to FICO allowed me to transition from doing this one lender at a time, and

06:49now helping multiple lenders at once, reaching even more consumers. So it was a no-brainer

06:53for me to come here. It's funny, I have a teenage daughter who, now that she's getting

06:58older, she hears a little bit more of kind of what I'm doing, what I'm talking about.

07:02And so she now says she wants to do the same thing that I'm doing, which she's only on

07:06career choice, I think number eight at this time. So we certainly have a long way to go.

07:11But at least with the teenager, I blame half my gray hair on her and then the other half

07:15on our kind of industry. So it's a win for me.

07:19Well, and hey, we need fresh blood in mortgages. That is the way.

07:22That's right. Second generation, right? It's necessary.

07:25Absolutely. And those are some big lenders that are already testing out this new model.

07:29Yeah, I think it makes up for about $264 billion in originations and about $1.4 trillion in

07:36servicing portfolios. So yeah, significant numbers there.

07:40So your team also looks at the capital market side. What has the capital markets appetite

07:44been for FICO Score 10T?

07:47Yeah, there's a lot of excitement around the new scoring model and the capital market space.

07:51So securitizing on 10T offers a more predictable cash flow and greater liquidity for all type

07:58of securitized assets, not just mortgages. So we also see it in auto loans, personal

08:02loans, credit and the ABS market. And really that more predictable cash flow equals more

08:06value. So FICO Score 10T has the potential to increase the overall value of the mortgage

08:11backed security as an investment instrument. And since MBS is a global investment, it makes

08:16perfect sense to use the FICO Score that is universally accepted and is expected to become

08:22the universal standard for investors. And we also recently announced the FICO partnership

08:27with MCT, Mortgage Capital Trading, which I think a lot of our industry is familiar

08:31with and FICO Score 10T loans are now actively trading on the MCT marketplace.

08:36Yeah, digging in a little bit there. Last year, Cardinal Financial issued the first

08:41MBS that was entirely composed of loans that were decisioned on FICO Score 10T. What do

08:48you think that issuance means for the broader mortgage ecosystem?

08:53Yeah, that's correct. Cardinal was one of the first lenders to adopt FICO Score 10T

08:58for its non-GSE loans and began utilizing the score model to originate VA loans in October

09:03of last year. And they reported that the majority of the borrowers received higher credit scores

09:07with the use of FICO Score 10T, allowing for more favorable loan terms to be offered with

09:12no observable increase in credit risk. And then in November, they formed and traded their

09:17first mortgage backed security decision by FICO Score 10T to a primary dealer that traded

09:22that same day. So the new score not only improves credit risk transparency for the

09:28investors, but this first MBS also expanded homeownership opportunities for military members,

09:33veterans, and their families. And we also have early adopters like Primus who are actively

09:38trading FICO Score 10T loans in addition to VA and MCT's platform. So needless to say,

09:44we're seeing a lot of traction in the market with positive results and investors should

09:47really think about updating their buy guides, especially for the non-QM and portfolio loans,

09:52to leverage FICO Score 10T so they're not missing out on quality loans.

09:56Who should lenders go to, whether they're clients or prospects,

10:01if they're interested in starting to integrate FICO Score 10T?

10:05Yeah, certainly we want to connect with everyone in the mortgage ecosystems,

10:09not just lenders, to help them minimize risks and maximize profitability. So we encourage lenders,

10:15servicers, and investors to reach out to our mortgage and capital markets team. And for more

10:19details, they can go to FICO.com forward slash FICO Score 10T, or email us at FICO Score Info

10:25at FICO.com. And we also attend a number of industry events. So come find us at any time

10:31or schedule some time to connect in person. Well, Joe, it's been really good catching up

10:36with you this morning. Thank you so much for joining me today. Thank you, Diego,

10:40for the opportunity. It's been great.

FICO’s Next Chapter: Inside the Future of Mortgage Scoring with Joe Marsocci

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