Historically, FICO was a toll road on mortgage originations. The regulator (FHFA), who governs the Government-Sponsored Enterprises (GSE - Fannie / Freddie) required a FICO score for every application, and this dynamic remained in place until recently.
In July 2025 the FHFA announced that VantageScore 4.0 could be used as an alternative to the FICO score, opening the door for competition. Lenders went live with it in April 2026. Priced at 99 cents, it substantially under-cuts FICOs pricing (which had raised nearly 1000%, perhaps hastening the regulatory appetite for VantageScore 4.0).
Since then, FICO has priced it's upcoming 10T FICO Score at 99 cents, although it does charge $65 to the lender if the loan closes (total cost $65.99). Death knell for FICO right?
Well, perhaps not.
It has been reported that there's about a 20 BPS spread between FICO and VantageScore 4.0. At the upper echelon of the market (e.g. borrower score 760+) this doesn't really matter. Top tier is top tier.
Although the mortgages are packaged up and sold by Freddie / Fannie (who then takes on the credit risk), improperly under-written loans can be handed back to the lender, who then has to resume the risk. Further, the guarantee fee (g-fee) charged by Fannie / Freddie may be different for VantageScore 4.0 vs FICO, depending on the risk assumed. At the mid to lower end borrower, a 20 bps on a multi-hundred thousand dollar mortgage will cost more than $65.99.
Furthermore, how does the MBS market respond to VantageScore 4.0? They know how to price FICO paper, but they don't have the history of VantageScore 4.0.
This history is not only lacking on the default side, but on the pre-payment side.
Will a VantageScore 4.0 loan exhibit the same pre-payment profile as a FICO scored loan? No one yet knows. Pre-payment impacts cash flows, and introduces the negative convexity risk that is common amongst MBS. So, with this unknown, does the market price VantageScore 4.0 paper the same as the FICO paper?
If there's a pricing disparity on the secondary market (e.g. FICO paper is priced at a premium to VantageScore 4.0 paper) then the moat is likely intact, as lenders are then incentivized to continue to use FICO.
If VantageScore 4.0 paper is priced the same as FICO paper, then the score is commoditized, and FICO's moat is breached.
What do ya'll think? Moat intact? Or Moat eroding?
Full explanation / write up here - [https://thepursuitofcompounding.substack.com/p/ficos-moat-origination-vs-destination?r=xy3ae](https://thepursuitofcompounding.substack.com/p/ficos-moat-origination-vs-destination?r=xy3ae)
