Before I say anything else, I want to thank Bill Pulte for really sticking it to the man and standing up for the little guy. I was really excited once I had saved up \~200k for a down payment and closing on costs on an $850k house in California, but I was devastated when FICO raised the price of a credit pull from 5 bucks to 10, and I just couldn't work that into my budget.
For those unfamiliar, FICO is basically the software/data set that gives you a credit score in the US. For you to get any sort of a loan, you're pretty much always going to get your Fico score pulled. They make money through a bunch of different segments, but the one that really matters is their mortgage business. For decades, the government basically handed FICO a monopoly in the form of making it a requirement for Fannie and Freddie loans.
The reason the stock price absolutely mooned over the past 5 years before crashing down spectacularly comes from a change in regulations that no longer mandated a fixed price for a credit pull when someone applied for a mortgage. Management (in a pretty arrogant, greedy fashion IMO) hiked prices aggressively. A single pull went from 60 cents to 10 dollars in a few years. On a PERCENTAGE basis, that is one of the most egregious price hikes in modern history. This initially caused the stock price to soar because the fundamentals looked great and the pricing power was obvious. However, this recently drew a lot of negative attention from Bill Pulte, the current federal director of housing. He recently passed through a new set of rules that allowed vantage score (a competing scoring system owned by the credit bureaus) to be used on Freddie and Fannie loans.
This begs the obvious question: why would anyone pay extra money when an alternative exists for less than a tenth of the price? Fico's moat comes from the securitization market. When a local bank generates a mortgage for a new homeowner, they often look to sell those loans to larger institutions to fill a pool of mortgage backed securities. They sell this loan with the borrower's FICO score as a measurement of risk. The corresponding risk will determine how much of a spread on the interest that loan will command; lower scores suggest riskier borrowers, which require higher interest rates to attract institutional investors to buy that pool of mortgage backed securities. The big thing to understand here is that FICO has been the only show in town for long enough that all the risk modeling these institutional investors do is built on Fico scoring.
There is a crucial, crucial question you need to understand: will there continue to be any spread at all between Fico scored mortgages and vantage scored mortgages in the securitization market? This is the whole fucking enchilada. When you're dealing with gigantic pools of mortgages from the perspective of a local bank that writes them, a spread of .1% in the interest rate is a thousand times more valuable than the cost you'd save by only using vantage scores and not spending the 10 bucks on a Fico pull.
There's also a conversation about bimerge and trimerge credit reports, some drama about Fico circumventing the credit bureaus with Fico direct, and other scary optics. The management team was clearly very greedy, and might have shot themselves in the foot raising prices this arrogantly. They also levered up the balance sheet pretty aggressively to buy back shares on debt, which was questionable. These are all valid points.
But all of those can be true, and this stock can still perform marvelously well if their securitization most persists. The pricing power here is absolutely immense, even if they exercised it too hard recently. To drive this point home, FICO could 10x prices over time, and if the spread between FICO mortgage and Vantage score mortgage interest rates stay within the normal range, no sane bank or borrower will make the switch.
As a disclaimer (in case my writing occasionally gets robotic), zero words of this writeup were AI generated. I might get some of the details slightly wrong, but at least it didn't come from ChatGPT hallucinating.