In this week’s episode of Optimal Insights, the show opens with a market update from Alex Hebner and James Cahill, highlighting current rate conditions, inflation trends, labor data, and the broader market tone shaping rate volatility and expectations. They also touch on industry conversations influencing affordability and overall mortgage activity.

In the special guest segment, Jim Glennon and Mike Vough welcome Julie May, Vice President & General Manager of B2B Scores at FICO. Julie breaks down how FICO Scores are constructed, explains the differences between FICO and VantageScore, and discusses why “lenders’ choice” can introduce risk by shifting how borrowers fall into scoring tiers. She also outlines how FICO 10T, UltraFICO, and emerging data sources – trended, rental, and cash‑flow – are shaping the next generation of credit risk modeling.

About Julie May

Julie May, vice president and general manager of B2B Scores at FICO. In this role, she is responsible for global product and business development, delivery, and support for the FICO Score. Julie joined FICO in 2004. Over the course of her career, she has held senior roles in customer relationship management, business consulting, and strategic product management, development, and delivery. Her expertise spans enterprise software, advanced analytics, fraud management, cybersecurity, go-to-market strategy and strategic partnership development. Julie earned her B.S. in Economics from Emporia State University in Kansas.

Julie’s FICO Blog: https://www.fico.com/blogs/author/julie-may

Julie’s LinkedIn: https://www.linkedin.com/in/julie-may-559b4b/

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Optimal Insights Team:

1. Jim Glennon, Senior Vice President of Hedging and Trading Operations
2. Alex Hebner, Hedge Account Manager
3. James Cahill, MSF/MSR Account Manager
4. Mike Vough, Senior Vice President of Corporate Strategy

Special Guest: Julie May, Vice President & General Manager, B2B Scores, FICO

Production Team:

1. Executive Producer: Sara Holtz
2. Producer: Matt Gilhooly

Commentary included in the podcast shall not be construed as, nor is Optimal Blue providing any legal, trading, hedging, or financial advice.

Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. Thank you for being here. Getting into the end of January already, which is kind of crazy to think about. We've got a great show for you today.

Glad you tuned in. We're going to have a market update here in a little bit. Tons to talk about there as we get into the middle of Q1. We have a special guest today, Mike Vogue and I will interview Julie May. Julie is the vice president and general manager of B2B scores at FICO. So she'll be joining us for a timely conversation about the state and the future of credit reporting, which is obviously a huge pillar of the mortgage process.

So we'll talk to her here in sec. Before we get into anything else, just in the way of data, continuing to see that spread, the spread between Treasuries and mortgages shrink, decrease. We've got the 10 years still around four and a quarter. It's been in that range for a really long period of time. And if that's the only measurement you watch in terms of interest rates, you might think rates haven't moved very much. But meanwhile, the OBMMI is at 6.1. We had been hovering more around six and a quarter.

earlier in January and going back into December, some of the news about the $200 billion that the GSEs are poised to buy in addition to some other things going on around efforts to reduce that spread, really efforts from the administration to get creative about how to make mortgages more affordable. We've seen some shrinkage in that spread. So that's a welcome development again, 6.1 on the OB-MMI and seeing really good volume continue through January.

Mostly because of that, more refi business obviously. So let's get into a market update here.

Good morning, everybody. You got Alex and James here ⁓ running the economic update this Jim is out of the office on this beautiful Monday, January 26 morning. we are coming at you with just the two of us today. Just kind of off the top and where we are with rates. Just kick things off. ⁓ OBMI, kind of tough to crack as our rates across the market, OBMI trading

it.

6.088 percent, that being the average rate lock that we're seeing in the Altibo blue system, and the 10-year to crack as well, ⁓ trading north of 4.2 percent as of this morning and was as high as 4.3 percent in the last which I think is just on the back of the geopolitics that we were talking about last week. Right, James?

Yeah. So it definitely seems, post Davos, some cooler heads have prevailed here for now, at least. but the, market definitely bounced back after the speech at Davos saying, we're, not really looking to do military intervention. We're going to figure this out, ⁓ with, ⁓ diplomacy that really settled people down. The market came back, cooled off a lot.

So always good when we're talking peace times. definitely geopolitics, the world, it's been a little crazy. so any cool down is something that we're definitely happy to see. Speaking cooling down, it looks like we got PCE this week or this past week. The number is still stuck at about 2.8, but our more general inflation numbers have

crept down a little bit. So something just to watch in the future. PCE is of course the Fed's preferred gauge. So looking at what they want to see, what they are judging, how inflation is working, it is still stuck a bit higher than they want.

Absolutely. We've been in this place, it feels like, for at least six months now, whether it's PCE or CPI, it's been trading right around 2.7, 2.8 % on every release. that is going to keep the inflationary pressure there, in my opinion. We've continued to cut rates into the face of And I think we're a long ways from the days of pre-COVID and a 2 % targeted inflation

So this continues to, I would say, kind of be backburnered as an issue. ⁓ Much more so, people are just focusing on the general health of the day-to-day economy and jobs, the Fed's other mandate of keeping us at full employment.

Yeah, and that initial jobless claim last week came in a bit better than expected 200K. job seemed to be trending fine enough. Inflation is a little too high, but fine enough. have exactly as you said, we're kind of stuck in this holding pattern. There is a Fed meeting, FOMC meeting this week on Wednesday. It is...

highly unexpected that there would be any sort of rate cut with just the data that's coming out as well as the the general fight that is going on around the Fed might be pushing some people to hold off further. I think I saw the CME was projecting 98 % chance of no rate cut this time around, 2 % chance that we actually would.

I don't think Mirren is going to pull them down over the next 48 hours, but you know, stranger things.

Absolutely. Yeah, I'm with you there. And I'm with the market on this one. ⁓ We're caught in the middle, know. Inflation keeps things just hot enough to keep rates where they're at. And the jobs market isn't melting down by any means. As we've always said, the weekly jobless claims of 250 or more is kind of the hot spot for that. And that's when we'd start to see them really begin to push for lower rates.

Also the politics around the Fed right now, I'm in agreement there as well that

Some of the older heads on the Federal Reserve Board, likely, I think, the face of the Trump administration's pressures on the Fed to maybe pump the brakes on rate cuts, which has been a very out push from the Trump administration.

speaking on kind of that line. So Mirren, who had originally replaced Kugler, technically that term is coming due. We were trying to look this up before the...

cast here, but there's no real news so far on who might be replacing Mirren. I think both you and I are leaning they will probably reinstate Mirren for the longer term. Although Mirren has said that he preferred the work that he was doing over at the White House on the Economic Council. So there could be a shifting of the guard there, but seems likely that he'll be sticking it through just based on the lack of news.

Yeah, I'm in agreement there. was, was hoping to see a headline that we'd get some either official confirmation that Myron will be continuing in that role or if Trump will be nominating somebody else. ⁓ but I don't think it's, really matters who's in that role. I mean, at end of the day, it's either going to be Myron or someone else that Trump is, ⁓ nominating and we know where his, ⁓ his thoughts are. So exactly, exactly.

his head will be at. Yeah.

So whether it's Myron or somebody else, they will be pushing for probably double rate cuts for the foreseeable future.

just some general market analysis. We've also just want to point out that precious metals have been on quite a run. We kind of kicked the top of this segment off talking about some of fears that remain in the rates market. And I think that's been reflected into the precious metals market. Just to note, silver hit $100 an ounce on Friday, gold hit $5,000 an ounce today, the day of this recording.

they've just been on massive, massive runs, which, you know, I'm not a gold bug by any means, but it's just something to keep in mind that it's a reflection of the fears in the market right now. regards to perception of stability of the US government, the US dollar, US markets in general, anytime there's a flare up in global tensions, we see the capital route articles all over. I think those articles are a little bit overblown.

but it does kind of showcase

some heads are in the market. On the flip side of that, I was reading some B of A research this morning. ⁓ Domestic fund managers remain extremely bullish. They've got record low, sidelined cash right around 3 % right now. So just thanks to keep an eye on to how institutional investors who are the ones moving the market most days of the week ⁓ are viewing things at this juncture.

And just to round out this coming week, we'll get a inflation reading for the month that'll be PPI this Friday. It's expected in the same neighborhood as our CPI and PCE readings at 2.8%.

I think that covers us pretty well on the news and different data releases that have been occurring or are coming down the pipeline here. James, know you and I, want to discuss one option in regards to mortgage affordability and the mortgage market here that's been gaining a little bit of traction and it's seen some research analysis.

Definitely. So you and I were both reading a paper from MSCI this morning that was just talking about mortgage portability. So, you the administration has done a big push the past month on affordability. So there was the 50 year mortgage. There was, they might be locking Street out of purchasing houses, which certain areas that could really have an effect in. Now they're looking at mortgage portability. So the idea being,

I like easy numbers. If I was one of the lucky people who got, you know, those 2 % rates during COVID on a $500,000 house, and now I've got, you know, wife, two kids, I'm kind of looking to move out of that starter house. I would be able to look at a larger property, let's say $600,000, and I could move my mortgage.

from the starter house to that larger one. I think of it a little bit as tranching almost. So my $500,000 mortgage would move with me. I would continue paying at my 2 % rate. And then I would take another $100,000 to cover that last spread there. And it would be at the current market rate.

So this way I would be able to continue paying majority of my low rate, but actually afford to move in to that larger house. This is something that's been, people have been kicking the tires on for a while. It actually, you know, when we were looking into it, it does turn out a lot of countries in Europe. This is a very normal mortgage portability is already allowed. So America is a little behind the ball on that one. I think we were both in agreement that this is a...

It's a good idea. makes sense. There's definitely people who are going to benefit from this, but it does mean people will be trading houses a little bit more quickly, which is going to encourage price appreciation, right? If there's more demand, right? At the end of the day, the underlying problem is still supply and that's the hardest issue to address. But the more tools that you can use to try and get into a house, the better.

Absolutely. I am in agreement that this is one of the better options that have been put forward. And I definitely think that there are certain demographics that this will be helping most. I think you kind of point out maybe an elder millennial type, you know, maybe moving into a larger home. I could also see it benefiting, maybe some empty nesters on the other side. Maybe they wouldn't even be taking an additional loan. They're just going to look to port over, know, from their larger family home.

into something smaller, the kids leave the house, whatever it may be. I think it could help both those demographics and like you said, that'll open up new homes to those that might be looking and just increase the amount of transactions that we're seeing in the industry. This MSCI paper, what they were talking about is obviously this is attractive to borrowers. Someone that wants to hold on to their 2%, that's been a major barrier for them to move in the last four or five years. So if they're able to move that,

that makes a lot of sense for them. But how do you make this attractive to investors? MSCI was pointing out that ⁓ there's likely going to be a fee ⁓ incurred based on the difference between current market rate and the rate that is being ported make this more attractive for investors as well. of the third stakeholder in our industry being servicers, this one's quite attractive to them, I would given that.

A loan that would otherwise be paid off and the servicing on that lost will be ported over if that option is exercised.

Yeah, definitely. so, you know, Alex and I, Alex works over on the pipeline side of Octone Blue and I work over on the MSR side. So it is interesting to see that this kind of works out well for the purchaser. So exactly as you're saying, Hey, if you're porting this over, you're continuing to pay that 3 % rate. whatever pool that your loan ended up slotted into and sold, you're not, you know, normally you would take a new mortgage, pay off the old one. It would prepay entirely.

So this is going to change how prepayment speeds work. This is going to how attractive an MBS pool is. This is going to trade, ⁓ change just the entire profile in there. So it's definitely interesting and effectively it could change it for the better. And so that means, you know, a ⁓ better priced pool, you're getting your money back quicker. You're able to lend more efficiently. And so, yeah, and that might help bring rates down and then get more buyers into the market.

So this is a, it's definitely a good tool.

Well, perfect. I'm definitely going be keeping an eye on portable loans and any more white papers that might be coming out, just because I think this is one of the best ideas that we've seen put forth on the affordability front so far. With all that being we hope everyone stays warm in these coming days. We know that most of the snow and ice across the country has departed, but I know there's still quite a bit of cleanup work to do. So wishing everyone the thanks for joining me today, James.

Thank you.

All right, Mike and I are here with Julie May, Vice President and General Manager of B2B Scores at FICO. Julie is responsible for global product and business development, delivery and support for the FICO score. Excited to have Julie here today. Julie's been with FICO, I believe for over 20 years. And over the course of her career, she's held senior roles in every aspect of delivering tech, analytics and other solutions. And her expertise spans enterprise software,

advanced analytics, fraud management, cybersecurity and more. somehow Julie still finds time to pen a blog, you should check out. Lots of timely updates there about credit reporting, just the industry and some of what we'll talk about today. So I'm sure I missed a few things here, but safe to say that Julie is an industry guru and we're happy to have her here today. Welcome, Julie.

Thank you so much for having me. I'm happy to be here.

You're in Texas, right?

I am in Texas. Yeah, I spend part of my time in Texas and part of my time in Nashville. So kind of back and forth between those two areas. But today I'm in Texas waiting for some impending ice and snow. So.

Yeah.

Alright.

I was

gonna ask you if you're staying warm. Yeah, we have a lot of teammates in Texas and they're in the middle of it right now, it sounds like, are on the way to some, let's see, know. Yeah.

There was no bread left yesterday in the grocery

store, so you know, it was not very good.

Of course,

of course. Yeah, we're at like seven degrees here in Denver and it's business as usual, but Texas, can't get below freezing without freaking people out.

Yeah.

Exactly.

on. Well, again, thanks for being here. We've got some just some questions that kind of kick off the conversation and get us talking about about credit reporting and the FICO score and some of the changes that are going on with with competition in the industry. You know, before we get into more recent events, though, could you stage a bit for our listeners? Can you explain what like what FICO does, what their role is in the mortgage industry, especially including TriMerge and the potential for a buy merge?

Yeah, you know FICO is the only kind of independent standard credit score provider out there and so we invented credit scoring really, right? FICO stands for Fair Isaac Corporation for those who don't know that. A little bit of background, we were founded Stanford grads, Bill Fair and Earl Isaac in a long long time ago in 1956 and they decided that they could find a better way to take something that

wasn't systematic and make it systematic and that was credit scoring interestingly they sent out letters to literally hundreds of lenders

And almost nobody replied except for Montgomery Ward Department Store. If you remember that, you know, I grew up in small town Kansas and we had a Montgomery Ward, but Montgomery Ward responded and said, hey, maybe we'll learn more. what became of that is they learned more and they showed how transformative credit scoring in a systematic way could be. And at that time, it wasn't very systematic. It was more a concept from a consulting perspective that could

I heard about it.

something in that way. And then over the years that became a truly systemized, automated, know, tech driven type of solution from an algorithm perspective that was standard using data from the repositories. And that created what we use today, which is, you know, what 90 % of top lenders in the US, over 90 % of top lenders in the US use today to make the vast majority of credit risk decisions across

across all different types of lending products. So that would be personal loans, credit cards, auto loans, and mortgages. And so that's a little bit of history on FICO, who we are, how we came about. By the early 90s, the vast majority of lenders were using us for all of those different types of lines of lending decisions. And when we had those significant lenders using our solutions, that's when the GSEs noticed, hey, a bunch of people are using

this thing called the FICO score and maybe we should be using it too. And so then they came knocking and then they opened up a competition. We won that competition. And that's when ⁓ in the early nineties, the GSEs started using us as standard in mortgage as well. they've been using our score, which is colloquially referred to as FICO Classic in the mortgage industry since then. FICO Classic is actually three different versions of scores associated with the three

different credit repositories, two, four, and five, depending on the repository. that's the score that has been used, you know, for a couple of decades ⁓ for FHFA GSE assessment.

from a try merge to answer your question. So that's a lot of history about FICO. It's kind of an interesting history I like to share with people because I think it's pretty interesting. And there's some confusion on how FICO came about and was used. I think people sometimes get the GSE use of the score reversed with it was already being used by at a very high level before the GSEs adopted

Yeah, it is.

But from a try merge or buy merge perspective, or you know, there's even been a lot of noise the last couple of weeks about 1B, lots of blogs flying back and forth that I've been keeping an eye on associated with 1B. What I would say is I think we actually should shift the conversation to an even bigger risk for the ecosystem from a mortgage perspective, which would be what is being referred to as lenders choice. And candidly, I would say lenders choice is a really good way

to brand something to make it sound better than it is. You mentioned I've been at FICO for over 20 years. I need to get them to strike that for my bio so I can seem younger. I have been at FICO for over 20 years. And years ago, we had this marketing effort where we said, we need to name our products in a very descriptive way so people immediately understand what they are. And if you were to name Lenders Choice

descriptive way so people immediately understand what it does from a risk perspective, you would rename it adverse score selection.

Because from a risk perspective, that's what Lenders Choice does. Lenders Choice sounds great. I get it. It sounds like you let the lenders choose. It creates competition in the market, and that will be great for all ecosystem participants. I get that, that's not the reality of the situation with Lenders Choice. The mortgage market's very different from other consumer credit markets in that with the GSE structure, we do pass risk to the American taxpayer.

And with that, they've accepted a standard of credit risk assessment for all of the ecosystem players that need to care about that. So not just the originator of the mortgage, but insurers, investors, servicers, et cetera, rating agencies, all of those different users who need to understand from a standard perspective what risk looks like.

Lenders Choice, also known as adverse score selection, doesn't enable that because credit scores use different recipes. The FICO score recipe is not the same as the Vantage score recipe. They're not the same. They have the same ingredients, the credit reporting agency's data, but they are not the same recipe. So if I had milk, eggs, and sugar, I have the same ingredients.

but I could be using that for a recipe which is gonna get me a cake, or I could be using that for a recipe which is gonna get me pudding. And the outcome of that is very different. the FICO score versus other score options that are out there. And before, know what, this is getting to be a long answer for you, but so before I end on this, what I'll just say is, what adverse score selection actually does in the marketplace is it shifts

what would have been a lower.

to having more risk in it. Because of those two different recipes and the way that credit scores work, what will happen is people will always want to select the highest score that will provide a borrower the best price. And by the nature of the way credit scores work, what that will mean is you will actually always pick the best score. And there are a whole bunch of tools out there that enable consumers to understand where is their score the best across repositories.

or across different types of scores. so what that means is more risk will be shifted in the same score cohorts across two different scores than you would have seen in a single score. And there are ⁓ third party entities who have studied this pretty extensively they've been able to quantify what the impact of that would be. One of the best ones that I've seen out there was done by Milliman and they assessed that what we would see as a result of less

lender's

choice is a 30 % increase in defaults. And I was like, wow, that's a lot. But then I was speaking with somebody the risk space. And they told me they actually think that might even be understated from their analysis. And it could be closer to 50 % increase in defaults from moving from a single score to two scores. And the last thing I'll say on this is it also could have potential impacts to GSE revenue, AEI, American Enterprise,

that it could actually revenue down by over a billion dollars a year. If they don't adjust LLPAs and if they do adjust LLPAs, that'll drive consumer costs up from $350 to over $1,500 per mortgage. So this is really, really concerning and not enough people are talking about that increase in risk systemically and the impacts of that. And so I want more people in the industry talking about those very real concerns with policies

changes that could be made.

Yeah, I feel like I've learned I've

Wow.

got lots of notes over here. Like that's, that was that was a little, little concerned there. You know, I think like, there's a, you know, I think a lot of folks are really thinking about affordability for the borrower right now. Right. That's a that's a big, big concern for everyone. And you know, I think to your point, lender choice is an exciting name. But there is like value to having like a single lingua franca.

I know. my good.

of credit risk, right, that you could talk to, hey, you could talk to your loan officer and they understand what a 680 versus a 720 is. And you know, the capital markets team and a lender understands that and then an investor understands that the agencies understand bringing in that extra choice, you know, while it could be helpful, I think it could also just obfuscate things like further for building off that point, like FICO has been to my point, like the link with Franca for credit for credit, like scoring.

But you know, the vanish score 4.0 has been approved by FHFA and the agencies for be used. You you mentioned the ingredients, but do you mind like going a little bit deeper on like the cooking methodology there? Are they are they baking it differently? Is it at different temperature? Or are they are they putting in the microwave and just putting it on five minutes? Like where? What's the difference there?

It's done!

Well, thanks for asking that question. And I can't, with all transparency, I can say that when you think about the recipe for scores, there are general kind of components that make up that recipe. And those components, when you look at them, they also look the same. But the mix of those components is where we see differences. So some of the things that are the components in the recipe would be like, how much new credit do you have?

much are you utilizing the credit that you've been granted? What is the length of history that you have associated with credit on your account? So these are things that make up both recipes, but what you'll see when you look at the way that these scores are built is that the percent that you apply relative to the importance of that in the recipe differs pretty greatly. And so that'll differ in your outcome. The other thing that people don't generally understand about credit scores is we look at credit risk as a maximum

So we can look at a probability of how much default we're going to have associated with the population related to what we believe the macro default will be. So like in the financial crisis, that macro level default greatly increased. But if you look at how the FICO score performed, we still perfectly rank order risk across the borrower population. It's just overall default rates significantly increased associated with decisions and risk

risk appetites that were operated, you know, perhaps less than ideally during that time. And so not perhaps, certainly less than ideally during that time. And so, but the rank ordering of risk associated with that and the probability from, you know, 850 being the lowest down to 300 being the highest remained right on even during the global financial crisis. And so we rank order that macro population along that range. And because our recipes

are different. The way that we sort borrowers into each individual element in that range and the type of borrowers because of those recipe differences will be different. And so when you combine two of them together you're not going to get a cake and you're not going to get a pudding.

Who knows what you're going to get, but you're definitely going to get an increase in defaults because they're just not the same. They have the same objective outcome, but the way that they measure it is different. And so it's not like a metric to the American system, right? It's not like I could say if I have a FICO score that's an 800 and I always subtract 20, I'm going to always get a competitive score. It doesn't work that way because there's not a single adjuster. And as macroeconomic risk change, the way they drift because of those

differences in the component of the recipes will also differ. And so these are significant things that people need to understand about how credit score and risk assessment works to really understand the risk that this could introduce into the system.

Is the way to think about it then like more of like a bell curve effectively then like in terms of like how like I was thinking about more linearly but I think it's more You know bell curve is the only other adjective I could think of but maybe it's more like scattershot or something like that But is that the way to think about it?

I mean, we definitely, there's

a higher probability and in general, you know, you double the probability of risk as you move up 20 points or you move down, you move down 20 points, not up 20 points associated with the FICO score. And so it definitely, it definitely rank wars that population, but you'll have a swap set of borrowers based on those recipe differences. So if you're only using a single score and each of the single scores, you could get to the same objective outcome if you were actually managing your risk to those levels of risk.

on each of those single scores, but when you combine the two of them together, you'll swap in and out certain borrowers and that's what pushes default up overall. And that's exactly what the Milliman analysis showed is that that would push different types of borrowers into the highest scores, which are the lowest risk scores, default. So at a macro level, you'll have an increased default risk. If you separate it and you only use one,

you can get to that single objective outcome, but there's no way to effectively do it across And that's, you know, that's just math. It's the way that it works.

Right.

Yeah,

it's always going to skew to the more advantageous side for the lender. And therefore you're going to kind of mix in the less credit worthy borrowers in a higher credit worthiness box. So you're going to get that sort of default risk. That's interesting.

Yeah.

Well, and the other

thing is there's no way to control it. know, there's questions about, could you always force that, you know, if you pull three, you can only present one. That's true. But, you know, one of the things I'm really proud that FICO is on the front end of doing over the last decade is making credit and credit scores visible to consumers. That has demystified credit to consumers. And that's been really important. I remember when I started working at FICO over 20 years ago, you

you know, you go to an auto lender and they would tell you what your credit score was and that's the only way you would know what your credit score was. That has significantly changed and that's good. Consumers should be educated about what their credit score is. They should understand how to improve it. They should understand what's impacting it. They need to know that because some of the things that are impacting it may be data errors that need to be corrected. These are things that have been really improvements in the industry as a whole and they've been good for consumers. But what that means is

Mm-hmm.

a consumer will know is my FICO score better? Is my Vantage score better? Is my XYZ score better? Or is my score at TransUnion better or at Experian or at Equifax related to my FICO score? They'll know this because the tools are available to them for free to see that. And there's no way to control that in an ecosystem as vast and large with as many players as the mortgage ecosystem has.

Good point. So I think, you know, generally speaking, I think everyone would agree that competition is good, but there's still, there's a ton of nuances to that and a ton to consider. Right. So we've talked about how there are, there's three different pricing bureaus, three different credit bureaus, right. And advantage score is actually owned by the three credit bureaus, I believe. While FICO, obviously, as you said, Farah and Isaac started the business. It's always run independently.

a big difference there structurally. Like how does that structural difference do you think impact transparency pricing competition ultimately for mortgage lenders? Does FICO have a view on that?

Yeah, I mean, you we certainly have a view on this, right? And what I would first say is.

FICO also believes in competition, right? We have competed for our business. We compete every day in every consumer lending market and we win, right? We still have over 90 % of all top lenders using the FICO score across all different types of lending decisions irrespective of if the GSEs or the FHFA are involved, right? So we compete every day and we win because we have the most predictive standardized score in the marketplace. And that's what we compete on.

believe

we should win on. there was an analysis through the credit scoring initiative of the FICO score and Tenti by far and above outperforms the competitive score in the marketplace. We are able to detect 18 % more defaults than the competitive score, will.

provide a better risk prediction from a lending perspective. so competition should be about in a lending space that has the unique dynamics of the conforming mortgage market, should be about managing stability and safeness associated with the mortgage ecosystem and picking the score that is the best risk prediction. We always have competed on that. We've always competed on building the best score and we've always been happy

to present our score against any other score because we know we'll win and we've always won. And that is competition and we believe in it and we do it every day outside of the mortgage market we win inside the mortgage market we win because we have the best score. What is not competition is having a score that is owned by the three credit repositories with a requirement to get a report, which is what is used to derive the scores from those three credit repositories.

and then scores and then being able to select a score from either score provider, either one who is also owned by the three credit repositories who have no incentive to compete because all three credit reports are required or a score that is provided and built by the only independent entity in this equation, which is FICO. The first,

Vantage score with the three credit repositories is vertical integration and it will lead to no competition in the mortgage and credit scoring in the mortgage credit scoring market. The second is an independent analytics provider with three credit repositories. It gets more complicated because for years those credit repositories were the only distributor of our independent score.

And so you may have heard of this little program we have called the Direct License Program where we're trying to shake up that paradigm and we're cutting out the three repositories in that Direct License Program model from being the distributor of our score. So last year,

If you wanted to get a FICO score through a TriMerge reseller, the TriMerge reseller had to go to the three major repositories, Equifax, TransUnion, and Experian to get their FICO price.

Now, those same tri-merge resellers through the direct license program have an option to buy that from us direct. And so that program is the repositories out as wholesalers of the FICO score and enable us to have an expanded distribution model to the mortgage really excited about the traction we have. have been multiple tri-merge resellers who've already

announced that they've signed up to be distributors for us. ⁓ Zactus and Ascend companies have all publicly announced that they're working through making scores available on our direct license program and have signed license agreements with us to do that. And there's many more behind the scenes that are working on integration with us as well. And so we're excited about the options that that will provide to the mortgage industry.

Yeah, I think kudos to y'all for that. Like, I think one of the things that's like one of the hidden weaknesses in the mortgage industry is just the amount of layers that are there, right? There's so Russian nesting dolls scattered throughout the mortgage industry. And even in our world, the more the capital markets world like the loans trade change hands so many times, and they get packaged into bonds and the bonds trade so many times and derivatives of the bonds change so many times. seems like there's a lot of overlap there.

You mentioned a couple of different variations of scores while we've been chatting, know, FICO Classic, FICO 10T, you know, I've also seen the news, the Ultra FICO score. I'd love to hear your view on like how those scores are different, when's the right time to use one versus the other. I think it just speaks to what you guys are doing from an innovation standpoint as well.

Yeah, that's great. Thanks. Thanks for asking that question, So FICO Classic is our score that today is required by the GSEs. And that's a score that was built approximately 25 years ago. And FICO 10T is our latest iteration of kind of what would be considered our standardized US credit risk model suite. And FICO 10T, the T stands for trended data. So one of the things you'll hear associated with kind of the credit scoring initiative and new modern credit scores being

as you'll hear well, we can use, you know.

Rental data is used and trended data is used and this type of data is FICO 10T uses rental data. It uses trended data. That's again what the T stands for. Trended data looks at things like consolidation of debt. So it gives you a different view of the borrows historic profile. So that's important and can prove risk prediction. Rental data 10T uses previous versions of the FICO score used it to rental data is not new. We've been using rental data and FICO scores for over a

Unfortunately, of the 80 million renters in the U.S., only slightly over 3 million actually have their data reported to the credit repositories. So it's not quite the silver bullet anyone wants it to be. I hope it gets there. It's why we started including rental data in our product over 10 years ago. But it certainly isn't the be all, end all solution. And there's a lot of work that needs to be done to get that.

Julie,

is that just because it's like mom and pop landlords that aren't reporting like that data to the repositories?

Right.

That is certainly part of the problem. I mean, we've seen an increase. When I first started having my team track this, it was in the 1.7 range. So now we're over 3 million. So we're making progress, but at 80 million, 3 million is still just barely scratching the surface. So that alone is not gonna be an answer for people who haven't been using kind of more historic types of credit, like credit cards or haven't gotten an auto loan or

F.

products. you know, rental data alone probably is not going to solve that problem for some time. So that's where things like our ultra FICO model really come into play. So ultra FICO is our version of using cashflow data to help make a credit risk assessment. FICO was actually a pioneer in this space too. I believe we had the first standardized cashflow model available in the marketplace with our first introduction of ultra FICO. have recently enhanced ultra FICO and we announced a partnership with Plaid.

They have over 12,000 financial institutions on their network. So we're going to use data that they're able to get from a cashflow perspective. And we're going to connect it with the repository data in our UltraFICO2 and UltraFICO3 suites. And the way that's different from other cashflow models that are out in the marketplace today is we use both sets of data. And when we build an UltraFICO model, you can have any sort of base FICO score from any of, from Equifax, Experian, or TransUnion.

And then we supplement that information with the cashflow data and they're scaled on the FICO score scale range. And so you don't have to actually throw out all the work you've done in your underwriting process to provide this additional incremental information associated with potential borrower. You can actually integrate this into the process that you already have, understanding the risk prediction and how that scales from a probability perspective. It'll really help people like thin file borrowers who haven't

have lot of access to credit.

And the other thing we're doing is we continue and we're always looking at whatever data may be available in the marketplace to help us expand access to credit. We recently announced that we also have put out models will look at BNPL data. So BNPL data also is not getting sick. There's also not as much furnishing to the credit But we have models that are available and we've done extensive study with the firm and others to

know that when lenders can start seeing BNPL data, they will have FICO scores that can consider that. And so that's another major innovation that we recently announced.

Yeah, the cash flow based approach is very interesting. I think it dovetails really nicely with just like what we've observed as like the rise of like non QM and some non traditional mortgages. Okay, maybe not traditional, but non agency, right. So, you know, for example, like, you know, we've seen, you DSCR

Right. ⁓

loans as a percent share rise over the last two or so years. You look at the economy, you think of the rise of gig working, you think of mom and pop landlords, Airbnb folks. It definitely seems like it's hitting at a time where you use that in partnership with some of these lenders who are focusing in non-QM. It could be really interesting for folks and help bring more credit and affordability to borrowers.

I couldn't agree with that more. think you can get sharper with your pencil when you look at additional data sources. And that's why we took the approach that we did with UltraFICO. I sit on the Structured Finance Association board. And we just recently at one of our ⁓ meetings had a whole presentation about what you just mentioned and talked through how we were seeing that shift. thing I would just say is from a non-QM perspective, we see people wanting to embrace additional data or modern things.

And so we've seen incredible 10T traction with a non QM space because it does use that trended data. does use that rental data. So irrespective of any timelines related the GSEs and the FHFA, we've seen incredible adoption of 10T. Right now we have over 350 billion in originations of lenders who are covered our 10T adoption program and $1.5 trillion

servicing volume, so we're really excited about that traction and we think that just shows the opportunity for things like UltraFICO. People are seeing benefits in these spaces of using new data, using our best and greatest and we look forward to serving them with UltraFICO too.

And that's a great segue into a question I've had for about the last 10 minutes that maybe it's an obvious one, right? You've got FICO Classic, tried and true. Models are built off of it for decades in terms of delinquency and performance on mortgage loans. But then we've got this seemingly exponential growth in different types of algorithms now. You've got the 10T, you Ultra FICO, you've got competitors out there now. Like how should we, if I'm a lender,

How should I think about making a decision on what algorithm or algorithms to use? It may depend on loan program like we just talked about and the flexibility, what are the main factors I should consider as a lender when I'm deciding which credit score mechanism I should be using?

Well, the first thing think is important is that the consumer understands what you're using to make a decision and you can explain it to them because obviously there's regulations that require that. it's really important that that's the first thing that anyone takes into account. I think the second thing then is good stewards in the mortgage industry. It's important that you try to use something that can get the best terms for your borrower, but at the best risk prediction so that you're not increasing risk into the ecosystem. Right. And, you know, certainly we have plenty of studies that say that's

that's

we look forward to more coming out to reconfirm what we've been saying for a long time. But I also think that as in all different types of lending,

There are scores that you use to be a language, like you said, a lingua franca, of this is what this is from a risk perspective, and I can share this with investors, and a rating agency can use this, and the insurer can understand what this is, and I can use this as an input to a decision that I'm making, but that doesn't preclude you from using other information from an underwriting perspective. And that's actually what we see, right? We see a lot of ⁓ lenders

that we work with across different types of consumer lending. They use the FICO score help them explain things to the consumers in terms of approval, pricing, and even credit rejections. They help use the score.

to help consumers understand what they need to do to improve their probability of being able to get lending products. then they also use other data to help them make underwriting decisions and to help them really sharpen the pencil. And so we think there's opportunity for all different types of data to help benefit the lending decision. But when it comes to making ecosystem risk visibility decisions, you can't have 25 different standards. It just doesn't work that way.

Good point. Well explained. I think I like how you pointed out at the very beginning, making sure that borrowers understand how they're being evaluated. And I think you're doing a great job here, honestly. We have folks that listen to this podcast, I hope, that are not lenders, that are consumers. And I think just this has been educational for me and Mike, so I'm sure it is for them as well. So hopefully everybody's been taking notes. So thank you for walking through that.

Yeah, yeah, I got a big list of notes over here. But Julia, to wrap us up here, know, one of the things I think about in the strategy role is like the three to five year future for Optimal Blue, like what we're trying to work on your seat today. Like what can you give us any tips or hints on like what you guys are thinking about for the future? Like what, you know, you guys have been releasing a lot of these different algorithms and

you know, trying to advance the ball here, but like let's pretend we wake up in three to five years. Like what do you think like the future kind of looks like?

Yeah, I would like to continue to drive consumer access to scores so that there's more visibility to that to all types of scores. So really expand our programs to include things like Ultra FICO from a consumer perspective. We'd like to continue to advance that, right? We already do things like have programs available on my FICO.com where you can get your FICO score for free. I encourage anyone to go out there and do that if you haven't already done it. So I want us to be continuing to do that, to be continuing to be good

stewards of increasing financial inclusion, know, by educating consumers on the credit ecosystem. So I hope we'll have continued to make significant strides in that, meaning that more people will understand what their FICO score is and will have made that even increasingly more accessible. I hope and fully expect across all of the different types of product will be using FICO 10T as a standard by then, because it takes about five to seven years for

new score to hit over 50 % saturation. So I fully expect in your five year timeline, we'll be at that. I hope by that time, more people are looking at cashflow data with our Ultra FICO product. And I have about six or seven other products of ways to look at risk from a scoring perspective, which are in the hopper, but I can't tell you yet because I can't be scooped on those things. But we've got a whole bunch of developments that we've been working on.

I think we talked with you about one of them last year at a conference, but don't, you know, don't, don't, don't leak that please, Mike. But yeah, we have a whole bunch of things in the, the hopper in terms of using algorithms to help people make better decisions credit risk and other things as well.

Secret save.

That's fantastic. I think that's a wonderful forward looking way to end the interview. Thank you so much, Julie. This has been, again, super informative for me and Mike, and I'm sure it will be for our listeners. We'd love to have you again on the podcast soon. And yeah, it's been an honor and a pleasure. Thank you very much, Julie.

Thank you so much for having me. It's been a great time.

Okay, let's wrap this thing up. Big thanks to Alex, James, Mike, and a big Optimal Blue thank you to Julie May for joining us today. Such a great conversation and wisdom for us to take back to our teams and share. So that's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.