The company’s business did not suddenly fail. What happened was that Wall Street lost its confidence in FICO’s ability to continue holding its position as the leading provider of mortgage credit scoring with only limited competition.
On September 29, Fair Isaac Corporation suffered a loss of more than a quarter of its market value when investors were obliged to reevaluate what had almost been regarded as a permanent aspect of American finance: the preeminence of the FICO score in mortgage lending.
On Tuesday FICO’s shares dropped by 26.5 per cent, reaching $617.87 and thus performed very poorly compared to a stock market which was generally quiet. The S&P 500 declined by only 0.17 per cent on that day, as noted in Reuters market coverage. The extent of this difference is significant. It was not the result of a general panic that caused FICO’s shares to fall. Rather, investors had specifically revised their assessment of the company’s economic outlook following the decision by the Federal Housing Finance Agency to increase competition in the mortgage credit-scoring market and after Rocket Mortgage announced that it would use VantageScore 4.0 as its preferred scoring model for eligible loans.
The real issue therefore isn’t whether Americans will suddenly cease to have FICO scores since they won’t. The more significant question is whether lenders will keep paying FICO the same rate as they did when there were fewer practical alternatives. It is this difference which shows that a single regulatory and competitive change could cause the value of the stock to drop by 26.5% in one session.
Accenture Beat Earnings. So Why Did Wall Street Dump the Stock? →
The plunge in FICO’s share price is a perfect illustration of the way the stock market takes into account the future rather than just rewarding a company for its earnings from the previous quarter.
The financial results that FICO has already produced are very strong. As shown in its most recent quarterly submission to the Securities and Exchange Commission, total revenue for the quarter ending June 30 amounted to $674.2 million, a year-on-year increase of 26%. Revenue from the Scores division was $458.9 million, or about 68% of the company’s total revenue, and this figure also rose by 41% compared to the previous year. Operating income increased by 38% to $362.6 million.
Above all, FICO informed investors that the rise in revenue from business-to-business mortgage-origination scores was mainly due to an increase in the unit price. It is this figure that makes Tuesday’s market reaction easier to understand. FICO has not just gained because Americans need credit scores; it has also gained as a result of having pricing power within a system in which its scoring products have always held an unusually important position.
The Federal Housing Finance Agency’s current credit-score policy now allows lenders who are selling eligible loans to Fannie Mae and Freddie Mac to select between Classic FICO and VantageScore 4.0. On September 9, the FHFA extended the availability of VantageScore to all approved lenders and cancelled the previous requirement for prior written approval. The agency points out that for many decades mortgages sent to Fannie Mae and Freddie Mac had to be based on a score from a single model, Classic FICO. Which is the reason why the stock market reacted so violently; it is possible for a company to keep on making excellent profits even though investors at the same time decide that these profits will be more difficult to defend in the future.
Gen Z Cost of Living Becomes Economic Warning Sign →
What interests consumers most about this story is that the competition among credit-scoring models can have effects beyond Wall Street.
On September 28, Rocket Mortgage announced that it intends to make VantageScore 4.0 its preferred scoring model in the fourth quarter for mortgages that are delivered to Fannie Mae and Freddie Mac, for VA loans and for other qualifying products. The company stated that it had tested the two scoring systems for about four months and collected 1.4 million credit reports using both VantageScore and FICO in 2026. The company added that borrowers who saved money using VantageScore saved an average of $1,600 at closing.
Jay Bray, CEO of Rocket Mortgage, stated the competitive point clearly by saying, “Competition is healthy, especially when it can lower costs and expand responsible access to homeownership.” The company also claims that VantageScore may take into account information such as rental and utility payment history when such information is included in a consumer’s credit file, which could allow some people with limited conventional credit histories to obtain scores.
The claims merit attention since the scoring system comes early in the mortgage process; a different score might influence whether a borrower is approved, what risk category the borrower is placed in and therefore the terms that are provided. This could be especially significant for younger buyers who pay their rent reliably but have shorter credit histories than older borrowers. It would be a mistake, on the other hand, to regard the change as implying that all borrowers will suddenly get cheaper mortgages. Credit scoring is only one element of the underwriting process. Rocket itself points out that income, debt, assets, the characteristics of the property and all the other requirements still count. Also, mortgage rates still make up a much greater portion of the monthly payment than the cost of obtaining a credit score.
America’s $2 Trillion Borrowing Habit Is Reshaping the Treasury Market →
There is also a powerful opposing argument to the view that FICO’s business model has suddenly been broken.
FICO will not be taken out of the American lending industry. Classic FICO will continue to be accepted for Fannie Mae and Freddie Mac loans, and the more recent FICO Score 10T is also advancing within the mortgage sector. This month, FICO announced that lenders approved by the FHA will be allowed to use FICO Score 10T starting January 1, 2027. The company states that this new model makes use of trended credit and rental-payment data and is especially effective when assessing first-time homebuyers. However, these performance assertions come from FICO itself and must therefore be seen as the company’s argument in favour of its own product rather than as independent evidence that competitors cannot capture market share.
There is also a limitation regarding the benefits to consumers. At present, the main difficulty encountered by many homebuyers is the cost of money. According to a report by Reuters on September 29, the 10-year Treasury yield had reached 5.293%, its highest level since 2007, and the 30-year Treasury yield had reached its highest level since 2002. The higher levels of long-term Treasury yields lead to increased borrowing costs across the economy and have therefore added to the renewed pressure on mortgage rates.
That is to say, while it is important to save hundreds or even thousands of dollars by using a more competitive scoring method, such savings do not cancel out the financial impact of financing a home at a much higher interest rate. The same reasoning holds true for FICO investors. VantageScore doesn’t have to destroy FICO in order to undermine the investment case; if competition leads lenders to negotiate more vigorously, to select the competing score more often, or to refuse future price rises, the value of FICO’s mortgage business can still decline even though that business continues to be profitable. That is the price that Wall Street seems to be assigning.
When FICO entered the situation it was in a strong position since its Scores business is growing quickly, its total revenue is increasing, and its products are still widely used throughout the financial system. The reason for the optimistic view is that banks and mortgage lenders place a high value on familiarity, historical data, well-established underwriting procedures, and the FICO brand, which is why the switch to alternative systems happens slowly. The bearish scenario is simpler since, for many years, lenders had few options; nowadays they have more.
The next significant figures won’t be Tuesday’s stock price or even FICO’s next earnings-per-share figure; instead, investors should pay attention to how many of the major lenders follow Rocket Mortgage, to whether VantageScore starts to take on measurable mortgage volume, to whether FICO is able to keep its current pricing per mortgage score, and to whether Scores revenue continues to grow at its recent rate.
A drop in the stock price of 26.5 per cent may appear to be irrational when the company in question is still making a high profit. That is exactly the situation with FICO. Rather than being a response to the company’s earnings from yesterday, Wall Street was attempting to assess the value of FICO’s position tomorrow.