Fair Isaac Stock Plunges 16% Amid Fannie Mae and Freddie Mac's Decision to Allow Alternative Credit Scoring

Fair Isaac stock has crashed 16% after the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac will allow lenders to use Vantage scores instead of FICO scores for homebuyer creditworthiness. Although the new rule is optional, not mandatory, investors are panicking over the loss of the company's monopoly on FICO scores. The high price of Fair Isaac stock at over 80 times earnings is a better reason to sell than the government's new rule.

Fair Isaac (NYSE:FICO) stock experienced a significant drop of 16% following the Federal Housing Finance Agency (FHFA) announcement that Fannie Mae and Freddie Mac will allow lenders to use VantageScore 4.0 instead of FICO scores for homebuyer creditworthiness. This decision, while optional, has sparked concerns among investors over the potential loss of FICO's monopoly on mortgage credit scoring.

The new rule, which takes effect immediately, allows lenders to use VantageScore 4.0, a credit score developed by a joint venture of Equifax (NYSE:EFX), TransUnion (NYSE:TRU), and Experian (OTCQX:EXPGF). VantageScore incorporates alternative data such as rent, utility, and telecom payments, which can benefit consumers who may not have a robust credit history. The move is seen as expanding access to millions of Americans, particularly those living in rural areas or who pay rent on time (Seeking Alpha, July 02, 2025 [2]).

Despite the optional nature of the new rule, investors are concerned about the potential erosion of FICO's market share. Wells Fargo, for instance, has lowered its price target on FICO to $2,300 from $2,600, citing concerns about potential regulatory changes in mortgage credit scoring (Investing.com, July 02, 2025 [1]). The firm also noted that even with the optionality between scoring models, FICO remains deeply embedded in existing lending systems, making immediate shifts costly and time-consuming.

The high price-to-earnings (P/E) ratio of FICO's stock, currently over 80 times earnings, has also raised eyebrows among investors. This valuation suggests that investors are pricing in significant risks, such as regulatory backlash and increased competition from agile competitors like VantageScore and Upstart. The latter uses AI to analyze 3,000+ data points, reducing APRs for underbanked borrowers by 12% (AInvest, July 02, 2025 [3]).

Investors are advised to monitor the regulatory landscape closely, especially considering the implications of the proposed OBBB Act, which could freeze state-level reforms. This act, if passed, could provide temporary respite for FICO but would not address the long-term trend of increasing transparency and bias mitigation in credit scoring models.

In conclusion, while the immediate impact of the new rule is uncertain, the broader trend towards regulatory pressure, increased competition, and the AI revolution favors agile, transparent alternatives. For investors, this is less a "buy the dip" scenario and more a call to reallocate capital towards companies that can thrive in a post-FICO world.

References:
[1] https://za.investing.com/news/analyst-ratings/wells-fargo-lowers-fair-isaac-price-target-to-2300-on-mortgage-score-concerns-93CH-3783196
[2] https://seekingalpha.com/news/4465971-fair-isaac-stock-tanks-after-fhfa-allows-fannie-freddie-to-use-vantagescore
[3] https://www.ainvest.com/news/credit-scoring-regulatory-crossroads-fico-decline-buying-opportunity-structural-shift-2507/