FICO dropped \~26% today after one of the biggest threats to its moat became very real.

For decades, FICO was basically the toll booth of mortgage lending. If you wanted to sell a mortgage to Fannie or Freddie, you needed a FICO score.

That is changing.

Lenders can now use VantageScore 4.0 for eligible loans, Rocket Mortgage is making it its preferred score, and VantageScore is being offered for as little as $0.99.

So why wouldn’t everyone switch?

I think this is where FICO’s REAL moat gets tested.

It’s not the algorithm.

It’s trust.

Lenders have decades of FICO data. Their underwriting, risk models and historical loan performance are all built around it.

AI will make it much easier to integrate VantageScore, compare models and change underwriting systems.

But AI can’t magically create 30 years of real world mortgage performance.

If VantageScore proves over time that it’s just as reliable, I think it takes meaningful market share and FICO loses a lot of its pricing power.

If lenders decide decades of FICO data and familiarity are worth paying for, FICO’s moat may be stronger than people think.

One other thing bothers me about this whole situation:

The cost of a credit score is TINY compared with the cost of buying a house.

If regulators really want to make housing transactions cheaper, I’d much rather see continued pressure on real estate broker and agent fees.

Paying a percentage of the value of a $500k, $750k or $1M asset simply because that’s historically how the industry worked has always seemed ridiculous to me.

Competition for FICO is good.

But there are much bigger costs in a real estate transaction worth attacking.

Is FICO Cooked?