Mar. 21: A dive into the UWM/TWO deal issues; credit trend papers to check out; you can't ignore fuel costs; a nod to Chuck Norris

Here we are, heading into the spring planting season, and U.S. fertilizer prices have doubled. In fact, with the Iranian War, the price of oil has moved higher, and while President Trump has said that it is a price worth paying, we are reminded that anything transported has become more expensive with the price of oil, adding to inflation and impacting the price of fixed-income securities and therefore interest rates. (Having your home or office flooded is also expensive, and thousands are being evacuated as all the islands in Hawai’i are under a flood watch. This has been reported by CBS News Radio, but not for long: CBS News announced that CBS News Radio will be shutting down this spring after nearly 100 years of broadcasting due to "challenging economic realities" and a shift in radio programming strategies as reasons behind the decision. About 700 affiliated stations nationwide carry CBS News Radio programming, which will end on May 22. All jobs on the radio team will be eliminated.) For you smokers, you’re lucky that you don’t live in Australia which has the most expensive cigarettes in the world at over $1.00 per cigarette. So, smokers are turning to the black market for their tobacco, which benefits organized crime. And so it goes.

The cost of credit: lots goin’ on

_________________________________________________

I moderated a panel at the L1 Summit recently that included the MBA and CHLA. One topic that came up, as you’d expect, was credit costs, process, and policy. At some point FHFA Director Bill Pulte will make decisions on credit scoring that will have a wide impact. While he ruminates, and while testing on real data takes place, if it takes place at all given privacy restrictions, it is good for the industry to know what is going on out there. Credit resellers appear ready to offer FICO direct when they are able to, based upon agreements and GSE approvals but the scores may vary some based upon where they come from: FICO direct or the bureaus.

Lenders should realize that Freddie and Fannie have not approved receiving scores that were derived from the FICO direct program, nor approved the delivery method as CRAs cannot deliver the FICO direct score in the same manner as the score provided by the bureaus… something about not being able to add a score to a raw data file. In addition, the credit reporting agencies are weighing the cost structure of various options to see what makes sense. For more details, LOs or lenders should speak to their credit partners.

There are salvos of information. “Where Things Stand for FICO® Score 10T in the Conforming Mortgage Market… FICO® Score 10T historical data to be released in advance of implementation by the GSEs.” There’s the “Top 10 Reasons to Migrate to FICO® Score 10T.” And let’s not forget, “FICO’s Adoption and Pricing in the Mortgage Origination Market… At $3.50 per score, FICO royalties constitute only 15 percent of the cost of a $70 tri-merge credit report and 2/10ths of one percent of mortgage closing costs

As the Federal Housing Finance Agency implements its “lender choice” policy allowing mortgage lenders to select between approved credit scoring models when submitting loans to the GSEs, a new paper from Dr. Cliff Rossi examines the potential risks lender choice poses for housing affordability and the safety and soundness of the mortgage market. Dr. Rossi presents empirical evidence showing that without new screening controls in the GSEs’ underwriting system, lender choice is highly likely to increase the chances of adverse selection and thus impose higher credit losses on the GSEs. While the intended objective of the policy is to lower borrowing costs through increased competition, Dr. Rossi finds that it could do just the opposite, enabling “gaming” of the system by selecting whichever score minimizes apparent risk while potentially masking true credit risk, ultimately adding uncertainty and costs throughout the system.

“This risk is compounded by Fannie Mae’s recent elimination of minimum credit score requirements, removing a longstanding safety control at precisely the moment new opportunities for gaming are introduced.

“Here are three key takeaways from the paper:

Lender choice enables strategic gaming that increases credit risk: Dr. Rossi finds that sophisticated lenders can build models to compare expected default rates (EDR) using both Classic FICO and VantageScore 4.0, then strategically submit whichever score produces the lowest EDR for each borrower. Dr. Rossi concludes that the strategy would lead to “higher actual default rates compared to a strategy where the lender randomly selects between the two model EDRs." Recent research from Milliman confirms that selecting the highest score between models results in significantly higher default rates than using either score consistently.

“Lender choice could increase costs for mortgage borrowers: By exacerbating adverse selection risk, Dr. Rossi finds that lender choice could ultimately increase credit losses for the GSEs, mortgage insurers, and credit risk investors. He notes that these higher losses would be reflected in higher mortgage rates for borrowers through increased guaranteed fees and mortgage insurance premiums, worsening the housing affordability crisis at precisely the wrong time.

“Eliminating minimum credit scores compounds the risks of lender choice: Dr. Rossi notes that Fannie Mae recently eliminated minimum credit score requirements that acted as “overrides” to the automated underwriting systems (AUS) scorecard and provided an additional safety mechanism on an area where the underwriting scorecards might be inherently weaker due to limited historical data. Combined with lender choice, this creates a particularly dangerous environment in which protections against systemic risk are being removed just as new gaming opportunities are introduced.

“In order to protect the safety and soundness of the mortgage market and promote housing affordability for borrowers, Dr. Rossi recommends FHFA suspend its “lender choice” policy until further analysis is conducted and appropriate risk mitigation controls are identified.”

Over the past month, the AEI Housing Center has published a series of pieces warning against the dangers of implementing a premature two-score system. “Our research shows that VantageScore’s claimed predictive superiority over Classic FICO relies on flawed methodologies, and that in practice the two models perform similarly. More concerning, introducing a dual-score regime invites ‘score shopping,’ distorts loan-level price adjustments, and could reduce GSE revenues by billions annually, undermining the GSEs’ ability to retain capital, manage risk, and operate independently. Policymakers should proceed cautiously, ensuring changes serve borrowers, lenders, investors, and taxpayers – not just a score provider.

Sissi Li, Tobias Peter, and Edward J. Pinto presented a paper titled, “ How Predictive is VantageScore 4.0 Compared to Classic FICO?”

“In a recent white paper, VantageScore claimed that its 4.0 model significantly outperforms Classic FICO in predicting mortgage defaults. We re-examine the key findings using publicly available data and find that much of the reported advantage comes from methodological inconsistencies and selection bias. Once these issues are corrected, the purported performance advantage of VantageScore 4.0 largely disappears. Read the full report here or click here.”

There’s more! Tobias Peter and Sissi Li wrote, “ FICO Isn't the Problem. A Premature Two-Score System Is.” “In July 2025, the Federal Housing Finance Agency officially approved the use of VantageScore 4.0 as an alternative to Classic FICO for mortgages purchased by Fannie Mae and Freddie Mac. VantageScore claims it will reduce costs for consumers, but the numbers tell a different story: in the context of thousands of dollars in closing costs, FICO’s share is marginal at best. And a two-score system that allows ‘score shopping’ could lead to more approvals, looser credit, and greater default risk, leaving borrowers with unsustainable debt. Thus, the real risk for the housing finance system isn’t Classic FICO. It’s the premature and fraught adoption of a two-score system.” Read the full report here or visit here.

Sissi Li, Tobias Peter, and Edward J. Pinto wrote, “VantageScore's Rebuttal Misses the Mark in Its Critique of the AEI Housing Center.” In response to our research paper that concluded VantageScore 4.0 overstated its performance claims, VantageScore released a rebuttal accusing us of "misunderstandings, outdated assumptions, selective omissions, and a general refusal to acknowledge what is coming next for mortgage finance" while reasserting its claims of superiority without addressing the analytical flaws that underpin them. In this report, we defend our original findings and respond to VantageScore's rebuttal point by point, demonstrating once again that while the performance of Classic FICO and VantageScore 4.0 is near-identical and emphasizing that the costs of rushing toward a two-score system risks doing significant harm.” Read the full report here or click here.

Lastly, the same three wrote, “ Estimating the Effect of a Two-Score System on Loan-Level Price Adjustments (LLPAs). “In July 2025, the Federal Housing Finance Agency (FHFA) adopted the use of VantageScore 4.0 in addition to Classic FICO. This study analyzes the impact of introducing a dual credit score system, where lenders may choose between either credit score, on Loan-Level Price Adjustment (LLPA) revenues collected by Fannie Mae and Freddie Mac (the GSEs).  We estimate that score shopping under a two-score system would reduce LLPA revenues by about 10-13 percent relative to baseline, or roughly $1.3 to 1.7 billion per year. This would be a step backwards since LLPAs were instituted in 2008 to compensate the GSEs for borrower differences in credit risk.” Read the full report here or visit here.

A dive into UWM/Two Harbors deal: 1+1 <2?

_________________________________________________

Chris Whalen had a very objective and insightful note, sent before the recent news of the new bidder. “Under scrutiny is United Wholesale Mortgage Corp (UWMC), which announced the acquisition of Two Harbors (TWO) in December and has since seen its stock sink to a five-year low. UWMC released OK earnings for Q4 but then spooked investors by not taking any questions from Street analysts.

“CEO Mat Ishbia touted UWM’s Q4 2025 results as a dominant finish to an ‘amazing year,’ highlighting a $164.5 million net income and $49.6 billion in originations. He emphasized that 2025 solidified UWM as the top overall and wholesale lender for the fourth consecutive year, with strong momentum for 2026 driven by in-house servicing, the Bilt partnership, and the Two Harbors acquisition.

“UWMC has since revised earnings guidance for Q1, and done a live call with investors sponsored by their loyal investment bankers, but the highly leveraged mortgage lender is struggling to gain shareholder approval for the TWO acquisition in a vote scheduled for this Monday March 16th. Will an upward revision in Q1 earnings guidance be sufficient?”

“’What might be driving this announcement is how UWM's stock price has declined since the deal was announced on Dec. 17,’ writes Brad Finklestein. ‘The previous day, UWM closed at $5.12 per share. After the deal was publicized, UWM fell to $4.81. Its consideration is a fixed exchange ratio of 2.33 times Two Harbors shares for each share of UWM.’

“The fixed exchange ratio offered by UWMC implies a significant discount to the book value of TWO. Since peaking at $13.66 in mid-January, the valuation of TWO has collapsed along with the share price of UWMC, closing yesterday below $10 per share or a market cap of about $1 billion.

“Once again, the management of TWO seems to have managed to destroy shareholder value in great bloody chunks. Given that the mortgage servicing rights of TWO had a book value of $2.4 billion at the end of Q4, it seems fair to ask whether the best trade for TWO shareholders is to vote against the merger with UWMC and simply sell the MSR.

“If this wretched transaction goes ahead, we suspect that the management of TWO may face some new litigation from aggrieved shareholders. Sell the MSR and keep the REIT, right? What are we missing? Try as we may, it is difficult to understand the motivation of TWO to proceed with a transaction that seems to badly prejudice its long-suffering shareholders, again. You can bet that the trial lawyers are cheering! We do not have a position in UWMC or TWO.

“In terms of the business model and risk profile, we like to think of UWMC as the spiritual heir to Countrywide Financial. The big issue with the all-stock offer from UWMC is that the acquisition currency has not been performing very well over the past year and more. The aggressive business model pursued by UWMC enables them to claim mortgage market leadership in terms of loan purchase volumes, but with very aggressive pricing on its loans and MSRs, and continued consumption of operating cash (See Page 70 of the 2025 10-K).

“UWMC has also seen loans available for repurchase double in the past year, a troubling sign of poor asset quality. Moreover, the Detroit-based company has considerably more non-funding debt liabilities than MSR. Why is the balance between MSR and non-funding debt most used to finance new loan production important? Because the MSR represents an intangible representation of the net present value of future cash receipts.

“In a classical analysis used by bank, mortgage, and insurance regulators, you exclude all intangible assets and subtract them against capital. What's left is the real business. This is why both Basel III and the Ginnie Mae risk-based capital rules require lenders to subtract the MSR from capital. When Fed Vice Chairman Michelle Bowman proposed to allow banks to stop subtracting excess MSRs from capital, that is a big deal.

“Insurance regulators (and countries other than the US using IFRS) don't recognize intangibles at all, but this does not prevent US insurers from lending against MSRs on a secured basis. The current style of the rating agencies, of note, is to give one or more notches of credit uplift for ‘secured’ MSR financings that are placed at the very top of the credit waterfall.

“In 2025, as in the previous year, UWMC sold $2.4 billion in MSRs for cash to offset operating losses. The high prices paid for loans in the broker channel flows into equally high valuations for UWMC’s MSRs. Looking at the 10-K for 2025, the reported capitalization of the UWMC MSRs appears to be north of 7x annual servicing income. Selling these valuable intangible assets at a lower price than cost to raise cash strikes us as a losing trade long-term.

“More, UWMC appears to be upside down on its debt, with the fair value of $4.1 billion of MSRs significantly below the total $2.5 million in combined MSR credit lines from Citigroup (C) and Goldman Sachs (GS), and the $2.9 billion in senior notes. UWMC cannot really accumulate servicing because of the need to sell assets to offset cash operating losses.

“UWMC says that the combination with TWO “has the’ potential to unlock substantial value, a stronger balance sheet, and streamlined operations,’ but we think this deal could be a case where 1 + 1 = < 2.”

Mr. Whalen finished up with, “Both TWO and UWMC have lost significant amounts of value over the past five years, with UWMC down more than 50 percent and TWO down almost 70 percent. Are the largely retail, income-oriented shareholders of the TWO REIT going to be long-term holders of UWMC, a stock with no significant dividend? Probably not.” Thank you to Chris and The Institutional Risk Analyst.

(Actor Chuck Norris, well-known movie martial arts, criminal-fighting tough guy, died on the Hawaiian Island of Kau’i this week. He had a reputation for being, well, tough.)

Chuck Norris can set ants on fire with a magnifying glass. At night.

Chuck Norris does not wear a condom. Because there is no such thing as protection from Chuck Norris.

Some people wear Superman pajamas. Superman wears Chuck Norris pajamas.

Chuck Norris is the reason why Waldo is hiding.

Chuck Norris will never have a heart attack. His heart isn't nearly foolish enough to attack him.

They once made a Chuck Norris toilet paper, but it wouldn't take s--- from anybody.

Chuck Norris has counted to infinity. Twice.

When the boogeyman goes to sleep, he checks his closet for Chuck Norris.

Chuck Norris ordered a Big Mac at Burger King, and got one.

When Chuck Norris does a pushup, he isn't lifting himself up, he's pushing the Earth down.

Visit www.ChrismanCommentary.com for more information on our industry partners, access archived commentaries, or subscribe to the Daily Mortgage News and Commentary. You can also explore the Chrisman Marketplace, a centralized hub connecting mortgage professionals with trusted vendors and solutions. If you’re interested, check out my periodic blog on the STRATMOR Group website. This month’s piece is titled, “Helping Borrowers in a Market Defined by Complexity and Change.” The Commentary’s podcast is available on all major platforms, including Apple and Spotify.

qoɹ

(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes, visit the Chrisman Job Board. This newsletter is intended for sophisticated mortgage professionals only. There are no paid endorsements by me. For the latest mortgage news, visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.ChrismanCommentary.com. Copyright 2026 Chrisman LLC. All rights reserved. Paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Rob Chrisman. The views and opinions in this newsletter are mine alone unless otherwise specifically stated herein.)