In the late 1990’s in Detroit, there were a couple, relatively attractive, female mortgage brokers with a banner in front of their main street office that read: “We Go Low!”
I have always thought that summed up the mortgage brokerage business in the early Roaring 2000’s. Low rates, low fees, low credit scores, low underwriting standards, low degree of common sense, low intellect, low level of professionalism, low down payments, low foresight for risk… LOW.
The only thing that wasn’t low, were these ladies’ income. They made a killing I’m told. Some how I missed a lot of the gravy train in the mortgage business, as I avoided sub-prime lending: high rates = big paychecks. These borrowers had sub-standard credit histories, measured by a FICO or Fair & Issac Company credit score. A score below 620 has traditionally been considered sub prime.
You could historically look at a credit report and see why a score would be low, a pattern of missed payments, defaulted debt, foreclosures, repossessions, tax liens, judgements - all pointed logically to a lending decision which should only be made with great caution.
But as credit markets have tightened, FICO has changed its core calculations - making basically good credit look even worse. The line between a true credit criminal and a 1×30 day late borrower has blurred at the score. Recently, I saw a borrower’s credit that had just one late mortgage payment in 10 years of absolutely perfect history - the score was 569. A score of 569 used to mean a deadbeat, not someone who missed the mailman.
It’s been estimated that by this time next fall, over 40% of Americans will have a sub-600 or sub-prime FICO score under the present method of measurement. What does this really mean?
Since FICO is now used to adjust your auto insurance premiums, profile candidates for jobs, offer credit in all forms - it simply means the division between the “haves and have nots” will become more vast without a re-thinking of FICO requirements.
Maybe its time to abandon FICO scores in favor of commonsense?
FICO was meant to determine risk, and rightfully, we are all much more at risk today of default, bankruptcy and financial as well as social ruin. “Oh how the mighty have fallen in the last year…” It’s hard for me to argue that FICO shouldn’t start painting the good as the bad, but the results will not gain the social result of recovery that we all must wish and work toward.
As your credit options, and employment options disappear - your ability to climb out of a hole is that much harder. Your cost of living will rise without a prime FICO score. Consumers will cut back on purchases, homes will not be purchased, cars will not be sold, Holiday gifts will stay on store shelves.
The credit industry will need to rely less on FICO and other credit scores, and actually go back to making common sense decisions about people’s ability and intention to pay debts. Without this, we are all doomed to further and further down cycles…
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