Is the Fico Score to Blame for the Mortgage Mess?

After the previous housing bust in the early 1990s, the mortgage industry needed to revamp and reassess their lending practices to ensure they made a strong recovery.

One new initiative was relying heavily on the credit score of a potential loan applicant, using Fair Isaac’s Fico Score as a means to weigh a potential borrower’s trustworthiness.

The system was rather extensive, with most loans broken down into groupings based upon credit score, such as A-Paper, Alt-A, and sub-prime. There are more divisions, such as B and C paper, but you get my point.

Banks and mortgage lenders also created niches based primarily on certain credit scores, with larger banks focusing primarily on fico scores of 620 or greater, while smaller subprime lenders such as New Century went after credit scores below 620.

But did the confidence in a three-digit number lead to the demise of the mortgage industry yet again?

In the past five to 10 years, banks and lenders paid a lot of attention to credit scores above all else, often overlooking the income and assets of homeowners looking to refinance their mortgage and prospective homeowners looking to purchase a piece of property.

Unfortunately, the credit score became the easy out, and subsequently, the easy-in for homeowners, allowing many unqualified borrowers to get their hands on properties they simply couldn’t afford.

All because of a three-digit number.

And what about borrowers with low Fico scores who had plenty of assets and an extensive employment history?

Many of those borrowers had to settle for sub-prime mortgage rates or were simply out of luck, all the while borrowers with a lowly two year job history, $10,000 in assets, and no history of supporting a mortgage were being handed out home loans left and right.

And guess what? All those borrowers with 720 fico scores who were seemingly responsible applicants couldn’t pay thousands of dollars a month in mortgage payments despite their stellar credit score because of the massive payment shock many experienced.

Enter mortgage crisis.

Leave A Response