[privacy] How credit scores help feed the real estate bubble

["Richard M. Smith" <rms () computerbytesman com>]

Credit Scores: Not-So-Magic Numbers
http://www.businessweek.com/print/magazine/content/08_07/b4071038384407.htm

Yet as FICO was becoming less effective, lenders were relying on it more and
more. In earlier times, banks would go to great lengths to vet potential
borrowers, checking pay stubs and tax returns, calling employers, poring
over investment account statements, and on and on, a process called
underwriting. The mortgage boom changed all that: Wall Street investment
banks were buying up every loan in sight, and lenders had to race to keep
pace with the surging demand. The FICO score became as important as a
pitcher's earned run average: It was a single, universal statistic that, in
theory, could communicate a loan's quality to lenders, investment banks, and
investors. Emboldened by its success, Minneapolis- based Fair Isaac marketed
the score for other purposes and began offering new products for different
industries.
 
Now the credit markets are in disarray, and big mortgage players like HSBC
(HBC
<http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?sym
bol=HBC> ), JPMorgan Chase (JPM
<http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?sym
bol=JPM> ), and Washington Mutual (WM
<http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?sym
bol=WM> ) -perhaps opportunistically-are laying much of the blame at Fair
Isaac's feet, arguing that its score didn't predict delinquencies as
expected. (Meredith Whitney, an analyst at CIBC World Markets, called FICO
scores "virtually meaningless" in a December note to clients.) Consumer
advocates and state regulators are clamoring for Fair Isaac to disclose its
formula. And credit-card providers are beginning to question the score, too.
"So many people, I think incorrectly, looked at FICO as being the' measure
of risk," Discover Financial Services (DFS
<http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?sym
bol=DFS> ) Chief Executive David W. Nelms told analysts in December. 

 
 

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