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Valued Contributor
Boswd
Posts: 1,065
Registered: ‎04-26-2007
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Re: Opinions differ on effectiveness of FICO score

There has been alot of finger pointing going during this sub-prime mortgage downturn/foreclosures.  consumer advocacy groups blaming the lenders.   The lenders blaming the scoring system so for and so forth.
 
Overall the bottom line of who to blame is the people who signed on the dotted line.   Yes alot of these Sub-Prime lenders share some of the blame for their marketing and advertising but the bottom line people were just too anxious to get themselves into a home before they were ready.   Though the lenders should have been a little more stingy in the amount they approved based on someone's income and credit history, the person accepting the mortgage should have been more fiscally responsible of what to do with what was approved.   If I go to my bank for a car loan and they approve me for a $100,000 that doesn't mean I go out and buy the new Lexus or Mercedes.     You buy what you can afford.   People weren't getting themselves educated on the home buying market.     If you go to your own bank to try to get a loan and are turned down, but were approved by a mortgage broker from the internet, right then and there shoud have been a red flag to the buyer that this is not going to be a great deal. 
Buying a house for the most part is going to be the largest purchase you are going to make in your life and you have to be ready and you have to understand what you are signing.   If you already budgeted away x amount of dollars for the down payment, you should also budget in a few more hundred dollars to have a real estate attorney explain to you the terms you are about to sign.  and understand that once you get the mortgage, that taking out home equity loans are not a free ride to get some extra cash to pay off old debts and what exactly ARM are and PIM's and every other confusing abbrev. involved in home buying.
Though I know this doesn't apply to everyone in foreclosure, circumstances beyond their control could have accounted for some of their financial hardship such as an unexpected medical expenses etc.  But the bottom line people weren't understanding what they were signing.  Just because and interest only for the first five years on your mortgage looks great on paper, you have to realize that once the five years is up paying on the principle is going to be very costly and you need to have saved for that day.
Overall sub-prime homebuyers were too anxious to get themselves into a home and were not ready for the huge financial responsibilty that comes with being a home owner,(no landlord to call when the pipes burst).   People love to blame the Sub Prime lenders, and Yes they are some that have some shady advertising but also at the same time they were there for people who did turn their debt around and were on financial stable ground but their scores were too low to qualify for a Prime Loan and could be able to now get into a house with the understanding of what it is going to take.   Now it looks like those days are going to be gone for people like me an my wife who have turned our debt around but due to people not getting themselves educated on these types of loans everyone is going to suffer. 
New Contributor
MikeToreno
Posts: 51
Registered: ‎04-18-2007
0

Re: Opinions differ on effectiveness of FICO score

Yeah. FICO predicts risk, given a particular set of circumstances surrounding the loan. You change the loan all around, and what on earth to you expect?
Moderator Emeritus
LadyFICO
Posts: 273
Registered: ‎04-13-2007
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Re: Opinions differ on effectiveness of FICO score

I know someone who makes around 45K with over a 300k mortgage. She was able to get in with a decent fico, past paid mortgages and no income verification. If income was a factor she would never get in the house, on paper she can't afford it. However, the lender got around it by using no ver. She is low risk based on fico but high risk considering her income.
 
I understand your point as well as to why it is still needed. But shouldn't only pertain to self employed or special cases?
Moderator Emeritus
LadyFICO
Posts: 273
Registered: ‎04-13-2007
0

Re: Opinions differ on effectiveness of FICO score

How is fico ineffective it is measuring risk? Those s/p lenders are targeting s/p borrowers fully understanding what their score is! So if fico says this person has a 500 and they are a 50% risk why are you approving the loan? Money! Simply money.
 
They really need to educate borrowers more like they do for student loans (mandatory training). We will all feel the effects of these foreclosures as it may stiffen requirements in the near future.
Valued Contributor
TheNewWorldMan
Posts: 2,374
Registered: ‎03-15-2007
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Re: Opinions differ on effectiveness of FICO score

Oh, the foreclosures are going to do a lot worse than that. Look at how the banks and lenders are so desperately trying to keep people in their homes, to prop up loans all over the place. Can you say "desperate and scared to death?"

They know full well that once the foreclosures begin in earnest, home prices will plunge. As home prices plunge, their collateral withers away. As their collateral erodes, other people on the edge will teeter. The economy will stall, which will lead to more defaults, and even lower home prices. These people are like the kid with his finger in the dike.
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in a credit-scoring postnuclear Stone Age...
New Contributor
hdporter
Posts: 56
Registered: ‎03-30-2007
0

Re: Opinions differ on effectiveness of FICO score

Bottom line, there are two variables here.

that sub-prime borrowers default is obvious. But, again, you expect defaults on loans extended to any credit quality borrower ... just more on sub-prime. You price according to risk, where the higher the price the more reserve there is to cover defaults. We're talking basic economics and there's nothing irrational in lending to sub-prime.

The issue is the pricing. If it's inadequate to cover default risk then there's a problem. There are two means by which inadequate pricing can be introduced.

If FICO purports to accurately measure risk of a borrower, assuming given underwriting standards, pricing becomes inadequate if FICO actually understates risk. This is the premise of lenders complaints.

On the other hand, if lenders weaken underwriting standards (e.g. inappropriately extend no doc loans), the lenders undermine FICO assumptions and are responsible for any inadequate pricing. This is FICO's defense.

We don't have the information from which to assess how accurately FICO measures risk. But the possibility that the problem largely lies with FICO is a distinct possibility that shouldn't be dismissed.

On the other hand, we do have anecdotal evidence that lenders have become too aggressive in targeting sub-prime. But, again, we don't have the data at hand to assess whether this is the predominant cause. There is good reason to suspect this is more likely to be at the root of the problem than any FICO inaccuracy.

- Harry

Starting Score 1/01/10: TU:768 EQ:770
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Valued Contributor
Boswd
Posts: 1,065
Registered: ‎04-26-2007
0

Re: Opinions differ on effectiveness of FICO score

The bottom line it all comes down to you ( the homebuyer) getting yourself as educated as much as possible on the home buying process on what it is going to take to actually afford these types of mortgages. And not just siging willy nilly just because you got approved.  I can't reccomend enough to anyone who is confused about this buying process to budget enough money to hire a Real Estate attorney who can explain this all to you and what you are going to expect to pay each month and in the future. .   And also buy a house based on your income and what you can afford realistically and not be struggling each month to make payments   as opposed to how much you have been approved for.
Not buy Champagne if you can only afford beer.
 
This is not FICO'S fault or even the sub-prime lenders( to a certain extent) fault, it's the home buyer biting off more than they can chew and not waiting until they are actually financially ready to take on the huge finacial burden that is owning a house.  
New Contributor
MikeToreno
Posts: 51
Registered: ‎04-18-2007
0

Re: Opinions differ on effectiveness of FICO score



Boswd wrote:
There has been alot of finger pointing going during this sub-prime mortgage downturn/foreclosures. consumer advocacy groups blaming the lenders. The lenders blaming the scoring system so for and so forth.
Overall the bottom line of who to blame is the people who signed on the dotted line.



I'm sorry, that's just ridiculous. The Sup-prime mortgage "problem" is usually defined as SUB-PRIME LENDERS NOT GETTING PAID BACK. That's the perspective from which the discussion usually occurs. Not the perspective of the borrower, but the perspective of the lender. So what you are saying is that the evil borrower is responsible for the plight in which the innocent lenders found themselves, because the evil borrower failed to closely examine the mortgage products that the innocent lenders were falling all over themselves to give him. It was the responsibility of the borrower to protect the lender, and he failed to do so. Look, all the advantages were with the lenders. From their perspective, they are not looking at one borrower, but at the great mass of borrowers, and they could used or developed statistical tools to predict what would happen (not that it would be difficult to predict). The only reason you market products like they marketed, where there's negative amortization and substantial jumps in the payment after a time, is because it is OK with you if borrowers can't make the payments, and you are counting on them refinancing or selling the house, or you taking it. They expected continuous rapid increases in housing prices, it looks like, and when that slowed down a bit, the whole house of cards collapsed. And you want to blame this on BORROWERS??? Borrowers didn't design the loans. They didn't market the loans. They didn't draft the agreement. They just signed the agreements and pledged their homes as security. If YOU draft an agreement, where someone else agrees to pay you, and to give you their HOUSE if they can't pay you, it is not THEIR fault if the agreement YOU DRAFTED doesn't protect you from loss, or is not profitable for you; it is YOUR FAULT.
Valued Contributor
Boswd
Posts: 1,065
Registered: ‎04-26-2007
0

Re: Opinions differ on effectiveness of FICO score

Never called them evil buyers, not once.   Never called them innocent lenders.   Most people got into bad mortgage loans because they were too anxious to get into a home and were too willing to sign anything.   Nobody put a gun to their head and made them sign it.   Mortgage lenders are guilty of approving too much but at the same time it is up to you to know what you can afford and what you can't.    Nobody is going to hold your hand, you are an adult and have to know exactly what you are signing, these were bad term loans but people weren't educating  themselves enough to realize it and just signed their lives away without reading the fine print or have someone like an attorney going over it with them and explain it to them.  
 
Moderator Emeritus
masdeocho
Posts: 2,050
Registered: ‎04-17-2007
0

Re: Opinions differ on effectiveness of FICO score

How is the FICO score at fault?  It hasn't changed the basic parameters.  It's not like suddenly the score indicates that someone with a 550 score has only a 2% risk of defaulting.
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