Opinions differ on effectiveness of FICO score

[Anonymous]

The problem was that lenders were getting people in to ARMs at a time when interest was bottomed out, then didn't adequately consider the effect of the interest rate changes on the consumer's ability to pay. The average consumer, let alone the sub prime consumer, doesn't understand the history of interest rates or the effects of interest rate changes at all, and a lender should explain these things to the consumer which they usually don't.

The finance companies compounded this error by doing this at the top of a housing bubble. So not only did they not consider that the consumer might not be able to afford increased payments when interest rates would go up (which they should have known would happen), they didn't calculate the risk of depressed housing pricess and a flooded market. If the housing priceses weren't falling they could just sell the property and get their money back out of it, but they can't now. Not only are pricesses falling but inventory is way up so they have to seirously discount the price if they want to move the property quickly.

Obviously the consumer has to take some responsibility for the individual defaults, however the finance company didn't adequately calculate the financial risks involved in these loans and now they are looking for someone to blame.

FICO calculates the risk that someone would default on one TL. The lender didn't expect it to be them all the time however since it's their loan costs that went through the roof it's the one that can't be paid any longer.

They got greedy and they are getting burned.

[girlie]

i work in real estate sales and have been for the past 10 years.  i have seen the market go up and i have seen the market go down.  lenders loosen the purse strings when times are good, offer very competitive rates and are much looser with their underwriting guidelines.  when times get tough and defaults start, they tighten the purse strings as well as their underwriting procedures.  it is all cyclical and covered in econ 101.  i have clients who purchased in the heyday on new construction without representation and made poor choices such as 90% financing on a neg am loan without proper reserves thinking that their circumstances couldn't possibly change.  job loss happens, life changes happen, interest rates go up, property values go down.  this is where short sales come in to play.  the lenders have seen this happen over the years and unfortunately the buyers are overly optimistic and think it could never happen to them.  i do not think fico scores are to blame.  everything changes as much as it stays the same.

[Anonymous]

No brain surgery here. They are handing out loans to anyone with a pulse because the real estate market is in the toilet. The same houses have been for sale for 2 years where I live. Prior to that people were standing in line to buy them. They don't care if they are setting people up for disaster, they just want to get those keys in your hand. So I agree, it's not FICO's fault. As Tuscani said, it's greedy brokers selling houses to people who can't afford them.

[Boswd]

Not to get this thread going again,  but it is ultimatly the person responsibilty to figure out what he or she can or cannot afford.   People weren't getting themselves educated enough to understand the home buying business and were convincing themselves they could afford it when in fact they couldn't.  People were just as too anxious to get themselves into a house and were soo excited that someone was able to approve them, they weren't realizing what they were signing and were willing to sign anything.   And they were buying houses up to max what they were approved.   Just because you were approved for $600,000 and your household income is less than a $80,000 doesn't mean you go out and buy a $600,000.   People need to start educating themselves on the home buying process instead of relying on everyone to babysit them.

[Anonymous]

Let's give BB guns to 12-year-olds and hope they do the right thing. I still say lenders should have more responsibility when handing out loans instead of crying about the increasing foreclosure rate. A savvy mortgage broker looking to close a deal can easily manipulate someone with house fever into believing they can afford it, so to say "they should have known better" when they get foreclosed on is pretty lame as it relates to this discussion.

Message Edited by devhip on 05-14-2007 11:59 AM

[Boswd]

How is it lame?   You blame the subprime mortgage companies because people are foreclosing, I blame the home buyer for being too anxious to get into a home.   Subprime blames FICO   it's an endless circle of blame.

These people aren't twelve and Subprime mortgages are a business of giving loans to sub prime people, I would be included in that catogory right now.  People were jumping into ARM's and interest free for x amount of years, never thinking to themselves that the interest rates could climb and we may not be able to afford this if they do.  Nope,  they just thought  " WOW, I got approved,  and for x amount of dollars, now we can really buy our dream home, much better than we anticipated".     As I said before, I don't wish foreclosure on anyone, it's horrible and I do feel for these people.   But you have to know and understand what you are signing, you have to step back and think about what you can realistically afford.

Think about it,  some of us who are on here who are searching for Alternate (subprime) credit cards.  We shop around, we read all the fine print, find out what fee's there are.  Why?  because we know they are subprime and we are not going to get the best deal and from what is out there, we want to get the best possible deal available.   And that is just for a stupid credit card.  Why wouldn't you place the same diligence in searching for a subprime mortgage, in most cases the largest loan you are going to take out in your life?

[Anonymous]

Why are you here Bowsd? I imagine, because like most of us, you've made a lot of bad financial decisions and are in the process of cleaning up the mess. There is an entire segment of the industry that preys on us, the financially disadvantaged who are in the position we are in because we've displayed a propensity to not pay our bills. From my perspective, yours is the same logic that would defend payday loan companies. Ultimately, yes...we are all responsible for the financial products we choose. However, to cast blame on the consumer entirely with a "buyer beware" defense thus relieving the industry of responsibility is a little laughable. If we all had it figured out and made financially sound decisions...we wouldn't be here. The industry has the responsibility of due diligence in qualifying people for mortgage loan products. Obviously, the foreclosure rate would indicate they are failing.

Message Edited by devhip on 05-14-2007 04:02 PM

[girlie]

devhip,

i take offense to that "it's greedy brokers who sell".  real estate brokers/agents DO NOT or should not qualify buyers for a home.  that is the lenders responsibility.  it is the agent's responsibility to represent the buyers and use their area of expertise to facilitate the transaction and that does not include financial advice.

[Anonymous]

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@girlie wrote:

devhip,

i take offense to that "it's greedy brokers who sell". real estate brokers/agents DO NOT or should not qualify buyers for a home. that is the lenders responsibility. it is the agent's responsibility to represent the buyers and use their area of expertise to facilitate the transaction and that does not include financial advice.

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You should read my post again. I didn't say anything about "real estate" agents or brokers. I said "mortgage brokers", i.e., lenders.

Message Edited by devhip on 05-15-2007 07:23 AM