Did FICO Cause Meltdown?

I read an interesting article from Peter G. Miller this morning that discussed weather the credit report scores contributed to the subprime “mess.”  In it, he wrote:

During the past few years we have been talking about toxic mortgages — and the need to avoid them. Without fail, each time the subject has arisen lenders would write to say we were wrong, that option ARMs and interest-only loans were simply “affordability products” with no financial sting. As to prepayment penalties and stated-income loan applications, they were — we were repeatedly told — minor concerns and not much of an issue.

We were needlessly worried, said lenders, because strong credit scores assured that borrowers could easily handle financing costs “if” monthly payments rose. But toxic loans were engineered to guarantee higher costs once start periods ended. There was no “if.”

The credit score argument never made sense because good credit was being required before borrowers faced higher monthly costs. It’s easy for some households to be well-qualified with a $1,200 monthly payment — but underwater when that same bill rises to $1,800.   (to read the rest of the article click here)

This is an interesting take on the problem – I think since FICO is changing it’s scoring criteria and will be announcing those changes later this month. The Credit Score is DEFINATELY the trigger for many loan programs – including FHA.  We should all be aware of our credit scores - and do everything possible to keep them as high as they can be… at least until underwriting goes back to the “good old days” of real people underwriting “real risk factors” with a loan – not just what the score is.

If you are considering the purchase of your first home, or you need information to refinance a mortgage, contact Steve and Eleanor Thorne 919-649-5058.  We help people every month who have credit problems… figure out how to purchase a home!  We can help you too!