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[privacy] How credit scores help feed the real estate bubble
From: "Richard M. Smith" <rms () computerbytesman com>
Date: Wed, 13 Feb 2008 11:44:10 -0500
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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- [privacy] How credit scores help feed the real estate bubble Richard M. Smith (Feb 13)