With the current (apparent) crisis in the mortgage market in the united states, I'd like to point out a central fact of that system which is completely berserk:
Credit scores are the primary mechanism for determining creditworthiness for getting a mortgage.
This is more than a little bit nuts. Credit scores are designed to tell how much returns a credit card lender can get by giving someone a line of credit. Mortgage default risk is something else entirely. A person who has a huge rotating debt on their credit card and pays off the minimum every month is a great credit card risk because they'll have payed off several times what they were loaned in the first place by the time they go under, but a terrible mortgage risk because they're likely to go under, while a person who never has any rotating debt is a terrible credit card risk because they never rack up any interest but a great mortgage risk because they're unlikely to get into financial distress.
Why then, are credit scores used? First I have to explain what kind of risk mortgage lenders are taking on. Historically, mortgages were so absurdly overcollateralized that the risk of default isn't that the money doesn't get paid back, but that it gets paid back too early, requiring that some new sucker be found to loan the money to to get the expected returns. It's obviously a bit of a stretch to call this 'risk', but that's the way things have been.
So about using credit scores - since there's very little risk being taken on, mostly it's about who can be beat up. Whatever sociopolitically justifiable games banks can play to increase interest rates they do, and as it happens people with lower credit scores are viewed as Bad People and collusion against them is a lot simpler.
What, then, would be a reasonable thing to do? Obviously drop credit scores, but replace it with what? Well, the current situation can tell us a lot. What's happened recently is that housing prices have actually fallen, so a number of mortgages are underwater, so there's a risk not only of the money being paid back early, but of it not being paid back at all. The way to gauge risk of this is something which is already used in mortgage assessment, but not heavily enough, which is percentage down. By definition, if a houses's value drops by ten percent then any mortgage with less than ten percent down will be underwater, but mortgages with more than that will still be just fine. The current mortgage mess is in part difficult to unwind because when mortgages got packaged up and resold they were clumped by credit rating and not percentage down, so the effects of real estate prices going down on them are quite difficult to infer.
As for aftershocks, I don't think this is such a big deal. The people holding on to mortgages right now are mostly hedge funds, which by definition only have accredited investors as shareholders, and accredited investors by definition have enough money that they can afford to suck it up if their investments go bad. Hopefully that's what will happen.
In the future, I think mortgages will continue to be much as they have been right before this crisis. This historical business of mortgages only coming in one risk class (damn near risk-free) and getting returns as if they were taking on real risk was a bad thing, and I anticipate that if there isn't any bailout this time then the mortgage industry will get together and start handing out interest rates which actually make sense - very high rates for anything interest-only, and rates only a hair above fed funds for anything with 50% down, regardless of the borrower's credit-worthiness.
August 24 2007, 02:34:18 UTC 4 years ago
It's not always easy to get at the collateral in a mortgage. It takes a long time to foreclose on and sell a property, and the transaction costs are high, so even an apparently well collateralized mortgage may not be as risk free as it appears.
August 24 2007, 04:48:45 UTC 4 years ago
The bad foreclosure thing is very weird. I cannot fathom why banks don't stage their houses and list them on MLS like any sane person selling a house, even with a single one-shot auction, would do.
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August 24 2007, 09:28:04 UTC 4 years ago
Anyone taking out a mortgage valued at more than something like 75% of the price of the property is generally required to also take out 'mortgage indemnity insurance' which is supposed to cover the gap if you can't keep up the payments and the mortgageco forecloses, but the equity in the property doesn't cover the outstanding loan.
August 28 2007, 19:08:40 UTC 4 years ago
August 28 2007, 03:44:46 UTC 4 years ago
The real credit scores in question.
The real credit scores in question here are not the consumer scores, but the bond issuers' scores. The firms who issue these commercial credit ratings supposedly have inside access to individual and aggregate loan ratings, and act in an objective manner in the service of the market at large.Who issued good commercial credit scores to shady fixed securities? Who owns these firms? Whose interests were being protected? Whose interests were being sold out? Whose interests were in conflict?
February 18 2008, 19:12:17 UTC 4 years ago
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How To Read A Credit Report
I think one aspect of your FICO score that is useful in determining risk is the debt to income ratio. I don't think you can discount that debt to income ratios have a clear effect on the risk of default.I don't think dropping credit scores is the answer. I think people just need to learn to be responsible with their fiances and learn how to use credit wisely. The bottom line is that if you can't afford to pay your bills, or are only able to pay minimums on your credit cards, you shouldn't be buying a big screen TV them. Many Americans feel over priveledged and no longer take any responsibility for their actions, and misuse of credit is a perfect example.
That said, most people haven't a clue how to manage their credit and achieve a high fico score. That said, here's a link to the first article in a series of blog posts entitled "Mastering Fico"
http://topinternetguides.com/2008/0
Mastering Fico explains everything you need to know in order to manage your credit. This article, How To Read a Credit Report, is the first step in managing your credit an achieving an excellent FICO score.
I hope the information in this guide proves valuable for your readers.
-Steve
May 22 2008, 08:47:25 UTC 4 years ago
June 27 2008, 08:18:10 UTC 3 years ago
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July 4 2008, 17:56:12 UTC 3 years ago
Home equity
Fortunately in the uk mortgage lenders are pretty understanding, and some even allow short breaks without penalties from mortgage repayments.Penalties are normally so high and affect your credit score/rating in a bad way
I believe that all banks should be that way and give all home owners regular breaks as they are with the mortgage provider for many many years
My speciality is in teaching people for free about how to obtain low rate loans using the equity of your home
Have a look and see if any of it is helpful :)home equity loans allow you to generate money perhaps for projects you feel you need to do around your house or in your life.
July 8 2008, 16:59:27 UTC 3 years ago
Re: Home equity
you know its funny, i hear about all these other countries other than US not having any of these home problems that we are having. So many people are having trouble paying their mortgage because they got ARMS because that was all they could get, now foreclosures are sky high because people get behind on mortgage payments, then there is not many options after that.July 10 2008, 00:31:30 UTC 3 years ago
August 8 2008, 22:35:20 UTC 3 years ago
Credit Scores are Unfair and Goverment Regulation of Mortgages and No Fax Payday Loans will ...
It is very difficult to determine who is qualified for a home loan. Credit ratings are not an accurate prediction of ability to pay. There are millions of people with inaccurate information posted by preditory collection practices and just plain old errors.To much regulation will me the poor and lower middle class will never have a chance to own a home. The pressure of a mortgage has straightened up many people who would otherwise continue to have been less than credit worthy.
In todays world you can not even achieve an excellant credit rating without a mortgage loan on your credit report.
Mortgage loans are comming under the same scrutiny that No Fax Payday Loans have been under for years. Regulation is not the answer but education is.
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No Fax Payday Loans
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Payday Loan Advocate for Mortgage Lending
Economy today was totally undergoes on different disastrous situation, the reason why people find themselves difficult to adjust in a way of living that the world offer today. Higher unemployment, more home foreclosures, skyrocketing oil prices, obscene gas prices are just an example of this. It is advisable for all of us to budget our money with an appropriate financial planning.Post Courtesy of Personal Money Store
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November 4 2008, 08:21:35 UTC 3 years ago
December 8 2008, 00:55:42 UTC 3 years ago
What?
http://capstarrealtygroup.com concludes that credit scores are not only viable instruments for gauging the intent of potential borrowers, but that the fact they were ignored is one component of the real estate morass we find ourselves in currently...October 30 2009, 19:10:40 UTC 2 years ago
The crisis today
It's funny to do research on this crisis, and come across old blog posts. I'm doing this for a paper in school. What do you think of the crisis today? I think it's still going to get worst, before it gets better with fake numbers (housing credit), and more ARMs due to reset in the future. Let me know what you guys think.Tom
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