So now that about 1/5 of the USA will have a consumer with a repo mortgage/mortgage default on their credit file, and the sub-prime market is "dead as a door nail" (quote from a Fed official), won't Fair, Isaac & Co. have to come up with a new scoring model that doesn't give too much weight to mortgage defaults?
Where did you get the data "...that about 1/5 of the USA will have a consumer with a repo mortgage/mortgage default on their credit file..."? I don't think the number is that high. Besides FICO is a "relative score", it computes based upon relative activity. So, with increasing negatives on the average consumer's report, the average score will adjust.
I agree with this question. What are people doing--making up numbers out of the air? Even if 1/5 of homeowners defaulted on their mortgages, that wouldn't be 1 out of 5 Americans. A lot of people rent. And then there are those who have paid off their homes, or who are paying as agreed because the bought a house they could afford and actually looked at the terms of the contract before they signed it. No way can 20% of all Americans have a foreclosure.
It will easily be 1/5 by the end of this - but to indulge you both, do you agree 1/5 will have had one late payment because of the mortgage crisis? If so, Fair, Isaac, Co. must adress mortgage scoring in general, sooner than later. I would expect once people like myself bring it to regulator attention, the government will be on them to make provisions, assuming enough consumers support such action. The other argument I suppose is that lenders "relax" lending scores to adjust, which will undoubtably be the FICO & CRA stance, but then again given the subprime write-downs of late, we all know they (banks) will not do this, and the regulators would not allow it anyway as it would be a step backwards, not forwards. Anyhow, assume 5% of the population has a default, isn't that enough to adjust the scoring model?? It will be interesting what the CRAs and Fair, Isaac say once this is brought to the attention of Washington. I'm a good friend of the sitting Chairman of the Senate Banking Commitee, should this be brought up with him ??
No, I don't believe that, either. As I said, not every American has a mortgage. And many, like me, live within our means, have payments debited automatically every month, so there's never a late. Most mortgages give a 10-day grace period anyway. I might believe more people might have lates on credit cards, but I don't even think one-fifth of mortgage holders will have a late, much less one-fifth of Americans. You seem to think that every person who has a credit file has a mortgage. Far from it. And Congress doesn't regulate the scoring model. They don't even know what it is--no one does. So no, I don't think credit scoring is anything Congress should mess with. Even if everyone's scores go down, then the average will go down. Lenders will adjust. The market will take care of itself.
my feeling is that, its going to take a long time for banks to regain the confidence. first time buyers and bad credit buyers will have to wait or raise bigger deposits.
No, I do not agree. The total "subprime market" we speak of is only about 3% of the total market. Many of those loans are not in trouble (w/late payments). The credit scoring models only have to be fair and unbiased. The Treasury department did a through study of them, they felt it was best to leave them alone. This is all about markets and supply and demand. The government doesn't like to interact unless they truly need to do so. I don't even see how the government could "regulate" credit scoring and credit approval criteria (outside of discrimination or truly predatory practices). Besides, the FICO model is mearly a formula based upon historical data, how could you regulate this? Approval criteria move with economic trends of supply and demand in the monetary markets. I'm just not sure where you're going with this...
You mean to tell me you bought a house you could afford and even had the gaul to read the contract. You must be some type of freak. Seriously, people want to bash the banks on this and brokers as well but, the bottom line is people are in trouble now because they wanted something they couldn't afford to begin with and failed to read the Agreements. Sure, the banks were getting a little loose with the underwriting requirements but, the theory that people will save the mortgage was sound. Turns out people will walk away from that just as soon as anything else.
You are absolutely correct. And yes, I bought a house I could afford--24 years ago. Would I like a bigger or better house now? Absolutely!! Am I going to get it? Probably not. I probably read the contract entirely, but I at least knew what it said. I've refinanced three or four times, and always insist on a 30-year fixed loan. My payments are probably three times what they were when I bought the house. I guess my income is probably roughly that, too, what with the various sources of income I have. And you're right. Most of these people have no one to blame but themselves. People have lost sight of the concept of saving and buying what you can afford.
What is this "saving" you speak of? Never heard of such a thing . . . I will say this on a serious note, most of my clients own or try to own homes three to four times the value of my own ($500,000.00 range). Problem is that they don't make what I make. Doesn't seem to bother them though and I personally don't think the loan officer should be the one to tell them that they can't afford it. They should know that themselves and act accordingly.
They certainly should know that. But the loan officer shouldn't approve a loan he doesn't think the customer can pay back. When my husband left and I got stuck with a pile of debts to pay off, I eventually figured out that I was going to have to refi my house. I had to get a subprime loan at a terrible rate because of my credit. But they told me to pay everything on time for a year and I could get a better deal--and I did. You've probably seen me post about things I did--like cancel the cable and work three or four jobs. These days people seem to think they're owed something without working for it. The situation with the economy won't ever get "well" until people learn to only buy what they can afford.
The issue of late mortgage / loan payments (i.e. on a HELOC) will affect a HUGE number of people - remember, HELOC's were driving consumer spending the past three years...now that values are dropping like a stone the ripple effect is going to impact many more people than the 'subprime borrowers'. In fact, I've been reading article after article that late mortgage payments are now being seen in the PRIME markets...so I think the assessment that a very large portion of consumers in the country will have late payments related to mortgages or HELOCs is very accurate. I lived in the North Bay of San Fran for a while in the early 2000's and belonged to a tennis club. Everyone I bumped into said "they owned there own company" when I asked how they were playing tennis all day long. Turns out "their companies" were HELOCs against their homes that they day-traded stocks with. These were seemingly otherwise well-educated, wealthy people. Also, I realize many people rent and don't own, but they are also screwed, for some odd reason renters typically need BETTER credit than buyers (at least this has been what I've observed the past few years). A homeowner renting out their property scrutinizes credit reports a lot harder than most banks did (i.e. in most communities its pretty hard to find a private home willing to welcome in a 'subprime' lessee). So what do they do? Can't buy / Can't rent. Unless FICO scores are relaxed for late payments/repos, where do people go that have had their homes taken away from interest rate resets?
A little closer to the numbers...."The Mortgage Bankers Association recently estimated that 1 out of every 200 homes in the US will be foreclosed upon..." This equates to 0.5% of homeowners, not 20% (1/5). Though this is a drastic, and unfortunate situation, it is not at the level stated. Again, FICO scors are relative, and FICO does not set credit approval criteria for the scores.
Depending on your other debts, that should be acceptable for a mortgage, assuming your scores are good enough. I'd talk to a mortgage broker if I were you. At one time I remember the "standard" being that you could afford a home that cost three times your salary. But what Apex and I are talking about is something like a guy I work with. In his 20s, makes probably $50-60K per year, and just bought a home that cost over $400K. How is he going to pay for it? (Hint--probably Mom and Dad are paying for it, or at least will be). He really can't afford that house right now.
And that's .5% of HOMEOWNERS. This thread was started on the theory that 1/5 of the US would have this problem. Since it's half a percent of the homeowners, it's going to be far less than half a percent of the US, since there are still many people who rent or live at home. And, the way it will adjust is that lenders will start changing the score that they will accept. Maybe instead of a 680, they'll accept a 670, or 660, or whatever gives them the basic percentage of the population that they're interested in. That's how the market works.
We are talking about mortgage defaults, and late payments here. Some more quotes for you: Mar 6, 12:50 PM (ET)"NEW YORK (AP) - Americans' percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday....Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak...The news follows a report from the Mortgage Bankers Association on Thursday that home foreclosures skyrocketed to an all-time high in the final quarter of last year. The proportion of all mortgages nationwide that fell into foreclosure surged to a record of 0.83 percent, while the percentage of adjustable-rate mortgages to borrowers with risky credit that entered the foreclosure process soared to a record of 5.29 percent.
And hedwig, lenders "will not adjust the score they are willing to accept" because after this crisis is over, the SHAREHOLDERS of the lender will be setting the FICO they can accept. And at the current rate of default, unless lenders drop min FICO to around 450 for a mortgage, nothing will change, and that's just not going to happen for pbvious reasons. So the Score has to change. Bond rating companies are going under because of this situation, so I wouldn't even be surprised if they start rating MBS on FICO buckets. The whole thing is wild!
They already do rate based on credit worthiness of underlying mortgages. I was doing this twenty years ago on ABS which became MBS.
